<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD __________TO __________.
COMMISSION FILE NUMBER 001-13797
HAWK CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1608156
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
200 Public Square, Suite 30-5000, Cleveland, Ohio 44114
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 861-3553
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of the date of this report,
the Registrant had the following number of shares of common stock outstanding:
Class A Common Stock, $0.01 par value: 8,548,520
Class B Common Stock, $0.01 par value: None (0)
<PAGE> 2
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED) (NOTE)
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,709 $ 3,993
Accounts receivable, less allowance of $398 and $408, respectively 33,221 29,745
Inventories 27,189 27,119
Deferred income taxes 1,732 1,747
Other current assets 2,358 3,599
----------- -----------
Total current assets 67,209 66,203
Property, plant and equipment:
Land 1,504 1,504
Buildings and improvements 16,326 16,067
Machinery and equipment 82,495 81,953
Furniture and fixtures 4,953 4,915
Construction in progress 5,639 3,710
----------- -----------
110,917 108,149
Less accumulated depreciation 40,360 37,964
----------- -----------
Total property, plant and equipment 70,557 70,185
Other assets:
Intangible assets 68,154 69,177
Net assets held for sale - -
Shareholder notes 1,010 1,010
Other 3,136 3,045
----------- -----------
Total other assets 72,300 73,232
----------- -----------
Total assets $ 210,066 $ 209,620
=========== =========
</TABLE>
3
<PAGE> 4
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED) (NOTE)
----------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,156 $ 11,414
Short-term borrowings 1,146 872
Accrued compensation 4,983 6,944
Other accrued expenses 10,387 6,271
Current portion of long-term debt 7,087 7,160
----------- -----------
Total current liabilities 37,759 32,661
Long-term liabilities:
Long-term debt 91,869 98,244
Deferred income taxes 10,550 10,559
Other 1,654 1,667
----------- -----------
Total long-term liabilities 104,073 110,470
</TABLE>
<TABLE>
<CAPTION>
Shareholders' equity:
<S> <C> <C>
Series D preferred stock, $.01 par value; an aggregate liquidation value of
$1,530, plus any accrued and unpaid dividends with 9.8% cumulative
dividend (1,530 shares
authorized, issued and outstanding) 1 1
Class A common stock, $.01 par value; 75,000,000
shares authorized, 9,187,750 issued and 8,548,520
and 8,540,920 outstanding, respectively 92 92
Class B common stock, $.01 par value, 10,000,000
shares authorized, none issued or outstanding
Additional paid-in capital 54,631 54,645
Retained earnings 20,616 18,491
Accumulated other comprehensive loss (2,371) (1,949)
Treasury stock, at cost (4,735) (4,791)
------------ ------------
Total shareholders' equity 68,234 66,489
Total liabilities and shareholders' equity $ 210,066 $ 209,620
=========== =========
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to consolidated financial statements.
4
<PAGE> 5
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2000 1999
---- -----
<S> <C> <C>
Net sales $ 55,037 $ 47,063
Cost of sales 39,932 32,983
------------ ------------
Gross profit 15,105 14,080
Selling, technical and administrative expenses 7,877 6,441
Amortization of intangibles 1,025 899
------------ ------------
Total expenses 8,902 7,340
Income from operations 6,203 6,740
Interest expense 2,289 2,370
Interest income (40) (120)
Other expense (income), net 89 (29)
------------ -------------
Income before income taxes 3,865 4,519
Income taxes 1,701 1,867
------------ ------------
Net income $ 2,164 $ 2,652
============ ============
Earnings per share:
Basic earnings per share: $ .25 $ .30
============ ============
Diluted earnings per share: $ .25 $ .30
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,164 $ 2,652
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,653 3,299
Deferred income taxes 24 16
Changes in operating assets and liabilities, net of acquired assets:
Accounts receivable (3,813) (3,203)
Inventories (306) (1,791)
Other assets 1,134 762
Accounts payable 2,901 (20)
Other liabilities 2,569 (1,123)
----------- ------------
Net cash provided by operating activities 8,326 592
Cash flows from investing activities:
Business acquisitions (14,500)
Purchases of property, plant and equipment (3,508) (1,819)
------- -------
Net cash used in investing activities (3,508) (16,319)
Cash flows from financing activities:
Proceeds from short-term debt 321 (420)
Proceeds from long-term debt 7,367 7,781
Payments on long-term debt (13,752) (1,589)
Repurchase of common stock (1,567)
Payments of preferred stock dividend (38) (37)
------------ ------------
Net cash (used in) provided by financing activities (6,102) 4,168
------------ -----------
Net decrease in cash and cash equivalents (1,284) (11,559)
Cash and cash equivalents at the beginning of the period 3,993 14,317
----------- -----------
Cash and cash equivalents at the end of the period $ 2,709 $ 2,758
=========== ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto included by reference in the Form 10-K for Hawk
Corporation (the "Company") for the year ended December 31, 1999.
