10-Q 1 l87943ae10-q.txt HAWK CORPORATION FORM 10-Q 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 MARCH 31, 2001 [ ] 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: 8,552,920 Class B Common Stock, $0.01 par value: None (0) 1 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 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22
2 3 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) HAWK CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2001 2000 (UNAUDITED) (SEE NOTE) ----------- ---------- ASSETS Current assets: Cash and cash equivalents $ 3,154 $ 4,010 Accounts receivable, less allowance of $360 and $372, respectively 34,790 29,602 Inventories 31,489 31,864 Deferred income taxes 1,386 1,113 Other current assets 2,489 2,976 -------- -------- Total current assets 73,308 69,565 Property, plant and equipment: Land 1,603 1,603 Buildings and improvements 18,328 18,240 Machinery and equipment 90,403 89,330 Furniture and fixtures 6,021 5,584 Construction in progress 3,804 3,316 -------- -------- 120,159 118,073 Less accumulated depreciation 50,062 47,672 -------- -------- Total property, plant and equipment 70,097 70,401 Other assets: Intangible assets 69,947 70,713 Shareholder notes 1,010 1,010 Other 3,806 3,696 -------- -------- Total other assets 74,763 75,419 -------- -------- Total assets $218,168 $215,385 ======== ========
3 4 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2001 2000 (UNAUDITED) (SEE NOTE) ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,917 $ 11,579 Accrued compensation 7,725 7,791 Other accrued expenses 5,852 6,446 Current portion of long-term debt 7,219 7,273 --------- --------- Total current liabilities 34,713 33,089 Long-term liabilities: Long-term debt 97,413 96,661 Deferred income taxes 11,716 11,554 Other 2,091 2,092 --------- --------- Total long-term liabilities 111,220 110,307 Minority Interest 203 300 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 8,552,920 and 8,548,520 outstanding, respectively 92 92 Class B common stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding Additional paid-in capital 54,628 54,631 Retained earnings 24,929 24,109 Accumulated other comprehensive loss - foreign currency translation (2,914) (2,409) Treasury stock, at cost (4,704) (4,735) --------- --------- Total shareholders' equity 72,032 71,689 Total liabilities and shareholders' equity $ 218,168 $ 215,385 ========= =========
Note: The balance sheet at December 31, 2000 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 5 HAWK CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 2001 2000 ---- ---- Net sales $ 53,781 $ 55,170 Cost of sales 39,961 40,227 -------- -------- Gross profit 13,820 14,943 Selling, technical and administrative expenses 8,780 7,715 Amortization of intangibles 1,131 1,025 -------- -------- Total expenses 9,911 8,740 Income from operations 3,909 6,203 Interest expense 2,443 2,289 Interest income (42) (40) Other expense 19 89 -------- -------- Income before income taxes and minority interest 1,489 3,865 Income taxes 729 1,701 -------- -------- Income before minority interest 760 2,164 Minority interest (97) -- -------- -------- Net income $ 857 $ 2,164 ======== ======== Earnings per share: Basic earnings per share: $ .10 $ .25 ======== ======== Diluted earnings per share: $ .10 $ .25 ======== ========
See notes to consolidated financial statements. 5 6 HAWK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH, 2001 2000 ---- ---- Cash flows from operating activities: Net income $ 857 $ 2,164 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,911 3,653 Deferred income taxes (81) 24 Changes in operating assets and liabilities, net: Accounts receivable (5,667) (3,813) Inventories 13 (306) Other assets (26) 1,134 Accounts payable 2,553 2,901 Other liabilities (382) 2,648 -------- -------- Net cash provided by operating activities 1,178 8,405 Cash flows from investing activities: Purchases of property, plant and equipment (2,840) (3,508) -------- -------- Net cash used in investing activities (2,840) (3,508) Cash flows from financing activities: Proceeds from borrowings on short-term debt 321 Proceeds from borrowings on long-term debt 13,733 7,367 Payments on long-term debt (12,781) (13,752) Payments of preferred stock dividend (37) (38) -------- -------- Net cash provided by (used in) financing activities 915 (6,102) Net decrease in cash and cash equivalents (747) (1,205) Effect of exchange rate changes on cash (109) (79) Cash and cash equivalents at the beginning of the period 4,010 3,993 -------- -------- Cash and cash equivalents at the end of the period $ 3,154 $ 2,709 ======== ========
