<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 ENDED JUNE 30, 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
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,866 $ 3,993
Accounts receivable, less allowance of $430 and $408, respectively 32,567 29,745
Inventories 27,156 27,119
Deferred income taxes 1,732 1,747
Other current assets 2,195 3,599
----------- -----------
Total current assets 67,516 66,203
Property, plant and equipment:
Land 1,504 1,504
Buildings and improvements 16,301 16,067
Machinery and equipment 82,904 81,953
Furniture and fixtures 5,002 4,915
Construction in progress 6,489 3,710
----------- -----------
112,200 108,149
Less accumulated depreciation 42,518 37,964
----------- -----------
Total property, plant and equipment 69,682 70,185
Other assets:
Intangible assets 67,133 69,177
Shareholder notes 1,010 1,010
Other 3,239 3,045
----------- -----------
Total other assets 71,382 73,232
----------- -----------
Total assets $ 208,580 $ 209,620
=========== =========
</TABLE>
<PAGE> 4
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 13,722 $ 11,414
Short-term borrowings 237 872
Accrued compensation 6,462 6,944
Other accrued expenses 9,279 6,271
Current portion of long-term debt 7,118 7,160
----------- -----------
Total current liabilities 36,818 32,661
Long-term liabilities:
Long-term debt 89,620 98,244
Deferred income taxes 10,616 10,559
Other 1,638 1,667
----------- -----------
Total long-term liabilities 101,874 110,470
Shareholders' equity:
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 22,488 18,491
Accumulated other comprehensive loss -
foreign currency translation (2,589) (1,949)
Treasury stock, at cost (4,735) (4,791)
------------ ------------
Total shareholders' equity 69,888 66,489
Total liabilities and shareholders' equity $ 208,580 $ 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.
<PAGE> 5
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 108,744 $ 95,155 $ 53,707 $ 48,092
Cost of sales 78,522 68,326 38,590 35,343
----------- ----------- ----------- -----------
Gross profit 30,222 26,829 15,117 12,749
Selling, technical and
administrative expenses 16,269 13,049 8,392 6,608
Amortization of intangibles 2,051 1,859 1,026 960
----------- ----------- ----------- -----------
Total expenses 18,320 14,908 9,418 7,568
Income from operations 11,902 11,921 5,699 5,181
Interest expense 4,545 4,799 2,256 2,429
Interest income 104 133 64 13
Other income (expense), net (155) 329 (66) 300
------------ ----------- ------------ -----------
Income before income taxes 7,306 7,584 3,441 3,065
Income taxes 3,232 3,143 1,531 1,276
----------- ----------- ----------- -----------
Net income $ 4,074 $ 4,441 $ 1,910 $ 1,789
=========== ============ ============ ============
Earnings per share:
Basic earnings per share $ .47 $ .50 $ .22 $ .20
=========== ============ ============ ============
Diluted earnings per share $ .47 $ .50 $ .22 $ .20
=========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,074 $ 4,441
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,362 6,691
Deferred income taxes 90 24
Loss (gain) on sale of property, plant and equipment 416 (274)
Changes in operating assets and liabilities, net:
Accounts receivable (3,158) (3,968)
Inventories (270) (1,484)
Other assets 1,482 1,953
Accounts payable 2,470 147
Other liabilities 2,187 (1,041)
----------- ------------
Net cash provided by operating activities 14,653 6,489
Cash flows from investing activities:
Business acquisitions (14,500)
Proceeds from sale of property, plant and equipment 69 2,052
Purchases of property, plant and equipment (5,587) (4,398)
------------ ------------
Net cash used in investing activities (5,518) (16,846)
Cash flows from financing activities:
Payments on short-term debt (587) (104)
Proceeds from borrowings on long-term debt 8,391 19,444
Payments on long-term debt (16,990) (19,717)
Payments of preferred stock dividend (76) (74)
Repurchase of common stock (1,567)
----------- ------------
Net cash used in financing activities (9,262) (2,018)
------------ ------------
Net decrease in cash and cash equivalents (127) (12,375)
Cash and cash equivalents at the beginning of the period 3,993 14,317
----------- -----------
Cash and cash equivalents at the end of the period $ 3,866 $ 1,942
=========== ============
See notes to consolidated financial statements.