The Company, through its business segments, designs, engineers, manufactures and
markets specialized components used in a variety of aerospace, industrial and
other commercial applications.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries and also include, effective March 1999, the
accounts of Allegheny Powder Metallurgy, Inc. and effective November 1999, the
accounts of Quarter Master Industries, Inc. All significant inter-company
accounts and transactions have been eliminated in the accompanying financial
statements.
Certain amounts have been reclassified in 1999 to conform with 2000
presentation.
NOTE 2 - COMPREHENSIVE INCOME
Comprehensive income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------------------------
<S> <C> <C>
Net income $ 2,164 $ 2,652
Foreign currency translation (422) (759)
-------- -----------
Comprehensive income $ 1,742 $ 1,893
======== ===========
</TABLE>
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method. The major components of inventories are as
follows:
MARCH 31, DECEMBER 31,
2000 1999
-----------------------
Raw materials and work-in-process $19,826 $19,503
Finished products 9,002 9,310
Inventory reserves (1,639) (1,694)
------- -------
$27,189 $27,119
======= =======
7
<PAGE> 8
NOTE 4 - EARNINGS PER SHARE
Basic and diluted earnings per share are computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------------------
<S> <C> <C>
Numerator:
Net income $ 2,164 $ 2,652
Preferred stock dividends (38) (37)
------ ---------
Numerator for basic earnings per share-income available
to common shareholders $ 2,126 $ 2,615
======= =========
Effect of dilutive securities:
Interest on convertible note, net of tax 19 -
------- ---------
Numerator for diluted earnings per share- income available
to common shareholders after assumed conversion $ 2,145 $ 2,615
======= =========
Denominator:
Denominator for basic earnings per share-
weighted average shares 8,547 8,773
Effect of dilutive securities:
Convertible notes and options 125 48
------- ---------
Denominator for diluted earnings per share-adjusted
Weighted-average shares and assumed conversions 8,672 8,821
======= =========
Basic earnings per share $ .25 $ .30
======= =========
Diluted earnings per share $ .25 $ .30
======= =========
</TABLE>
NOTE 5 - BUSINESS SEGMENTS
The Company operates in two primary business segments: friction products and
powder metal. The Company's reportable segments are strategic business units
that offer different products and services. They are managed separately based on
fundamental differences in their operations.
The friction products segment engineers, manufactures and markets specialized
components, used in a variety of aerospace, industrial and commercial
applications. The Company, through this segment, is a worldwide supplier of
friction components for brakes, clutches and transmissions.
The powder metal segment engineers, manufactures and markets specialized
components, used primarily in industrial applications. The Company, through this
segment, targets three areas of the powder metal component marketplace: high
precision components that are used in fluid power applications, large structural
powder metal parts used in construction, agricultural and truck applications,
and smaller, high volume parts.
8
<PAGE> 9
The other segment consists of corporate and operating segments, which do not
meet the quantitative thresholds for determining reportable segments. The
operating segments include the manufacturing of die-cast aluminum rotors,
driveline racing components and a stamping operation.