See notes to consolidated financial statements. 6 7 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2001 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto in the Form 10-K for Hawk Corporation (the "Company") for the year ended December 31, 2000. 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. Beginning in December 2000, the financial statements also include the Company's 67% ownership interest in Net Shape Technologies, LLC. All significant inter-company accounts and transactions have been eliminated in the accompanying financial statements. Certain amounts have been reclassified in 2000 to conform to 2001 presentation. NOTE 2 - COMPREHENSIVE INCOME Comprehensive income is as follows: THREE MONTHS ENDED MARCH 31, 2001 2000 ---- ---- Net income $ 857 $ 2,164 Foreign currency translation (505) (422) ------- -------- Comprehensive income $ 352 $ 1,742 ======= ======== 7 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: MARCH 31, DECEMBER 31, 2001 2000 ---- ---- Raw materials and work-in-process $22,929 $23,106 Finished products 11,549 11,725 Inventory reserves (2,989) (2,967) ------- ------- $31,489 $31,864 ======= ======= NOTE 4 - EARNINGS PER SHARE Basic and diluted earnings per share are computed as follows:
THREE MONTHS ENDED MARCH 31, 2001 2000 ------------------------ Numerator: Net income $ 857 $ 2,164 Preferred stock dividends (37) (38) ------- ------- Numerator for basic earnings per share- income available to common shareholders $ 820 $ 2,126 ======= ======= Effect of dilutive securities: Interest on convertible note, net of tax -- 19 ------- ------- Numerator for diluted earnings per share- income available to common shareholders after assumed conversion $ 820 $ 2,145 ======= ======= Denominator: Denominator for basic earnings per share- weighted average shares 8,550 8,547 Effect of dilutive securities: Convertible notes and options 19 125 ------- ------- Denominator for diluted earnings per share- adjusted weighted-average shares and assumed conversions 8,569 8,672 ======= ======= Basic earnings per share $ .10 $ .25 ======= ======= Diluted earnings per share $ .10 $ .25 ======= =======
8 9 NOTE 5 - BUSINESS SEGMENTS The Company operates in four primary business segments: friction products, powder metal, performance automotive and motors. 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 performance automotive segment engineers, manufactures and markets high performance friction material for use in racing car brakes in addition to premium branded clutch and drive train components. The Company, through this segment, targets leading teams in the NASCAR racing series, as well as high-performance street vehicles and other road race and oval track competition cars. The motor segment engineers, manufactures and markets die-cast aluminum rotors for use in the subfractional electric motors. The Company, through this segment, targets a wide variety of applications such as business equipment, small household appliances and exhaust fans. The information by segment is as follows: THREE MONTHS ENDED MARCH 31, 2001 2000 -------------------------------- Revenues from external customers: Friction Products $ 28,321 $ 30,151 Powder Metal 17,846 19,904 Performance Automotive 5,403 2,655 Motor 2,211 2,460 -------------------------------- Consolidated $ 53,781 $ 55,170 Depreciation and amortization: Friction Products $ 2,219 $ 2,237 Powder Metal 1,194 1,096 Performance Automotive 270 147 Motor 228 173 -------------------------------- Consolidated $ 3,911 $ 3,653 Operating income: Friction Products $ 3,237 $ 2,489 Powder Metal 1,102 3,195 Performance Automotive 15 554 Motor (445) (35) -------------------------------- Consolidated $ 3,909 $ 6,203 9 10 NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138. As amended, SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, measure those instruments at fair value and recognize changes in the fair value of derivatives in earnings in the period of change unless the derivative qualifies as an effective hedge that offsets certain exposures. The Company periodically enters into interest-rate swap agreements to moderate exposure to interest-rate changes and to lower the overall cost of borrowing. During the quarter ended March 31, 2001, the Company entered into an interest-rate swap agreement that effectively converts a portion of its floating rate debt to a fixed rate of 5.34% on $10.0 million notional amount on its variable-rate debt maturing in 2003. Although this financial instrument did not meet the hedge accounting criteria of SFAS 133, it continues to be effective in achieving the risk management objectives for which it was intended. The fair value of the interest rate swap did not have a material impact on the Company's financial position or results of operations for the first quarter of 2001. NOTE 7 - 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 March 31, 2001 and December 31, 2000, consolidating condensed statements of income for the three month periods ended March 31, 2001 and 2000 and consolidating condensed statements of cash flows for the three months ended March 31, 2001 and 2000. 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 11 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
