<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 SEPTEMBER 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 (or 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 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,709 $ 3,993
Accounts receivable, less allowance of $515 and $408, respectively 30,655 29,745
Inventories 27,970 27,119
Deferred income taxes 1,711 1,747
Other current assets 2,680 3,599
----------- -----------
Total current assets 67,725 66,203
Property, plant and equipment:
Land 1,518 1,504
Buildings and improvements 17,117 16,067
Machinery and equipment 83,541 81,953
Furniture and fixtures 5,223 4,915
Construction in progress 6,514 3,710
----------- -----------
113,913 108,149
Less accumulated depreciation 44,494 37,964
----------- -----------
Total property, plant and equipment 69,419 70,185
Other assets:
Intangible assets 66,109 69,177
Shareholder notes 1,010 1,010
Other 3,379 3,045
----------- -----------
Total other assets 70,498 73,232
----------- -----------
Total assets $ 207,642 $ 209,620
=========== =========
</TABLE>
3
<PAGE> 4
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,900 $ 11,414
Short-term borrowings 46 872
Accrued compensation 7,025 6,944
Other accrued expenses 9,213 6,271
Current portion of long-term debt 7,119 7,160
----------- ---------
Total current liabilities 35,303 32,661
Long-term liabilities:
Long-term debt 89,059 98,244
Deferred income taxes 10,640 10,559
Other 1,578 1,667
----------- ---------
Total long-term liabilities 101,277 110,470
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 23,944 18,491
Accumulated other comprehensive loss -
foreign currency translation (2,871) (1,949)
Treasury stock, at cost (4,735) (4,791)
----------- ---------
Total shareholders' equity 71,062 66,489
Total liabilities and shareholders' equity $ 207,642 $ 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 DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 156,490 $ 140,781 $ 47,746 $ 45,626
Cost of sales 112,756 103,264 34,234 34,938
----------- ----------- ----------- -----------
Gross profit 43,734 37,517 13,512 10,688
Selling, technical and
administrative expenses 23,982 19,597 7,713 6,548
Amortization of intangibles 3,075 2,816 1,024 957
----------- ----------- ----------- -----------
Total expenses 27,057 22,413 8,737 7,505
Income from operations 16,677 15,104 4,775 3,183
Interest expense 6,775 7,095 2,230 2,296
Interest income 171 399 67 266
Other (expense) income, net (441) 780 (286) 451
------------ ----------- ------------ -----------
Income before income taxes 9,632 9,188 2,326 1,604
Income taxes 4,065 3,512 833 369
----------- ----------- ----------- -----------
Net income $ 5,567 $ 5,676 $ 1,493 $ 1,235
=========== ============ ============ ============
Earnings per share:
Basic earnings per share $ .64 $ .64 $ .17 $ .14
=========== ============ ============ ============
Diluted earnings per share $ .64 $ .63 $ .17 $ .14
=========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,567 $ 5,676
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,974 10,133
Deferred income taxes 171 23
Loss (gain) on sale of property, plant and equipment 416 (95)
Changes in operating assets and liabilities, net:
Accounts receivable (1,750) (3,470)
Inventories (1,436) 672
Other assets 814 741
Accounts payable 866 (124)
Other liabilities 3,497 392
----------- -----------
Net cash provided by operating activities 19,119 13,948
Cash flows from investing activities:
Business acquisitions (14,500)
Proceeds from sale of property, plant and equipment 69 3,648
Purchases of property, plant and equipment (8,331) (6,873)
------------ ------------
Net cash used in investing activities (8,262) (17,725)
Cash flows from financing activities:
Payments on short-term debt (760)
Proceeds from borrowing on short-term debt 91
Proceeds from borrowings on long-term debt 10,982 26,051
Payments on long-term debt (20,065) (30,738)
Payments of preferred stock dividend (114) (111)
Repurchase of common stock (2,798)
----------- ------------
Net cash used in financing activities (9,957) (7,505)
Effect of exchange rate changes on cash (184) (100)
Net decrease in cash and cash equivalents 716 (11,382)
Cash and cash equivalents at the beginning of the period 3,993 14,317
----------- -----------
Cash and cash equivalents at the end of the period $ 4,709 $ 2,935
=========== ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 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 September 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 incorporated 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>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 5,567 $ 5,676 $ 1,493 $ 1,235
Foreign currency translation (922) (795) (281) 293
---------- ---------- ----------- ----------
Comprehensive income $ 4,645 $ 4,881 $ 1,212 $ 1,528