The information by segment is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
--------------------------------
<S> <C> <C>
Revenues from external customers:
Friction Products $ 26,849 $ 26,054
Powder Metal 21,791 16,188
Other 6,397 4,821
--------------------------------
Consolidated $ 55,037 $ 47,063
Depreciation and amortization:
Friction Products $ 2,057 $ 2,023
Powder Metal 1,248 1,018
Other 348 258
--------------------------------
Consolidated $ 3,653 $ 3,299
Operating income:
Friction Products $ 2,206 $ 2,865
Powder Metal 3,684 3,645
Other 313 230
--------------------------------
Consolidated $ 6,203 $ 6,740
</TABLE>
NOTE 6 - SUPPLEMENTAL GUARANTOR INFORMATION
Certain of the subsidaries ("Guarantor Subsidiaries") have fully and
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal, premium, if any, and interest with respect to the Company's Senior
Notes, due on December 1, 2003 ("Senior Notes"). The Guarantor Subsidiaries are
direct or indirect wholly-owned subsidiaries of the Company.
The following supplemental unaudited consolidating condensed financial
statements present (in thousands):
1. Consolidating condensed balance sheets as of March 31, 2000 and
December 31, 1999, consolidating condensed statements of income for
the three month period ended March 31, 2000 and 1999 and consolidating
condensed statements of cash flows for the three months ended March
31, 2000 and 1999.
2. Hawk Corporation ("Parent") combined Guarantor Subsidiaries and
combined Non-Guarantor Subsidiaries (consisting of the Company's
non-U.S. subsidiaries) with their investments in subsidiaries
accounted for using the equity method.
3. Elimination entries necessary to consolidate the Parent and all of its
subsidiaries.
Management does not believe that separate financial statements of the Guarantor
Subsidiaries of the Senior Notes are material to investors. Therefore, separate
financial statements and other disclosures concerning the Guarantor Subsidiaries
are not presented.
9
<PAGE> 10
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 584 $ 150 $ 1,975 $ 2,709
Accounts receivable, net 26,061 7,160 33,221
Inventories, net 21,185 6,004 27,189
Deferred income taxes 1,459 273 1,732
Other current assets 437 1,521 400 2,358
---------------------------------------------------------------------------
Total current assets 2,480 48,917 15,812 67,209
Investment in subsidiaries 793 4,694 $ (5,487)
Inter-company advances, net 157,017 2,019 (1,951) (157,085)
Property, plant and equipment 62,345 8,212 70,557
Intangible assets 213 67,941 68,154
Other 1,010 3,436 710 (1,010) 4,146
---------------------------------------------------------------------------
TOTAL ASSETS $ 161,513 $ 189,352 $ 22,783 $ (163,582) $ 210,066
===========================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 10,694 $ 3,462 $ 14,156
Short-term borrowings 1,146 1,146
Accrued compensation $ 9 4,079 895 4,983
Other accrued expenses 4,795 5,106 486 10,387
Current portion of long-term debt 5,000 1,708 379 7,087
---------------------------------------------------------------------------
Total current liabilities 9,804 21,587 6,368 37,759
Long-term liabilities:
Long-term debt 86,760 4,366 743 91,869
Deferred income taxes 9,906 644 10,550
Other 522 1,132 1,654
Inter-company advances, net 1,127 147,766 9,202 $ (158,095)
---------------------------------------------------------------------------
Total long-term liabilities 97,793 152,654 11,721 (158,095) 104,073
---------------------------------------------------------------------------
Total liabilities 107,597 174,241 18,089 (158,095) 141,832
Shareholders' equity 53,916 15,111 4,694 (5,487) 68,234
---------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 161,513 $ 189,352 $ 22,783 $ (163,582) $ 210,066
===========================================================================
</TABLE>
10
<PAGE> 11
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,691 $ 193 $ 2,109 $ 3,993
Accounts receivable, net 22,883 6,862 29,745
Inventories, net 21,766 5,353 27,119
Deferred income taxes 1,459 288 1,747
Other current assets 1,327 1,979 293 3,599
---------------------------------------------------------------------------
Total current assets 4,477 46,821 14,905 66,203
Investment in subsidiaries 793 5,065 $ (5,858)
Inter-company advances, net 156,992 997 (904) (157,085)
Property, plant and equipment 62,590 7,595 70,185
Intangible assets 215 68,962 69,177
Other 1,010 3,394 661 (1,010) 4,055
---------------------------------------------------------------------------
TOTAL ASSETS $ 163,487 $ 187,829 $ 22,257 $ (163,953) $ 209,620
===========================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 8,084 $ 3,330 $ 11,414
Short-term borrowings 872 872
Accrued compensation $ 9 6,032 903 6,944
Other accrued expenses 1,473 4,388 410 6,271
Current portion of long-term debt 5,000 1,745 415 7,160
---------------------------------------------------------------------------
Total current liabilities 6,482 20,249 5,930 32,661
Long-term liabilities:
Long-term debt 92,451 4,934 859 98,244
Deferred income taxes 9,906 653 10,559
Other 522 1,145 1,667
Inter-company advances, net 1,127 148,363 8,605 $ (158,095)