</TABLE>
<PAGE> 7
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
(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 June 30, 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>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 4,074 $ 4,441 $ 1,910 $ 1,789
Foreign currency translation (640) (1,088) (218) (329)
---------- ---------- ----------- -----------
Comprehensive income $ 3,434 $ 3,353 $ 1,692 $ 1,460
========= ========= =========== ============
</TABLE>
<PAGE> 8
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:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials and work-in-process $19,685 $19,503
Finished products 9,163 9,310
Inventory reserves (1,692) (1,694)
------- -------
$27,156 $27,119
======= =======
</TABLE>
NOTE 4 - EARNINGS PER SHARE
Basic and dilutive earnings per share is computed as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $ 4,074 $ 4,441 $ 1,910 $ 1,789
Preferred stock dividends (76) (74) (38) (37)
--------- --------- -------- ----------
Numerator for basic earnings per share-income
available to common shareholders 3,998 4,367 1,872 1,752
======== ======== ======= ========
Effect of dilutive securities:
Interest on convertible note, net of tax 41 18
--------- --------- -------- ----------
Numerator for diluted earnings per share-income
available to common shareholders after assumed
conversion 4,039 4,367 1,890 1,752
======== ======== ======= ========
Denominator:
Denominator for basic earnings per share-
weighted average shares 8,548 8,734 8,549 8,694
Effect of dilutive securities:
Employee stock options 11 27
Convertible notes and options 112 89 100 133
-------- -------- ------- --------
Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversions 8,671 8,823 8,676 8,827
======== ======== ======== ========
Basic earnings per share $ .47 $ .50 $ .22 $ .20
======== ======== ======== ========
Diluted earnings per share $ .47 $ .50 $ .22 $ .20
======== ======== ======== ========
</TABLE>
<PAGE> 9
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.
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,
clutch assemblies for the high performance racing markets and a stamping
operation.
The information by segment is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from external customers:
Friction products $ 53,199 $ 51,014 $ 26,350 $ 24,960
Powder metal 43,293 34,597 21,502 18,409
Other 12,252 9,544 5,855 4,723
-------- -------- -------- --------
Consolidated $ 108,744 $ 95,155 $ 53,707 $ 48,092
Depreciation and amortization:
Friction products $ 4,124 $ 3,952 $ 2,067 $ 1,929
Powder metal 2,527 2,228 1,279 1,210
Other 711 511 363 253
-------- -------- -------- --------
Consolidated $ 7,362 $ 6,691 $ 3,709 $ 3,392
Operating income:
Friction products $ 5,395 $ 5,393 $ 3,189 $ 2,527
Powder metal 6,375 6,557 2,691 2,913
Other 132 (29) (181) (259)
-------- -------- -------- --------
Consolidated $ 11,902 $ 11,921 $ 5,699 $ 5,181
</TABLE>
<PAGE> 10
NOTE 6 - SUPPLEMENTAL GUARANTOR INFORMATION
Each of the Company's Guarantor Subsidiaries has fully and unconditionally
guaranteed, on a joint and several basis, the obligation to pay principal,
premium, if any, and interest with respect to the 10.25% Senior Notes due
December 1, 2003 (the "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 June 30, 2000 and
December 31, 1999, consolidating condensed statements of income for
the three and six month periods ended June 30, 2000 and 1999 and
consolidating condensed statements of cash flows for the six months
ended June 30, 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.