MARCH 31, 2001 ------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 828 $ 173 $ 2,153 $ 3,154 Accounts receivable, net 27,685 7,105 34,790 Inventories, net 25,233 6,256 31,489 Deferred income taxes 1,199 187 1,386 Other current assets 1,326 375 788 2,489 ----------------------------------------------------------------------------------- Total current assets 3,353 53,466 16,489 73,308 Investment in subsidiaries 794 2,469 $ (3,263) Inter-company advances, net 160,524 7,555 (6,070) (162,009) Property, plant and equipment, net 25 60,996 9,076 70,097 Intangible assets 205 69,742 69,947 Other 1,010 3,968 848 (1,010) 4,816 ----------------------------------------------------------------------------------- TOTAL ASSETS $165,911 $198,196 $ 20,343 $(166,282) $218,168 =================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,831 $ 3,086 $ 13,917 Accrued compensation $ 5 6,817 903 7,725 Other accrued expenses 2,394 1,992 1,466 5,852 Current portion of long-term debt 5,000 1,872 347 7,219 ----------------------------------------------------------------------------------- Total current liabilities 7,399 21,512 5,802 34,713 Long-term liabilities: Long-term debt 88,750 5,009 3,654 97,413 Deferred income taxes 11,128 588 11,716 Other 942 1,149 2,091 Inter-company advances, net 1,233 154,508 6,681 $(162,422) ----------------------------------------------------------------------------------- Total long-term liabilities 101,111 160,459 12,072 (162,422) 111,220 ----------------------------------------------------------------------------------- Total liabilities 108,510 181,971 17,874 (162,422) 145,933 Minority interest 203 203 Shareholders' equity 57,401 16,022 2,469 (3,860) 72,032 ----------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $165,911 $198,196 $ 20,343 $(166,282) $218,168 ===================================================================================
11 12 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2000 ------------------------------------------------------------------------------------------ COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 553 $ 1,027 $ 2,430 $ 4,010 Accounts receivable, net 22,785 6,817 29,602 Inventories, net 25,792 6,072 31,864 Deferred income taxes 1,199 (86) 1,113 Other current assets 967 1,363 646 2,976 ------------------------------------------------------------------------------------------ Total current assets 2,719 50,967 15,879 69,565 Investment in subsidiaries 794 3,168 $ (3,962) Inter-company advances, net 160,192 5,784 (5,084) (160,892) Property, plant and equipment 26 61,219 9,156 70,401 Intangible assets 207 70,506 70,713 Other 1,010 3,931 775 (1,010) 4,706 ------------------------------------------------------------------------------------------ Total assets $164,948 $ 195,575 $ 20,726 $(165,864) $215,385 ========================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,313 $ 3,266 $ 11,579 Accrued compensation $ 5 6,854 932 7,791 Other accrued expenses 633 5,047 766 6,446 Current portion of long-term debt 5,000 1,901 372 7,273 ------------------------------------------------------------------------------------------ Total current liabilities 5,638 22,115 5,336 33,089 Long-term liabilities: Long-term debt 90,645 5,574 442 96,661 Deferred income taxes 11,128 426 11,554 Other 937 1,155 2,092 Inter-company advances, net 1,197 149,909 10,199 $(161,305) ------------------------------------------------------------------------------------------ Total long-term liabilities 102,970 156,420 12,222 (161,305) 110,307 ------------------------------------------------------------------------------------------ Total liabilities 108,608 178,535 17,558 (161,305) 143,396 Minority interest 300 300 Shareholders' equity 56,340 16,740 3,168 (4,559) 71,689 ------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $164,948 $ 195,575 $ 20,726 $(165,864) $215,385 ==========================================================================================
12 13 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 ---------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------------------------------------------------------------------------- Net sales $ 47,093 $ 6,688 $ 53,781 Cost of sales 34,362 5,599 39,961 ---------------------------------------------------------------------------------- Gross profit 12,731 1,089 13,820 Expenses: Selling, technical and administrative expenses $ (412) 8,074 1,118 8,780 Amortization of intangible assets 3 1,128 1,131 ---------------------------------------------------------------------------------- Total expenses (409) 9,202 1,118 9,911 ---------------------------------------------------------------------------------- Income from operations 409 3,529 (29) 3,909 Interest income (expense), net 925 (3,132) (194) (2,401) Income (loss) from equity investees (213) (417) $ 630 Other income (expense), net (161) 142 (19) ---------------------------------------------------------------------------------- Income (loss) before income taxes and minority interest 1,121 (181) (81) 630 1,489 Income taxes 264 129 336 729 Minority interest (97) (97) ---------------------------------------------------------------------------------- NET INCOME (LOSS) $ 857 $ (213) $ (417) $ 630 $ 857 ==================================================================================