---------------------------------------------------------------------------
Total long-term liabilities 103,484 153,819 11,262 (158,095) 110,470
---------------------------------------------------------------------------
Total liabilities 109,966 174,068 17,192 (158,095) 143,131
Shareholders' equity 53,521 13,761 5,065 (5,858) 66,489
---------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 163,487 $ 187,829 $ 22,257 $ (163,953) $ 209,620
===========================================================================
</TABLE>
11
<PAGE> 12
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 49,632 $ 5,405 $ 55,037
Cost of sales $ 165 35,468 4,299 39,932
-------------------------------------------------------------------------
Gross profit (165) 14,164 1,106 15,105
Expenses:
Selling, technical and
administrative expenses 120 6,796 961 7,877
Amortization of intangible assets 2 1,023 - 1,025
-------------------------------------------------------------------------
Total expenses 122 7,819 961 8,902
-------------------------------------------------------------------------
Income from operations (287) 6,345 145 6,203
Interest income (expense), net 929 (3,034) (144) (2,249)
Income (loss) from equity investees 1,772 (231) - $ (1,541)
Other income (expense), net (1) 3 (91) (89)
-------------------------------------------------------------------------
Income (loss) before income taxes 2,413 3,083 (90) (1,541) 3,865
Income taxes 249 1,311 141 1,701
-------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,164 $ 1,772 $ (231) (1,541) $ 2,164
=========================================================================
</TABLE>
12
<PAGE> 13
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 41,947 $ 5,116 $ 47,063
Cost of sales 28,516 4,467 32,983
-------------------------------------------------------------------------
Gross profit 13,431 649 14,080
Expenses:
Selling, technical and
administrative expenses $ (125) 5,935 631 6,441
Amortization of intangible assets 899 899
-------------------------------------------------------------------------
Total expenses (125) 6,834 631 7,340
-------------------------------------------------------------------------
Income from operations 125 6,597 18 6,740
Interest income (expense), net 1,020 (3,156) (114) (2,250)
Income (loss) from equity investees 1,976 (126) $ (1,850)
Other income 20 9 29
-------------------------------------------------------------------------
Income (loss) before income taxes 3,121 3,335 (87) (1,850) 4,519
Income taxes 469 1,359 39 1,867
-------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,652 $ 1,976 $ (126) (1,850) $ 2,562
=========================================================================
</TABLE>
13
<PAGE> 14
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
--------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities $ 4,622 $ 3,259 $ 445 $ 8,326
Cash flows from investing activities:
Purchase of property, plant and
equipment - (2,608) (900) (3,508)
--------------------------------------------------------------------------
Net cash used in investing activities - (2,608) (900) (3,508)
Cash flows from financing activities:
Proceeds from short-term debt 321 321
Proceeds from long-term debt 7,367 7,367
Payments on long-term debt (13,058) (694) (13,752)
Payment of preferred stock dividend (38) (38)
--------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (5,729) (694) 321 (6,102)
Net decrease in cash and
cash equivalents (1,107) (43) (134) (1,284)
--------------------------------------------------------------------------
Cash and cash equivalents,
at beginning of period 1,691 193 2,109 3,993
--------------------------------------------------------------------------
Cash and cash equivalents,
at end of period $ 584 $ 150 $ 1,975 $ 0 $ 2,709
==========================================================================
</TABLE>
14
<PAGE> 15
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by
operating activities $ (2,750) $ 2,613 $ 729 $ 592
Cash flows from investing activities:
Business acquisitions (14,500) (14,500)
Purchase of property, plant and
equipment (1,519) (300) (1,819)
--------------------------------------------------------------------------
Net cash used in investing activities (14,500) (1,519) (300) (16,319)
Cash flows from financing activities:
Payments on short-term debt (420) (420)
Proceeds from long-term debt 7,781 7,781
Payments on long-term debt (1,250) (159) (180) (1,589)
Payment of preferred stock dividend (37) (37)
Repurchase of common stock (1,567) (1,567)
--------------------------------------------------------------------------
Net cash provided by (used in) 4,927 (159) (600) 4,168
financing activities
Net (decrease) increase in cash
and cash equivalents (12,323) 935 (171) (11,559)
--------------------------------------------------------------------------
Cash and cash equivalents,
at beginning of period 12,878 46 1,393 14,317
--------------------------------------------------------------------------
Cash and cash equivalents,
at end of period $ 555 $ 981 $ 1,222 $ 0 $ 2,758
==========================================================================
</TABLE>
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto appearing
elsewhere in this report.