========= ========= =========== ===========
</TABLE>
7
<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:
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
Raw materials and work-in-process $19,069 $19,503
Finished products 10,384 9,310
Inventory reserves (1,483) (1,694)
------- -------
$27,970 $27,119
======= =======
NOTE 4 - EARNINGS PER SHARE
Basic and dilutive earnings per share is computed as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $ 5,567 $ 5,676 $ 1,493 $ 1,235
Preferred stock dividends (114) (111) (38) (37)
--------- --------- -------- ---------
Numerator for basic earnings per share-income
available to common shareholders 5,453 5,565 1,455 1,198
========= ========= ======== =========
Effect of dilutive securities:
Interest on convertible note, net of tax 56 18
--------- --------- -------- ---------
Numerator for diluted earnings per share-income
available to common shareholders after assumed
conversion 5,509 5,565 1,473 1,198
========= ========= ======== =========
Denominator:
Denominator for basic earnings per share-
weighted average shares 8,548 8,696 8,549 8,621
Effect of dilutive securities:
Employee stock options 21 51
Convertible notes 108 101 100 125
--------- --------- -------- ---------
Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversions 8,677 8,797 8,700 8,746
========= ========= ======== =========
Basic earnings per share $ .64 $ .64 $ .17 $ .14
========= ========= ======== =========
Diluted earnings per share $ .64 $ .63 $ .17 $ .14
========= ========= ======== =========
</TABLE>
8
<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>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from external customers:
Friction products $ 78,301 $ 75,762 $ 25,102 $ 24,748
Powder metal 61,202 50,921 17,909 16,324
Other 16,987 14,098 4,735 4,554
-------- -------- -------- --------
Consolidated $ 156,490 $ 140,781 $ 47,746 $ 45,626
Depreciation and amortization:
Friction products $ 6,139 $ 5,950 $ 2,015 $ 1,998
Powder metal 3,751 3,422 1,224 1,194
Other 1,084 761 373 250
-------- -------- -------- --------
Consolidated $ 10,974 $ 10,133 $ 3,612 $ 3,442
Operating income:
Friction products $ 8,629 $ 6,771 $ 3,234 $ 1,380
Powder metal 8,406 8,657 2,031 2,098
Other (358) (324) (490) (295)
-------- -------- -------- --------
Consolidated $ 16,677 $ 15,104 $ 4,775 $ 3,183
</TABLE>
9
<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 September 30, 2000 and
December 31, 1999, consolidating condensed statements of income for
the three and nine month periods ended September 30, 2000 and 1999 and
consolidating condensed statements of cash flows for the nine months
ended September 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>
SEPTEMBER 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 $ 2,497 $ 102 $ 2,110 $ 4,709
Accounts receivable, net 24,115 6,540 30,655
Inventories, net 22,407 5,563 27,970
Deferred income taxes 1,459 252 1,711
Other current assets 269 1,504 907 2,680
---------------------------------------------------------------------------
Total current assets 4,225 48,128 15,372 67,725
Investment in subsidiaries 793 3,716 $ (4,509)
Inter-company advances, net 154,193 4,594 (4,523) (154,264)
Property, plant and equipment, net 61,053 8,366 69,419
Intangible assets 209 65,900 66,109
Other 1,010 3,611 778 (1,010) 4,389
---------------------------------------------------------------------------
TOTAL ASSETS $ 160,430 $ 187,002 $ 19,993 $ (159,783) $ 207,642
===========================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 9,201 $ 2,699 $ 11,900
Short-term borrowings 46 46
Accrued compensation $ 9 6,100 916 7,025
Other accrued expenses 4,707 3,973 533 9,213
Current portion of long-term debt 5,000 1,779 340 7,119
---------------------------------------------------------------------------
Total current liabilities 9,716 21,053 4,534 35,303
Long-term liabilities:
Long-term debt 84,534 4,013 512 89,059
Deferred income taxes 9,906 734 10,640
Other 522 1,056 1,578
Inter-company advances, net 1,149 144,684 9,441 $ (155,274)
---------------------------------------------------------------------------
Total long-term liabilities 95,589 149,219 11,743 (155,274) 101,277
---------------------------------------------------------------------------
Total liabilities 105,305 170,272 16,277 (155,274) 136,580
Shareholders' equity 55,125 16,730 3,716 (4,509) 71,062
---------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY
$ 160,430 $ 187,002 $ 19,993 $ (159,783) $ 207,642
===========================================================================
</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>
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>
NINE MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 139,974 $ 16,516 $ 156,490
Cost of sales $ 285 99,135 13,336 112,756