13 14 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 ------------------------------------------------------------------------------------ COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------------------ Net sales $ 49,762 $ 5,408 $ 55,170 Cost of sales $ 165 35,714 4,348 40,227 ------------------------------------------------------------------------------------ Gross profit (165) 14,048 1,060 14,943 Expenses: Selling, technical and administrative expenses 120 6,680 915 7,715 Amortization of intangible assets 2 1,023 1,025 ------------------------------------------------------------------------------------ Total expenses 122 7,703 915 8,740 ------------------------------------------------------------------------------------ Income from operations (287) 6,345 145 6,203 Interest income (expense), net 929 (3,034) (144) (2,249) Income (loss) from equity investees 1,772 (231) $ (1,541) Other income (expense), net (1) 3 (91) (89) ------------------------------------------------------------------------------------ Income (loss) before income taxes and minority interest 2,413 3,083 (90) (1,541) 3,865 Income taxes 249 1,311 141 1,701 ------------------------------------------------------------------------------------ NET INCOME (LOSS) $ 2,164 $ 1,772 $ (231) $ (1,541) $2,164 ====================================================================================
14 15 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 ---------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------------------------------------------------------------------------- Net cash provided by (used in) operating activities $ 2,207 $ 1,922 $ (2,951) $ 1,178 Cash flows from investing activities: Purchase of property, plant and equipment (2,242) (598) (2,840) ---------------------------------------------------------------------------------- Net cash used in investing activities (2,242) (598) (2,840) Cash flows from financing activities: Proceeds from long-term debt 10,190 3,543 13,733 Payments on long-term debt (12,085) (534) (162) (12,781) Payment of preferred stock dividend (37) (37) ---------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (1,932) (534) 3,381 915 Net increase (decrease) in cash and cash equivalents 275 (854) (168) (747) Effect of currency rate changes (109) (109) ---------------------------------------------------------------------------------- Cash and cash equivalents, at beginning of period 553 1,027 2,430 4,010 ---------------------------------------------------------------------------------- Cash and cash equivalents, at end of period $ 828 $ 173 $ 2,153 $ 0 $3,154 ==================================================================================
15 16 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 ----------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------------------------------------------------------------------------------- Net cash provided by operating activities $ 4,622 $ 3,259 $ 524 $ 8,405 Cash flows from investing activities: Purchase of property, plant and equipment (2,608) (900) (3,508) -------------------------------------------------------------------------------- Net cash used in investIng activities (2,608) (900) (3,508) Cash flows from financing activities: Proceeds from short-term debt 321 321 Proceeds from long-term debt 7,367 7,367 Payments on long-term debt (13,058) (694) (13,752) Payment of preferred stock dividend (38) (38) -------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (5,729) (694) 321 (6,102) Net decrease in cash and cash equivalents (1,107) (43) (55) (1,205) Effect of currency rate changes (79) (79) -------------------------------------------------------------------------------- Cash and cash equivalents, at beginning of period 1,691 193 2,109 3,993 -------------------------------------------------------------------------------- Cash and cash equivalents, at end of period $ 584 $ 150 $ 1,975 $ 0 $2,709 ================================================================================
16 17 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 in four primary reportable segments: friction products, powder metal, performance automotive and motor components. The Company's friction products are made from proprietary formulations of composite materials that primarily consist of metal powders, synthetic and natural fibers. Friction products 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 components for use in brakes, transmissions and clutches in aerospace, construction, agriculture, truck and specialty vehicle markets. The Company's powder metal components are made from formulations of composite powder metal alloys. The powder metal segment manufactures a variety of components for use in fluid power, truck, lawn and garden, construction, agriculture, home appliance, automotive and office equipment markets. In its performance automotive segment, the Company manufactures brakes, clutches and gearboxes for the performance automotive markets. Through its motor segment, the Company designs and manufactures die-cast aluminum rotors for small electric motors used in appliances, business equipment and exhaust fans. The Company focuses on manufacturing products requiring sophisticated engineering and production techniques for applications in markets in which it has achieved a significant market share. FIRST QUARTER 2001 COMPARED TO FIRST QUARTER 2000 Net Sales. Net sales decreased $1.4 million, or 2.5%, to $53.8 million in the first quarter of 2001 from $55.2 million in the comparable quarter of 2000. The sales decrease was primarily attributable to softness in the heavy truck, automotive, lawn and garden and appliance markets served by the Company during the quarter. Sales