10
<PAGE> 11
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,935 $ 116 $ 1,815 $ 3,866
Accounts receivable, net 24,987 7,580 32,567
Inventories, net 21,521 5,635 27,156
Deferred income taxes 1,459 273 1,732
Other current assets 209 1,375 611 2,195
---------------------------------------------------------------------------
Total current assets 3,603 47,999 15,914 67,516
Investment in subsidiaries 793 4,265 $ (5,058)
Inter-company advances, net 152,888 3,219 (3,126) (152,981)
Property, plant and equipment, net 61,328 8,354 69,682
Intangible assets 211 66,922 67,133
Other 1,010 3,507 742 (1,010) 4,249
---------------------------------------------------------------------------
TOTAL ASSETS $ 158,505 $ 187,240 $ 21,884 $ (159,049) $ 208,580
===========================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 10,513 $ 3,209 $ 13,722
Short-term borrowings 237 237
Accrued compensation $ 9 5,315 1,138 6,462
Other accrued expenses 3,082 5,690 507 9,279
Current portion of long-term debt 5,000 1,750 368 7,118
---------------------------------------------------------------------------
Total current liabilities 8,091 23,268 5,459 36,818
Long-term liabilities:
Long-term debt 85,000 3,967 653 89,620
Deferred income taxes 9,906 710 10,616
Other 522 1,116 1,638
Inter-company advances, net 1,127 143,183 9,681 $ (153,991)
---------------------------------------------------------------------------
Total long-term liabilities 96,033 147,672 12,160 (153,991) 101,874
---------------------------------------------------------------------------
Total liabilities 104,124 170,940 17,619 (153,991) 138,692
Shareholders' equity 54,381 16,300 4,265 (5,058) 69,888
---------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 158,505 $ 187,240 $ 21,884 $ (159,049) $ 208,580
===========================================================================
</TABLE>
11
<PAGE> 12
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> <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, net 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>
12
<PAGE> 13
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 97,322 $ 11,422 $ 108,744
Cost of sales $ 285 69,069 9,168 78,522
-------------------------------------------------------------------------
Gross profit (285) 28,253 2,254 30,222
Expenses:
Selling, technical and
administrative expenses 144 14,029 2,096 16,269
Amortization of intangible assets 5 2,046 2,051
-------------------------------------------------------------------------
Total expenses 149 16,075 2,096 18,320
-------------------------------------------------------------------------
Income from operations (434) 12,178 158 11,902
Interest (income) expense, net (1,893) 6,014 320 4,441
Income (loss) from equity investees 3,179 (455) $ (2,724)
Other expense 101 54 155
-------------------------------------------------------------------------
Income (loss) before income taxes 4,638 5,608 (216) (2,724) 7,306
Income taxes 564 2,429 239 3,232
-------------------------------------------------------------------------
NET INCOME (LOSS) $ 4,074 $ 3,179 $ (455) $ (2,724) $ 4,074
=========================================================================
</TABLE>
13
<PAGE> 14
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 84,581 $ 10,574 $ 95,155
Cost of sales 59,242 9,084 68,326
-------------------------------------------------------------------------
Gross profit 25,339 1,490 26,829
Expenses:
Selling, technical and
administrative expenses $ (125) 11,862 1,312 13,049
Amortization of intangible assets 4 1,855 1,859
-------------------------------------------------------------------------
Total expenses (121) 13,717 1,312 14,908
-------------------------------------------------------------------------
Income from operations 121 11,622 178 11,921
Interest (income) expense, net (1,928) 6,374 220 4,666
Income (loss) from equity investees 3,183 (116) $ (3,067)
Other income (29) (281) (19) (329)
-------------------------------------------------------------------------
Income (loss) before income taxes 5,261 5,413 (23) (3,067) 7,584
Income taxes 820 2,230 93 3,143
-------------------------------------------------------------------------
NET INCOME (LOSS) $ 4,441 $ 3,183 $ (116) $ (3,067) $ 4,441
=========================================================================
</TABLE>
14
<PAGE> 15
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 47,690 $ 6,017 $ 53,707
Cost of sales $ 120 33,601 4,869 38,590
-------------------------------------------------------------------------