------------------------------------------------------------------------
Gross profit (285) 40,839 3,180 43,734
Expenses:
Selling, technical and
administrative expenses 88 20,800 3,094 23,982
Amortization of intangible assets 6 3,069 3,075
-------------------------------------------------------------------------
Total expenses 94 23,869 3,094 27,057
-------------------------------------------------------------------------
Income (loss) from operations (379) 16,970 86 16,677
Interest (income) expense, net (2,860) 8,971 493 6,604
Income (loss) from equity investees 3,891 (793) $ (3,098)
Other expense 370 71 441
-------------------------------------------------------------------------
Income (loss) before income taxes 6,372 6,836 (478) (3,098) 9,632
Income taxes 805 2,945 315 4,065
-------------------------------------------------------------------------
NET INCOME (LOSS) $ 5,567 $ 3,891 $ (793) $ (3,098) $ 5,567
=========================================================================
</TABLE>
13
<PAGE> 14
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 125,272 $ 15,509 $ 140,781
Cost of sales 90,195 13,069 103,264
-------------------------------------------------------------------------
Gross profit 35,077 2,440 37,517
Expenses:
Selling, technical and
administrative expenses $ (65) 17,439 2,223 19,597
Amortization of intangible assets 7 2,807 2 2,816
-------------------------------------------------------------------------
Total expenses (58) 20,246 2,225 22,413
-------------------------------------------------------------------------
Income from operations 58 14,831 215 15,104
Interest (income) expense, net (2,850) 9,215 331 6,696
Income (loss) from equity investees 3,820 (225) $ (3,595)
Other (income) expense (4) (821) 45 (780)
-------------------------------------------------------------------------
Income (loss) before income taxes 6,732 6,212 (161) (3,595) 9,188
Income taxes 1,056 2,392 64 3,512
-------------------------------------------------------------------------
NET INCOME (LOSS) $ 5,676 $ 3,820 $ (225) $ (3,595) $ 5,676
=========================================================================
</TABLE>
14
<PAGE> 15
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 42,652 $ 5,094 $ 47,746
Cost of sales 30,066 4,168 34,234
-------------------------------------------------------------------------
Gross profit 12,586 926 13,512
Expenses:
Selling, technical and
administrative expenses $ (56) 6,771 998 7,713
Amortization of intangible assets 1 1,023 1,024
-------------------------------------------------------------------------
Total expenses (55) 7,794 998 8,737
-------------------------------------------------------------------------
Income (loss) from operations 55 4,792 (72) 4,775
Interest (income) expense, net (967) 2,957 173 2,163
Income (loss) from equity investees 712 (338) $ (374)
Other expense 269 17 286
-------------------------------------------------------------------------
Income (loss) before income taxes 1,734 1,228 (262) (374) 2,326
Income taxes 241 516 76 833
-------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,493 $ 712 $ (338) $ (374) $ 1,493
=========================================================================
</TABLE>
15
<PAGE> 16
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 40,691 $ 4,935 $ 45,626
Cost of sales 30,953 3,985 34,938
-------------------------------------------------------------------------
Gross profit 9,738 950 10,688
Expenses:
Selling, technical and
administrative expenses $ 60 5,577 911 6,548
Amortization of intangible assets 3 952 2 957
-------------------------------------------------------------------------
Total expenses 63 6,529 913 7,505
-------------------------------------------------------------------------
Income (loss) from operations (63) 3,209 37 3,183
Interest (income) expense, net (922) 2,841 111 2,030
Income (loss) from equity investees 637 (109) $ (528)
Other expense (income) 25 (540) 64 (451)
-------------------------------------------------------------------------
Income (loss) before income taxes 1,471 799 (138) (528) 1,604
Income taxes 236 162 (29) 369
-------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,235 $ 637 $ (109) $ (528) $1,235
=========================================================================
</TABLE>
16
<PAGE> 17
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities $ 8,837 $ 7,054 $ 3,228 $ 19,119
Cash flows from investing activities:
Proceeds from sale of property,
plant and equipment 69 69
Purchase of property, plant and
equipment (6,326) (2,005) (8,331)
--------------------------------------------------------------------------
Net cash used in investIng activities (6,257) (2,005) (8,262)
Cash flows from financing activities:
Payments on short-term debt (760) (760)
Proceeds from borrowings of
long-term debt 10,208 774 10,982