in the Company's friction products segment declined $1.9 million, or 6.3%, to $28.3 million from $30.2 million in the comparable quarter of 2000. The sales decrease in this segment reflected soft demand in the heavy truck and, to a lesser degree, the automotive markets served by the Company. These decreases were offset by higher demand in sales to the aerospace market for the quarter. The powder metal segment reported sales of $17.9 million in the first quarter of 2001 compared to $19.9 million in the first quarter of 2000, a decline of $2.1 million, or 10.6%. The sales decrease in this segment was primarily the result of softness in the heavy truck, lawn and garden, appliance and automotive markets served by the Company. Sales in the Company's performance automotive segment increased $2.8 million, or 107.7 percent, to $5.4 million in the first quarter of 2001 compared to $2.6 million in the comparable quarter of 2000. The acquisition of Tex Racing in November of 2000 was the primary reason for the sales increase in this segment for the quarter. In addition, sales of the Company's high performance brake pads which are sold into racing markets showed strong sales gains as well. Sales in the Company's motor segment decreased $0.3 million, or 12.0 percent, to $2.2 million in the first quarter of 2001 compared to $2.5 million from the first quarter of 2000. Sales declines in the segment were the result of softening economic conditions in the domestic motor markets served by the Company. Sales from the Company's Mexican facility began in the first quarter of 2001, but were immaterial to total segment sales in the quarter. Gross Profit. Gross profit decreased $1.1 million, or 7.4%, to $13.8 million in the first quarter of 2001 from $14.9 million in the comparable quarter of 2000. The decrease is primarily attributable to the lower sales volumes during 17 18 the quarter, product mix and expenses associated with the Company's newly opened facilities in Mexico and China. The decline was partially offset by continued improvement in operating efficiencies at the Company's friction facilities. As a result of these factors, the gross profit margin decreased to 25.7% in the first quarter of 2001 from 27.0% in the comparable quarter of 2000. Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased $1.1 million, or 14.3%, to $8.8 million in the first quarter of 2001 from $7.7 million in the comparable period of 2000. The increase in ST&A expenses is primarily attributable to the acquisition of Tex Racing, expenditures associated with the commencement of operations at the Company's Mexican and Chinese facilities and expenditures associated with the Company's investment in Net Shape Technologies in December 2000. As a percent of sales, ST&A expenses increased to 16.4% of sales in the first quarter of 2001 from 13.9% in the comparable quarter of 2000. Income from Operations. Income from operations decreased by $2.3 million, or 37.1%, to $3.9 million in the first quarter of 2001 from $6.2 million in the comparable quarter of 2000. Income from operations as a percent of sales decreased to 7.2% in the first quarter of 2001 from 11.2% in the comparable quarter of 2000. Operating income from the Company's friction segment increased $0.7 million, or 28.0%, to $3.2 million in the first quarter of 2001 from $2.5 million in the comparable quarter of 2000. The increase in operating profits in this segment resulted primarily from product mix and improvements in operating efficiencies at the Company's friction facilities. Operating income from the Company's powder metal segment decreased $2.1 million, or 65.6%, to $1.1 million in the first quarter of 2001 from $3.2 million in the comparable quarter of 2000. The decrease in operating income in this segment resulted from the volume declines in the markets served by the Company, product mix and start-up losses at Net Shape Technologies. Operating income in the Company's performance automotive segment was at break-even for the first quarter of 2001 compared to $0.5 million in the comparable quarter of 2000. The decline in operating profit in this segment was primarily the result of increased selling and administrative expenses associated with personnel costs incurred to grow this portion of the business. Operating losses in the motor segment increased to $0.4 million in the first quarter of 2001 compared to break-even in the comparable quarter of 2000. The increased loss in this segment was primarily the result of the continuing start up expenditures at the Company's Mexican facility. Interest Expense. Interest expense increased $0.1 million, or 4.3%, to $2.4 million in the first quarter of 2001 from $2.3 million in the comparable quarter of 2000. The increase is attributable to higher debt levels during the quarter. Income Taxes. The Company's effective tax rate for the first quarter of 2001 was 49.0% compared with 44.0% in the comparable quarter of 2000. The increase in the effective tax rate was primarily the result of losses incurred at the Company's Mexican and Chinese operations. Net Income. As a result of the factors discussed above, net income decreased $1.3 million, or 59.1%, to $0.9 million in the first quarter of 2001 from $2.2 million in the comparable quarter of 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of funds for conducting its business activities and servicing its indebtedness has been cash generated from operations. In addition, the Company has available a $50.0 million revolving credit facility entered into in May 1998, which may be used for general corporate purposes or to finance future acquisitions. As of March 31, 2001, the Company had $38.8 million available under its revolving credit facility. 