Gross profit (120) 14,089 1,148 15,117
Expenses:
Selling, technical and
administrative expenses 24 7,233 1,135 8,392
Amortization of intangible assets 3 1,023 1,026
-------------------------------------------------------------------------
Total expenses 27 8,256 1,135 9,418
-------------------------------------------------------------------------
Income (loss) from operations (147) 5,833 13 5,699
Interest (income) expense, net (964) 2,980 176 2,192
Income (loss) from equity investees 1,407 (224) $ (1,183)
Other (income) expense (1) 104 (37) 66
-------------------------------------------------------------------------
Income (loss) before income taxes 2,225 2,525 (126) (1,183) 3,441
Income taxes 315 1,118 98 1,531
-------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,910 $ 1,407 $ (224) $ (1,183) $ 1,910
=========================================================================
</TABLE>
15
<PAGE> 16
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 42,634 $ 5,458 $ 48,092
Cost of sales 30,726 4,617 35,343
-------------------------------------------------------------------------
Gross profit 11,908 841 12,749
Expenses:
Selling, technical and
administrative expenses 5,927 681 6,608
Amortization of intangible assets $ 4 956 960
-------------------------------------------------------------------------
Total expenses 4 6,883 681 7,568
-------------------------------------------------------------------------
Income (loss) from operations (4) 5,025 160 5,181
Interest (income) expense, net (908) 3,218 106 2,416
Income (loss) from equity investees 1,207 10 $ (1,217)
Other income (29) (261) (10) (300)
-------------------------------------------------------------------------
Income (loss) before income taxes 2,140 2,078 64 (1,217) 3,065
Income taxes 351 871 54 1,276
-------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,789 $ 1,207 $ 10 $ (1,217) $ 1,789
=========================================================================
</TABLE>
16
<PAGE> 17
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities $ 7,771 $ 6,193 $ 689 $ 14,653
Cash flows from investing activities:
Proceeds from sale of property,
plant and equipment
Purchase of property, plant and 69 69
equipment (5,377) (210) (5,587)
--------------------------------------------------------------------------
Net cash used in investing activities (5,308) (210) (5,518)
Cash flows from financing activities:
Payments on short-term debt (587) (587)
Proceeds from borrowings of
long-term debt 7,867 524 8,391
Payments on long-term debt (15,318) (1,486) (186) (16,990)
Payment of preferred stock dividend (76) (76)
--------------------------------------------------------------------------
Net cash used in financing activities (7,527) (962) (773) (9,262)
Net increase (decrease) in cash
and cash equivalents 244 (77) (294) (127)
Cash and cash equivalents,
at beginning of period 1,691 193 2,109 3,993
--------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 1,935 $ 116 $ 1,815 $ 0 $ 3,866
==========================================================================
</TABLE>
17
<PAGE> 18
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities $ 2,807 $ 2,627 $ 1,055 $ 6,489
Cash flows from investing activities:
Business acquisitions (14,500) (14,500)
Purchase of property, plant and
equipment (3,936) (462) (4,398)
Proceeds from sale of
property, plant and equipment 2,052 2,052
--------------------------------------------------------------------------
Net cash used in investing activities (14,500) (1,884) (462) (16,846)
Cash flows from financing activities:
Payments on short-term borrowings (104) (104)
Proceeds from borrowings of
long-term debt 19,444 19,444
Payments on long-term debt (18,736) (640) (341) (19,717)
Payment of preferred stock dividend (74) (74)
Repurchase of common stock (1,567) (1,567)
--------------------------------------------------------------------------
Net cash used in financing activities (933) (640) (445) (2,018)
Net (decrease) increase in cash and
cash equivalents (12,626) 103 148 (12,375)
Cash and cash equivalents,
at beginning of period 12,878 46 1,393 14,317
--------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 252 $ 149 $ 1,541 $ 0 $ 1,942
==========================================================================
</TABLE>
18
<PAGE> 19
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 six 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 six 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.
SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999
Net Sales. Net sales increased $5.6 million, or 11.6%, to $53.7 million in the
second quarter of 2000 from $48.1 million in the comparable quarter of 1999. The
Company experienced sales increases in all its segments. Sales in the Company's
powder metal segment increased $3.1 million, or 16.9%, to $21.5 million in the
second quarter of 2000 from $18.4 million in the comparable quarter of 1999. The
increase in sales in this segment was driven primarily by increased demand from
the Company's existing customer base as well as sales to new customers in 2000.
Sales in the friction segment increased $1.4 million, or 5.6%, to $26.4 million
in the second quarter of 2000 from $25.0 million in the comparable quarter of
1999. The increase in this segment was driven by strong demand in the
construction and specialty friction markets. This increase was partially offset
by declines in the truck markets served by the Company. Sales in the Company's
other segment, which includes rotors and high performance clutches, increased
$1.2 million, or 25.5%, to $5.9 million in the second quarter of 2000 from $4.7
million in the comparable quarter of 1999. The increase in this segment is
attributable to the acquisition of Quarter Master Industries, Inc. in November
1999. Sales of rotors during the second quarter of 2000 were flat compared to
the comparable quarter in 1999.
Gross Profit. Gross profit increased $2.4 million, or 18.9%, to $15.1 million in
the second quarter of 2000 from $12.7 million in the comparable quarter of 1999.
The increase is attributable to volume increases during the current quarter and
the effects of cost reduction and manufacturing improvement programs initiated
by the Company. Offsetting this increase were product mix, start up costs of new
product introductions and a 9.8% increase in depreciation in the second quarter
of 2000, primarily as a result of the Company's capital expansion program. As a
result of these factors, the gross profit margin increased to 28.1% in the
second quarter of 2000 from 26.4% in the comparable period of 1999.
Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased
$1.8 million, or 27.3%, to $8.4 million in the second quarter of 2000 from $6.6
million in the comparable period of 1999. The acquisition of Quarter Master, and
expenses associated with the opening of the Company's Mexican and Chinese
facilities represented 44.4% of the total increase in ST&A during the second
quarter of 2000. In addition, the Company incurred additional personnel costs
during the quarter as a result of a number of staff development programs
initiated in the friction and
19
<PAGE> 20
powder metal segments. As a result, ST&A expenses, as a percent of sales,
increased to 15.6% of sales in the second quarter of 2000 from 13.7% in the
comparable quarter of 1999.
Income from Operations. Income from operations increased by $0.5 million, or
9.6%, to $5.7 million in the second quarter of 2000 from $5.2 million in the
comparable quarter of 1999. Income from operations as a percent of net sales
decreased to 10.6% in the second quarter of 2000 from 10.8% in the comparable
quarter of 1999, reflecting increased depreciation and ST&A expenses. Operating
income in the Company's friction segment increased $0.7 million, or 28.0%, to
$3.2 million in the second quarter of 2000 from $2.5 million in the comparable
quarter of 1999. This increase occurred as a result of increased sales volumes,
internal manufacturing process improvements and cost reduction programs, offset
by increased expenditures relating to the Company's Chinese facility start-up
and higher depreciation costs. Operating income in the Company's powder metal
segment decreased $0.2 million, or 6.9%, to $2.7 million in the second quarter
of 2000 from $2.9 million in the comparable quarter of 1999. The decline in this
segment was due to product mix, the continued reduction of high margin shipments
to a customer in the office equipment market and higher depreciation expenses.
Interest Expense. Interest expense decreased $0.1 million, or 4.2%, to $2.3
million in the second quarter of 2000 from $2.4 million in the comparable
quarter of 1999. The decrease is attributable primarily to lower debt levels
during the quarter.
Income Taxes. The provision for income taxes increased to $1.5 million in the
second quarter of 2000 from $1.3 million in the comparable quarter of 1999,
reflecting the increase in pre-tax income. The Company's effective tax rate
during the second quarter of 2000 was 44.5% compared to 41.6% in the comparable
quarter of 1999. The increase in the effective rate during the second quarter of
2000 resulted primarily from the Company qualifying for state investment tax
credits in the second quarter of 1999.