Payments on long-term debt (18,125) (1,662) (278) (20,065)
Payment of preferred stock dividend (114) (114)
--------------------------------------------------------------------------
Net cash used in financing activities (8,031) (888) (1,038) (9,957)
Effect of exchange rate changes on
cash (184) (184)
Net increase (decrease) in cash and
cash equivalents 806 (91) 1 716
Cash and cash equivalents,
at beginning of period 1,691 193 2,109 3,993
--------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 2,497 $ 102 $ 2,110 $ 4,709
==========================================================================
</TABLE>
17
<PAGE> 18
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities $ 8,317 $ 4,220 $ 1,411 $ 13,948
Cash flows from investing activities:
Business acquisitions (14,500) (14,500)
Purchase of property, plant and
equipment (6,312) (561) (6,873)
Proceeds from sale of
property, plant and equipment 3,648 3,648
--------------------------------------------------------------------------
Net cash used in investIng activities (14,500) (2,664) (561) (17,725)
Cash flows from financing activities:
Proceeds from borrowings of
short-term debt 91 91
Proceeds from borrowings of
long-term debt 26,051 26,051
Payments on long-term debt (29,301) (961) (476) (30,738)
Payment of preferred stock dividend (111) (111)
Repurchase of common stock (2,798) (2,798)
--------------------------------------------------------------------------
Net cash used in financing activities (6,159) (961) (385) (7,505)
Effect of exchange rate changes on
cash (100) (100)
Net (decrease) increase in cash and
cash equivalents (12,342) 595 365 (11,382)
Cash and cash equivalents,
at beginning of period 12,878 46 1,393 14,317
--------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 536 $ 641 $ 1,758 $ 2,935
==========================================================================
</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 50% of the Company's sales
in the first nine 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 39%
of Company sales in the first nine 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 and automotive markets.
RECENT DEVELOPMENT
On November 1, 2000, the Company acquired Tex Racing Enterprises, Inc., a
leading manufacturer of premium branded drive train components for motorsports
and performance automotive markets. Tex Racing, founded in 1975, is located in
Ether, North Carolina. The transaction was financed using available cash of the
Company.
THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999
Net Sales. Net sales increased $2.1 million, or 4.6%, to $47.7 million in the
third quarter of 2000 from $45.6 million in the comparable quarter of 1999. The
Company experienced sales increases in all its segments for the quarter. Sales
in the Company's powder metal segment increased $1.6 million, or 9.8%, to $17.9
million in the third quarter of 2000 from $16.3 million in the comparable
quarter of 1999. Sales increases in this segment were primarily the result of
continuing demand from the Company's existing customer base, as well as sales to
new customers during the quarter. The Company continued to experience strong
demand from customers in the appliance and fluid power markets. Sales to
customers in the lawn and garden markets remained flat at last year's record
levels. Sales in the friction segment increased $0.4 million, or 1.6%, to $25.1
million in the second quarter of 2000 from $24.7 million in the comparable
quarter of 1999. The increase in this segment was primarily the result demand
experienced during the quarter in the construction and specialty friction
markets, which was primarly a result of demand in the motorcycle and bicycle
markets. This increase was partially offset by continuing declines in the truck
markets served by the Company. Sales in the Company's other segment, which
includes rotors and high performance clutches, increased $0.1 million, or 2.2%,
to $4.7 million in the third quarter of 2000 from $4.6 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
third quarter of 2000 were flat compared to the comparable quarter in 1999 while
sales of other products in this segment were down during the third quarter of
2000 compared to the comparable quarter of 1999.
Gross Profit. Gross profit increased $2.8 million, or 26.2%, to $13.5 million in
the third quarter of 2000 from $10.7 million in the comparable quarter of 1999.
The increase is attributable to sales volume increases during the current
quarter and the continuing effects of cost reduction and manufacturing
improvement programs initiated by the Company in 2000. Offsetting this increase
were product mix, start up costs of new product introductions and a 4.3%
increase in depreciation in the third quarter of 2000, primarily as a result of
the Company's capital expansion program.