GENERAL
Hawk operates primarily in two reportable segments: friction products and powder
metal. The Company's friction products are made from proprietary formulations of
composite materials that primarily consist of metal powders and synthetic
natural fibers. Friction products, which represented 49% of the Company's sales
in the first three months of 2000, are the replacement elements used in brakes,
clutches and transmissions to absorb vehicular energy and dissipate it through
heat and normal mechanical wear. Friction products manufactured by the Company
include friction linings for use in brakes, transmissions and clutches in
aerospace, construction equipment, agricultural, truck and specialty vehicle
markets. The Company's powder metal components are made from formulations of
composite powder metal alloys. The powder metal segment, which represented 40%
of Company sales in the first three months of 2000, manufactures a variety of
components for use in fluid power, truck, lawn and garden, construction,
agriculture, home appliance, automotive and office equipment markets. In
addition, the Company designs and manufactures die-cast aluminum rotors for
small electric motors used in appliances, business machines and exhaust fans and
clutch assemblies for the high performance racing markets.
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
Net Sales. Net sales increased $7.9 million, or 16.8%, to $55.0 million in the
first quarter of 2000 from $47.1 million in the comparable quarter of 1999. The
sales increase was primarily attributable to the acquisitions of Allegheny
Powder Metallurgy, Inc. in March 1999 and Quarter Master Industries, Inc. in
November 1999. The friction segment reported sales of $26.8 million in the first
quarter of 2000 compared to $26.1 million in the comparable quarter of 1999. The
sales increase in this segment reflected strong demand in the construction and
specialty markets served by the Company. These increases were offset by lower
demand in sales to the aerospace market for the quarter. The reduction in
aerospace sales was primarily the result of inventory adjustments by certain
commercial aircraft end users and a reduction in military sales during the
quarter. The powder metal segment reported sales of $21.8 million in the first
quarter of 2000 compared to $16.2 million in the first quarter of 1999. The
sales increase in this segment was primarily from the acquisition of Allegheny
in March 1999. Sales in the powder metal segment, exclusive of Allegheny,
increased $1.0 million or 7.0% to $15.3 million in the first quarter of 2000
from $14.3 million in the comparable quarter of 1999. This increase was driven
primarily by new product sales and increased sales to existing customers in the
lawn and garden, pump and motor, automotive and appliance markets served by the
Company. This increase was partially offset by declines in the office equipment
market served by the Company.
Gross Profit. Gross profit increased $1.0 million, or 7.1%, to $15.1 million in
the first quarter of 2000 from $14.1 million in the comparable quarter of 1999.
The increase is attributable to the increased volumes achieved during the
quarter, as well as improved operating efficiencies experienced by the Company's
friction facilities. The improvements in the gross profit were offset by changes
in product mix, expenses associated with the commencement of operations at the
Company's Mexican facility and a 8.3% increase in depreciation, to $2.6 million
in the first quarter of 2000 from $2.4 million in the comparable quarter of
1999. As a result of these factors, the gross profit margin decreased to 27.5%
in the first quarter of 2000 from 29.9% in the comparable quarter of 1999.
Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased
$1.5 million, or 23.4%, to $7.9 million in the first quarter of 2000 from $6.4
million in the comparable period of 1999. The increase in ST&A expenses is
primarily attributable to the acquisitions of Allegheny and Quarter Master, as
well as expenditures
16
<PAGE> 17
associated with the commencement of operations at the Company's Mexican facility
and severance costs associated with strategic changes in the Company's friction
segment. As a percent of sales, ST&A expenses increased to 14.4% of sales in the
first quarter of 2000 from 13.6% in the comparable quarter of 1999.
Income from Operations. Income from operations decreased by $0.5 million, or
7.5%, to $6.2 million in the first quarter of 2000 from $6.7 million in the
comparable quarter of 1999. Income from operations as a percent of sales
decreased to 11.3% in the first quarter of 2000 from 14.2% in the comparable
quarter of 1999.
Operating income from the Company's friction segment decreased $0.7 million, or
24.1%, to $2.2 million in the first quarter of 2000 from $2.9 million in the
comparable quarter of 1999. The decrease in operating profits in this segment
resulted primarily from product mix and severance costs incurred during the
quarter as part of the segment's restructuring initiatives.
Operating income from the Company's powder metal segment increased $0.1 million,
or 2.8%, to $3.7 million in the first quarter of 2000 from $3.6 million in the
comparable quarter of 1999. The increase in operating income in this segment
resulted from the volume increases primarily as a result of the acquisition of
Allegheny in March 1999. Offsetting this improvement was the continued reduction
of high margin shipments to a customer in the office equipment market and
increased depreciation expense during the quarter.
Interest Expense. Interest expense decreased $0.1 million, or 4.2%, to $2.3
million in the first quarter of 2000 from $2.4 million in the comparable quarter
of 1999. The decrease is attributable to lower debt levels during the quarter.
Income Taxes. The Company's effective tax rate for the first quarter of 2000 was
44.0% compared with 41.3% in the comparable quarter of 1999. During the first
quarter of 1999, the Company benefited from a variety of job tax credits
provided by the State of Ohio.
Net Income. As a result of the factors discussed above, net income decreased
$0.5 million, or 18.5%, to $2.2 million in the first quarter of 2000 from $2.7
million in the comparable quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds for conducting its business activities and
servicing its indebtedness has been cash generated from operations. In addition,
the Company has available a $50.0 million revolving credit facility entered into
in May 1998, which may be used for general corporate purposes or to finance
future acquisitions. As of March 31, 2000, the Company had $49.5 million
available under its revolving credit facility.
Net cash provided from operating activities was $8.3 million and $0.6 million
for the three month period ended March 31, 2000 and 1999, respectively. Cash
provided through effective working capital management primarily accounted for
the increase in operating cash flow.
Net cash used in investing activities was $3.5 million and $16.3 million for the
three month period ended March 31, 2000 and 1999, respectively. The cash used in
investing activities during the three month period ended March 31, 2000, was for
the purchase of property, plant and equipment. In the comparable period of 1999,
cash used in investing activities consisted of $14.5 million for the acquisition
of Allegheny and $1.8 million for purchase of property, plant and equipment.
Net cash used in financing activities was $6.1 million for the three month
period ended March 31, 2000, primarily as a result of payments of debt. In the
three month period ended March 31, 1999, cash provided by financing activities
17
<PAGE> 18
was $4.2 million. In 1999, the Company received $6.2 million from the borrowings
under its credit facilities. Additionally, the Company purchased $1.6 million of
its common stock in 1999.
The primary financing requirements of the Company are (1) for capital
expenditures for maintenance, replacement and acquisitions of equipment,
expansion of capacity, productivity improvements and product development, (2)
for making additional strategic acquisitions of complementary businesses, (3)
for funding the Company's day-to-day working capital requirements and (4) to pay
interest on, and to repay principal of, indebtedness.
As of March 31, 2000, the Company was in compliance with the terms of its
indebtedness.
The Company believes that cash flow from operating activities, borrowings under
the revolver and access to capital markets will be sufficient to satisfy its
working capital, capital expenditures and debt requirements and to finance
continued growth internally and through acquisitions for the next twelve months.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence in its prospects and strategies and its expectations about
growth of existing markets and its ability to expand into new markets, to
identify and acquire complementary businesses and to attract new sources of
financing, are forward-looking statements that involve risks and uncertainties.