Net Income. As a result of the factors discussed above, net income increased
$0.1 million, or 5.6%, to $1.9 million in the second quarter of 2000 from $1.8
million in the comparable period of 1999.
FIRST SIX MONTHS OF 2000 COMPARED TO FIRST SIX MONTHS OF 1999
Net Sales. Net sales increased by $13.5 million, or 14.2%, to $108.7 million
during the first six months of 2000 from $95.2 million during the first six
months of 1999. The sales increase during the period was attributable to the
acquisition of Quarter Master and to a lesser extent, the acquisition of
Allegheny Powder Metallurgy, Inc. in March 1999 and volume increases to existing
and new customers in the Company's other segments. Sales in the Company's powder
metal segment increased 25.1% to $43.3 million for the first six months of 2000
from $34.6 million in the comparable period of 1999. Sales in the Friction
segment increased 4.3% to $53.2 million for the six months ended June 2000 from
$51.0 million in the comparable period of 1999. Sales in the Company's other
segment, which includes rotors and high performance clutches, increased $2.8
million, or 29.5%, to $12.3 million in the second quarter of 2000 from $9.5
million in the comparable quarter of 1999. The increase in this segment is
attributable to the acquisition of Quarter Master.
Gross Profit. Gross profit increased $3.4 million, or 12.7%, to $30.2 million
during the first six months of 2000 from $26.8 million during the first six
months of 1999. The gross profit margin decreased to 27.8% during the first six
months of 2000 from 28.2% during the comparable period of 1999. The decrease was
primarily due to product mix changes, start-up costs of new product
introductions in the powder metal segment and a 10.1% increase in depreciation
primarily as a result of the Company's capital expansion program.
ST&A Expenses. ST&A expenses increased $3.3 million, or 25.4%, to $16.3 million
during the first six months of 2000 from $13.0 million during the first six
months of 1999. The factors affecting the increase in ST&A include the
acquisition of Quarter Master, expenses associated with the opening of the
Company's facilities in Mexico and China
20
<PAGE> 21
and increased personnel costs in the friction and powder metal segments. ST&A
expenses increased to 15.0% of sales during the first six months of 2000 from
13.7% during the comparable period of 1999.
Income from Operations. Income from operations was flat at $11.9 million during
the first six months of 2000 and 1999. Income from operations as a percent of
net sales decreased to 10.9% in the first six months of 2000 from 12.5% in the
comparable six month period of 1999, reflecting increased depreciation and ST&A
expenses. Operating income from the Company's friction segment was flat at $5.4
million. Operating income increases due to higher volumes during the six month
period ended June 30, 2000 were offset by product mix and severance costs
expenditures in the first quarter of 2000. Operating income in the powder metal
segment decreased $0.2 million, or 3.0%, to $6.4 million in the first six months
of 2000 from $6.6 million in the comparable six month period of 1999. The
decrease was the result of product mix, the continued reduction of high margin
shipments to a customer in the office equipment market and higher depreciation
expenses offset by volume increases during the period.
Interest Expense. Interest expense decreased $0.3 million, or 6.3%, to $4.5
million in the first six months of 2000 from $4.8 million in the comparable six
month period of 1999. The decrease is attributable to lower debt levels during
the period.
Income Taxes. The provision for income taxes increased to $3.2 million in the
first six months of 2000 from $3.1 million in the comparable period of 1999. The
Company's effective tax rate during the first six months of 2000 was 44.2%
compared to 41.4% in the comparable six month period of 1999. The increase in
the effective rate during the six month period ended June 30, 2000 compared to
the period ended June 30, 1999 resulted primarily from the Company qualifying
for state investment tax credits during the 1999 period.