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<PAGE> 20
As a result of these factors, the gross profit margin increased to 28.3% in the
third quarter of 2000 from 23.5% in the comparable period of 1999.
Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased
$1.2 million, or 18.5%, to $7.7 million in the third quarter of 2000 from $6.5
million in the comparable period of 1999. The acquisition of Quarter Master, and
ongoing expenses associated with the opening of the Company's Mexican and
Chinese facilities represented 41.7% of the total increase in ST&A during the
third 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 powder metal segments. As a result, ST&A expenses,
as a percent of net sales, increased to 16.1% of sales in the third quarter of
2000 from 14.3% in the comparable quarter of 1999.
Income from Operations. Income from operations increased by $1.6 million, or
50.0%, to $4.8 million in the third quarter of 2000 from $3.2 million in the
comparable quarter of 1999. Income from operations as a percent of net sales
increased to 10.1% in the third quarter of 2000 from 7.0% in the comparable
quarter of 1999, reflecting volume increases and margin improvement. Operating
income in the Company's friction segment increased $1.8 million, or 128.6%, to
$3.2 million in the third quarter of 2000 from $1.4 million in the comparable
quarter of 1999. This increase occurred as a result of increased sales volumes,
product mix, internal manufacturing process improvements and cost reduction
programs, partially offset by continuing expenditures relating to the Company's
Chinese facility start-up. Operating income in the Company's powder metal
segment decreased $0.1 million, or 4.8%, to $2.0 million in the third quarter of
2000 from $2.1 million in the comparable quarter of 1999. The decline in this
segment was primarily 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 4.3%, to $2.2
million in the third quarter of 2000 from $2.3 million in the comparable quarter
of 1999. The decrease is attributable primarily to lower debt levels partially
offset by higher interest rates during the quarter.
Other Expense (Income). Other expense was $0.3 million during the third quarter
of 2000 compared to other income of $0.5 million during the comparable quarter
of 1999. The expense reported during the third quarter of 2000, resulted
primarily as a result of foreign currency translation losses from the Company's
Italian facility. The income reported in 1999 resulted from the collection of a
contingent receivable relating from the purchase of S. K. Wellman Corp. in 1995,
partially offset by a loss on the sale of an unused manufacturing facility in
LaVergne, Tennessee.
Income Taxes. The provision for income taxes increased to $0.8 million in the
third quarter of 2000 from $0.4 million in the comparable quarter of 1999,
primarily the result of the increase in the Company's pre-tax income. The
Company's effective tax rate during the third quarter of 2000 was 35.8% compared
to 23.0% in the comparable quarter of 1999. The increase in the effective rate
during the third quarter of 2000 resulted primarily from the Company qualifying
for various state investment and job tax credits during 1999.
Net Income. As a result of the factors discussed above, net income increased
$0.3 million, or 25.0%, to $1.5 million in the third quarter of 2000 from $1.2
million in the comparable period of 1999.
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<PAGE> 21
FIRST NINE MONTHS OF 2000 COMPARED TO FIRST NINE MONTHS OF 1999
Net Sales. Net sales increased by $15.7 million, or 11.2%, to $156.5 million
during the first nine months of 2000 from $140.8 million during the first nine
months of 1999. Sales in the Company's powder metal segment increased 20.2% to
$61.2 million for the first nine months of 2000 from $50.9 million in the
comparable period of 1999. The sales increase in this segment for the nine month
period ended September were primarily the result of new powder metal programs
and growth from existing customers. In addition, sales in the 2000 nine-month
period benefited fully from the March 1999 acquisition of Allegheny Powdered
Metallurgy, Inc., which was only partially reflected in the results of the first
nine months of 1999. Sales in the friction segment increased 3.3% to $78.3
million for the nine months ended September 2000 from $75.8 million in the
comparable period of 1999. The increase in this segment was primarily the result
of increases in the construction and specialty friction markets served by the
Company. These increases were somewhat offset by declines in the aerospace and
truck markets and continued softness in the agriculture markets served by the
Company. Sales in the Company's other segment, which includes rotors and high
performance clutches, increased $2.9 million, or 20.6%, to $17.0 million in the
nine month period ended September 2000 from $14.1 million in the comparable
period of 1999. The increase in this segment is attributable to the acquisition
of Quarter Master.