18 19 Net cash provided from operating activities was $1.2 million and $8.4 million for the three month period ended March 31, 2001 and 2000, respectively. The decline in cash from operations was caused primarily by the reduction in net income and an increase in working capital assets during the quarter. Net cash used in investing activities was $2.8 million and $3.5 million for the three month period ended March 31, 2001 and 2000, respectively. The cash used in investing activities during the three month periods ended March 31, 2001 and 2000, was for the purchase of property, plant and equipment. Net cash provided by financing activities was $0.9 million for the three month period ended March 31, 2001, as a result of increased borrowings by the Company. In the three month period ended March 31, 2000, cash used in financing activities was $6.1 million primarily for the payment 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 March 31, 2001, 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: o 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; o 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; o the ability of the Company to utilize all of its manufacturing capacity in light of softness in some end-markets served by the Company; o the effect of any future acquisitions by the Company on its indebtedness and on the funds available for operations and future business opportunities; o the effect of competition by manufacturers using new or different technologies; o 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 19 20 foreign operations, political and economic instability, fluctuations in currency exchange rates, difficulty in accounts receivable collection and potentially adverse tax consequences; o the ability of the Company to successfully integrate acquisitions into the Company's existing businesses; o the ability of the Company to negotiate new agreements, as they expire, with its unions representing certain of its employees, on terms favorable to the Company or without experiencing work stoppages; o 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; o the continuity of business relationships with major customers; and o the ability of the Company's products to meet stringent Federal Aviation Administration criteria and testing requirements. These risks and others that are detailed in this Form 10-Q and other filings by the Company with the Securities and Exchange Commission must be considered by any investor or potential investor in the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 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. The Company's market risk exposure relates primarily to interest rates, where the Company will periodically use interest rate swaps to hedge interest rates on long-term debt. The Company does not engage in activities using complex or highly leveraged instruments. At March 31, 2001, the Company had outstanding debt of approximately $28.8 million, which has floating rate terms. The Company had outstanding an interest rate swap, essentially converting $10.0 million notional amount of its floating rate debt to fixed rate debt. 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, Mexican pesos and Chinese renminbi. Because the Company has foreign-currency denominated assets and liabilities, financial exposure may result, primarily from the timing of transactions and the movement of exchange rates. The unhedged foreign currency balance sheet exposures as of March 31, 2001 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. 20 21 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Effective February 23, 2001, the Company issued 4,400 shares of its Class A Common Stock to the following individuals as part of their annual compensation for services as directors of the Company: Paul R. Bishop, Jack Kemp, Dan T. Moore, III and William J. O'Neill, Jr. Each director received 1,100 shares having a market value of approximately $7,500 at the time of issuance. The shares were issued without registration as permitted by Section 4(2) of the Securities Act of 1933. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.17* Amendment No. 1 to the Employment Agreement, dated as of October 24, 2000, between the Company and Norman C. Harbert 10.18* Amendment No. 1 to the Employment Agreement, dated as of October 24, 2000, between the Company and Ronald E. Weinberg (b) Reports on Form 8-K: None ----------- *filed herewith 21 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 11, 2001 HAWK CORPORATION By: /s/ RONALD E. WEINBERG ---------------------- Ronald E. Weinberg, Co-Chairman and Co-CEO By: /s/ THOMAS A. GILBRIDE ---------------------- Thomas A. Gilbride, Vice President-Finance (Chief Accounting Officer) 22