Net Income. As a result of the factors discussed above, net income decreased
$0.3 million, or 6.8%, to $4.1 million in the first six months of 2000 from $4.4
million in the comparable period 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 (the
"Revolver") entered into in May 1998, which may be used for general corporate
purposes or to finance future acquisitions. As of June 30, 2000, the Company had
$50.0 million available under the Revolver.
Net cash provided by operating activities was $14.7 million and $6.5 million for
the six month period ended June 30, 2000 and 1999, respectively. Cash provided
by working capital assets as of June 30, 2000 and a 10.0% increase in
depreciation and amortization expense to $7.4 million for the period ended June
30, 2000 primarily accounted for the increase in operating cash flow.
Net cash used in investing activities was $5.5 million and $16.8 million for the
six month period ended June 30, 2000 and 1999, respectively. The cash used in
investing activities during the six month period ended June 30, 2000, consisted
of purchases 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 $4.4 million for purchases of property, plant and equipment.
During the period ended June 30, 1999, the Company received proceeds of $2.1
million from the sale of its research and development facility in Solon, Ohio.
Net cash used in financing activities was $9.3 million for the six month period
ended June 30, 2000 from the payment of outstanding debt. In the six month
period ended June 30, 1999, cash used in financing activities was $2.0 million.
The funds were primarily used to repurchase $1.6 million of the Company's common
stock and the payment of $0.3 million of outstanding debt.
21
<PAGE> 22
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 June 30, 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,
including agreements with approximately 230 employees at the Company's
Brook Park, Ohio facility expiring in October 2000 and approximately
190 employees at the Company's Orzinuovi, Italy facility expiring in
December 2000, 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
23
<PAGE> 23
- 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 June 30, 2000, the
notional amount was $25.0 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 June 30, 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 June 30, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 2000 the Company held its 2000 Annual Meeting of Stockholders to act
on proposals to elect Directors, approve the Hawk Corporation 2000 Long-Term
Incentive Plan, approve performance based compensation for the Company's
co-chief executive officers and to ratify the appointment of its independent
accountants for 2000.
Paul R. Bishop, Jack F. Kemp and Dan T. Moore, III were re-elected for a one
year term of office expiring in 2001 with 7,606,862, 7,606,362, and 7,606,862
affirmative votes, respectively (99.8% of the total votes cast, respectively).
These candidates had 14,707, 15,207 and 14,707 votes withheld, respectively.
Pursuant to the terms of the Company's Series D Preferred Stock, the holders of
the Series D Preferred Stock have the right to elect a majority of the Company's
Board of Directors. The holders of the Series D Preferred Stock are Norman C.
Harbert, Ronald E. Weinberg, Byron S. Krantz, the Harbert Family Limited
Partnership, the Weinberg
23
<PAGE> 24
Family Limited Partnership and the Krantz Family Limited Partnership. The
holders of the Series D Preferred Stock elected Norman C. Harbert, Ronald E.
Weinberg, Byron S. Krantz and William J. O'Neill, Jr. at the Annual Meeting.
The proposal to approve the Hawk Corporation 2000 Long-Term Incentive Plan
received 5,930,122 affirmative votes (77.8% of the total votes cast), 589,021
votes against and 5,100 abstentions.
The proposal to approve the performance-based compensation for the Company's
co-chief executive officers for purposes of Section 162(m) of the Internal Code
received 7,519,125 affirmative votes (98.7% of the total votes cast), 73,011
votes against and 7,423 abstentions.
The proposal to ratify the appointment of Ernst and Young LLP as the Company's
independent accountants for 2000 received 7,617,191 affirmative votes (99.9% of
the total votes cast), 3,613 votes against and 755 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule for the period ended
June 30, 2000 (filed herewith).
(b) Reports on Form 8-K:
None
24
<PAGE> 25
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: August 14, 2000 HAWK CORPORATION
By: /s/ Ronald E. Weinberg
-----------------------
Ronald E. Weinberg,
Co-Chairman and Treasurer
By: /s/ Thomas A. Gilbride
-----------------------
Thomas A. Gilbride,
Vice President- Finance (Chief Accounting Officer)
25