Gross Profit. Gross profit increased $6.2 million, or 16.5%, to $43.7 million
during the first nine months of 2000 from $37.5 million during the first nine
months of 1999. The gross profit margin increased to 27.9% during the first nine
months of 2000 from 26.6% during the comparable period of 1999. The increase was
due to the sales volume increases as well as and the continuing effects of cost
reduction and manufacturing improvement programs initiated by the Company in
2000, partially offset by product mix at the Company's powder metal facilities.
ST&A Expenses. ST&A expenses increased $4.4 million, or 22.4%, to $24.0 million
during the first nine months of 2000 from $19.6 million during the first nine
months of 1999. The factors affecting the increase in ST&A include the
acquisition of Quarter Master, ongoing expenses associated with the opening of
the Company's facilities in Mexico and China and increased personnel costs in
the friction and powder metal segments. ST&A expenses increased to 15.3% of
sales during the first nine months of 2000 from 13.9% during the comparable
period of 1999. The acquisition of Quarter Master, and ongoing expenses
associated with the opening of the Company's Mexican and Chinese facilities
represented 43.2% of the total increase in ST&A during the first nine months of
2000.
Income from Operations. Income from operations increased by $1.6 million, or
10.6%, to $16.7 million during the first nine months of 2000 from $15.1 million
in the comparable nine month period of 1999. Income from operations as a percent
of net sales remained flat at 10.7% during the first nine months of 2000 and
1999. Operating income from the Company's friction segment increased $1.8
million, or 26.5%, to $8.6 million for the first nine months of 2000 from $6.8
million in the comparable nine month period of 1999. This increase was primarily
driven by the sales volume increases, internal manufacturing process
improvements and cost reduction programs, partially offset by the continuing
start-up costs of the Company's Chinese manufacturing facility. Operating income
from the Company's powder metal segment decreased $0.3 million, or 3.4%, to $8.4
million in the first nine months of 2000 from $8.7 million in the comparable
nine month period of 1999. The decline in this segment was primarily caused by
product mix, the continued reduction of high margin shipments to a customer in
the office equipment market and an 8.0% increase in depreciation during the
period.
Interest Expense. Interest expense decreased $0.3 million, or 4.2%, to $6.8
million in the first nine months of 2000 from $7.1 million in the comparable
nine month period of 1999. The decrease is attributable to lower debt levels
partially offset by higher interest rates during the period.
Income Taxes. The provision for income taxes increased to $4.1 million in the
first nine months of 2000 from $3.5 million in the comparable period of 1999.
The Company's effective tax rate during the first nine months of 2000 was 42.2%
compared to 38.2% in the comparable nine month period of 1999. The increase in
the effective rate resulted primarily from the Company qualifying for state job
and investment tax credits during the 1999 period.
21
<PAGE> 22
Net Income. As a result of the factors discussed above, net income decreased
$0.1 million, or 1.8%, to $5.6 million in the first nine months of 2000 from
$5.7 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 September 30, 2000, the
Company had $49.2 million available under the Revolver.
Net cash provided by operating activities was $19.1 million and $13.9 million
for the nine month period ended September 30, 2000 and 1999, respectively. Cash
provided by favorable changes in working capital assets as of September 30, 2000
primarily accounted for the increase in operating cash flow.
Net cash used in investing activities was $8.3 million and $17.7 million for the
nine month period ended September 30, 2000 and 1999, respectively. The cash used
in investing activities during the nine month period ended September 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 $6.9 million for purchases of property, plant
and equipment. During the period ended September 30, 1999, the Company received
proceeds of $3.6 million from the sale of two unused facilities.
Net cash used in financing activities was $10.0 million for the nine month
period ended September 30, 2000 primarily from the payment of outstanding debt.
During the nine month period ended September 30, 1999, cash used in financing
activities was $7.5 million. In 1999, the funds were primarily used to
repurchase $2.8 million of the Company's common stock and the payment of $4.7
million of outstanding debt.
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 September 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 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
22
<PAGE> 23
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, its Tex Racing acquisition, 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 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
- 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 September 30, 2000, the
notional amount was $23.8 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 September 30, 2000, the Company would
receive approximately $0.1 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
23
<PAGE> 24
movement of exchange rates. The unhedged foreign currency balance sheet
exposures as of September 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule for the period ended September 30, 2000
(filed herewith).
(b) Reports on Form 8-K:
None
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<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: November 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