In addition to statements which are forward-looking by reason of context, the
words "believe," "expect," "anticipate," "intend," "designed," "goal,"
"objective," "optimistic," "will" and other similar expressions identify
forward-looking statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of the forward-looking statements should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially and adversely from those in
the forward-looking statements, including the following:
- the effect of the Company's debt service requirements on funds
available for operations and future business opportunities and the
Company's vulnerability to adverse general economic and industry
conditions and competition;
- the ability of the Company to continue to meet the terms of its credit
facilities, which contain a number of significant financial covenants
and other restrictions;
- the ability of the Company to utilize all of its manufacturing
capacity;
- changes in product mix, including increased sales of lower margin
powder metal products compared to higher margin friction components;
- the effect of any future acquisitions by the Company on its
indebtedness and on the funds available for operations and future
business opportunities;
- the effect of competition by manufacturers using new or different
technologies;
- the effect on the Company's international operations of unexpected
changes in regulatory requirements, export restrictions, currency
controls, tariffs and other trade barriers, difficulties in staffing
and managing foreign operations, political and economic instability,
fluctuations in currency exchange rates, difficulty in accounts
receivable collection and potentially adverse tax consequences;
- the ability of the Company to successfully integrate its international
expansion to Mexico and China, as well as any other future
acquisitions, into the Company's existing businesses;
- the ability of the Company to negotiate new agreements, as they
expire, with its unions representing certain of its employees, on
terms favorable to the Company or without experiencing work stoppages;
- the effect of any interruption in the Company's supply of raw
materials or a substantial increase in the price of any of the raw
materials;
- the continuity of business relationships with major customers; and
18
<PAGE> 19
- the ability of the Company's products to meet stringent Federal
Aviation Administration criteria and testing requirements.
Any investor or potential investor in the Company must consider these risks and
others that are detailed in other filings by the Company with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk Disclosures. The following discussion about the Company's market
risk disclosures involves forward-looking statements. Actual results could
differ materially and adversely from those projected in the forward-looking
statements. The Company is exposed to market risk related to changes in interest
rates and foreign currency exchange rates. The Company does not use derivative
financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. In June 1998, the Company entered into an interest
rate swap with a notional amount of $35.0 million. At March 31, 2000, the
notional amount was $26.3 million. The notional amount is used to calculate the
contractual cash flow to be exchanged and does not represent exposure to credit
loss. If this agreement were settled at March 31, 2000, the Company would
receive approximately $0.3 million.
Foreign Currency Exchange Risk. The Company currently does not hedge its foreign
currency exposure and, therefore, has not entered into any forward foreign
exchange contracts to hedge foreign currency transactions. The Company has
operations outside the United States with foreign-currency denominated assets
and liabilities, primarily denominated in Italian lira, Canadian dollars and
Mexican pesos. Because the Company has foreign-currency denominated assets and
liabilities, financial exposure may result, primarily from the timing of
transactions and the movement of exchange rates. The unhedged foreign currency
balance sheet exposures as of March 31, 2000 are not expected to result in a
significant impact on earnings or cash flows.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the ordinary course of
business. In the Company's opinion, the outcome of these matters is not
anticipated to have a material adverse effect on the Company's financial
condition, liquidity or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective January 28, 2000, the Company issued 5,600 shares of its Class A
Common Stock to the following individuals as part of their annual compensation
for services as directors of the Company: Paul R. Bishop, Jack Kemp, Dan T.
Moore, III and William J. O'Neill, Jr. Each director received 1,400 shares
having a market value of approximately $7,500 at the time of issuance. The
shares were issued without registration as permitted by Section 4(2) of the
Securities Act of 1933.
Pursuant to an Agreement between the Company and Robert E. Geralde, an employee,
the Company issued 2,000 shares of its Class A Common Stock, having a market
value of approximately $11,250, effective January 5, 2000. The shares were
issued without registration as permitted by Section 4(2) of the Securities Act
of 1933.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 2000 HAWK CORPORATION
By: /s/ RONALD E. WEINBERG
----------------------------
Ronald E. Weinberg,
Co-Chairman and Co-CEO
By: /s/ THOMAS A. GILBRIDE
----------------------------
Thomas A. Gilbride,
Vice President- Finance (Chief Accounting Officer)
21
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