-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L6b++81O6MWw17gyAH+oeAN1u1u5ZTxpKy2cD+CGOkO2lToX2jXnF14jpEE4q/GG KvFUqSfsomCAQKSnEan8nw== 0000950152-98-008949.txt : 19981118 0000950152-98-008949.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950152-98-008949 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWK CORP CENTRAL INDEX KEY: 0000849240 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 341608156 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13797 FILM NUMBER: 98749506 BUSINESS ADDRESS: STREET 1: 200 PUBLIC SQ STE 30-5000 STREET 2: STE 29-2500 CITY: CLEVELAND STATE: OH ZIP: 44114 BUSINESS PHONE: 2168613553 MAIL ADDRESS: STREET 1: 200 PUBLIC SQUARE STREET 2: STE 29-2500 CITY: CLEVELAND STATE: OH ZIP: 44114-2301 FORMER COMPANY: FORMER CONFORMED NAME: HAWK GROUP OF COMPANIES INC DATE OF NAME CHANGE: 19950417 10-Q 1 HAWK CORPORATION QUARTERLY REPORT 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 SEPTEMBER 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD _____________TO ____________. COMMISSION FILE NUMBER 001-13797 HAWK CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 34-1608156 -------- ---------- (State of incorporation) (I.R.S. Employer Identification No.) 200 Public Square, Suite 30-5000, Cleveland, Ohio 44114 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) (216) 861-3553 -------------- Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of the date of this report, the Registrant had the following number of shares of common stock outstanding: Class A Common Stock, $0.01 par value: 9,187,750 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 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25
2 3 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) HAWK CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1998 1997 (UNAUDITED) (NOTE) ----------- ------ ASSETS Current assets: Cash and cash equivalents $ 13,437 $ 4,388 Marketable securities 4,000 Accounts receivable, less allowance of $405, and $321, respectively 27,475 25,746 Inventories 24,276 22,083 Deferred income taxes 2,917 2,833 Other current assets 1,464 1,375 -------- -------- Total current assets 73,569 56,425 Property, plant and equipment: Land 1,229 1,218 Buildings and improvements 13,621 10,877 Machinery and equipment 69,555 57,104 Furniture and fixtures 2,632 2,326 Construction in progress 2,974 1,914 -------- -------- 90,011 73,439 Less accumulated depreciation 26,782 20,959 -------- -------- Total property, plant and equipment 63,229 52,480 Other assets: Intangible assets 61,117 56,539 Net assets held for sale 3,604 3,604 Shareholder notes 1,010 1,675 Other 2,290 2,363 -------- -------- Total other assets 68,021 64,181 -------- -------- Total assets $204,819 $173,086 ======== ========
3 4 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS - (CONTINUED) (DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1998 1997 (UNAUDITED) (NOTE) ----------- ------ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 11,934 $ 10,369 Short term borrowings 1,189 1,744 Accrued compensation 8,401 8,069 Other accrued expenses 6,514 5,494 Current portion of long-term debt 6,713 1,955 --------- --------- Total current liabilities 34,751 27,631 Long-term liabilities: Long-term debt 97,876 130,193 Deferred income taxes 6,490 6,322 Other 2,005 1,811 --------- --------- Total long-term liabilities 106,371 138,326 Detachable stock warrants, subject to put option 9,300 Shareholders' equity (deficit): Preferred stock 1 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 Class A common stock, $.01 par value; 75,000,000 shares authorized, 9,187,750 issued and outstanding 92 14 Class B common stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding Additional paid-in capital 54,658 1,964 Retained earnings (deficit) 9,607 (3,120) Accumulated other comprehensive loss (661) (1,030) --------- --------- Total shareholders' equity (deficit) 63,697 (2,171) Total liabilities and shareholders' equity (deficit) $ 204,819 $ 173,086 ========= =========
Note: The balance sheet at December 31, 1997 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) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 --------- --------- --------- --------- Net sales $ 140,120 $ 116,362 $ 43,401 $ 39,381 Cost of sales 94,985 82,940 29,607 28,895 --------- --------- --------- --------- Gross profit 45,135 33,422 13,794 10,486 Selling, technical and administrative expenses 17,213 14,241 5,632 4,794 Amortization of intangibles 2,648 2,575 880 949 Plant consolidation expense 50 50 --------- --------- --------- --------- Total expenses 19,861 16,866 6,512 5,793 Income from operations 25,274 16,556 7,282 4,693 Interest expense 9,531 11,307 2,406 3,758 Interest income (741) (668) (250) (168) Other expense, net 19 122 2 82 --------- --------- --------- --------- Income before income taxes and extraordinary items 16,465 5,795 5,124 1,021 Income taxes 7,003 2,534 2,176 545 --------- --------- --------- --------- Income before extraordinary items 9,462 3,261 2,948 476 Extraordinary charge 3,079 --------- --------- --------- --------- Net income $ 6,383 $ 3,261 $ 2,948 $ 476 ========= ========= ========= ========= Earnings per share: Basic: Earnings before extraordinary items $ 1.32 $ .65 $ .32 $ .08 Extraordinary items (.44) --------- --------- --------- --------- Basic earnings per share $ .88 $ .65 $ .32 $ .08 ========= ========= ========= ========= Diluted: Earnings before extraordinary items $ 1.23 $ .53 $ .32 $ .07 Extraordinary items (.41) --------- --------- --------- --------- Diluted earnings per share $ .82 $ .53 $ .32 $ .07 ========= ========= ========= =========
See notes to consolidated financial statements. 5 6 HAWK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 ---- ---- Cash flows from operating activities: Net income $ 6,383 $ 3,261 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,314 7,166 Accretion of discount on debt 238 487 Deferred income taxes 2,343 Extraordinary charge, net of income taxes 3,079 Changes in operating assets and liabilities, net: Accounts receivable 132 (5,319) Inventories (940) (865) Other assets 89 (925) Accounts payable 542 2,800 Other liabilities 1,969 1,248 -------- -------- Net cash provided by operating activities 19,806 10,196 Cash flows from investing activities: Purchase of marketable securities (4,130) Business acquisitions (9,100) (26,088) Purchases of property, plant and equipment (11,127) (4,798) Payments received on shareholder notes 665 163 -------- -------- Net cash used in investing activities (23,692) (30,723) Cash flows from financing activities Payments on short term debt (636) Proceeds from borrowings on long-term debt 35,000 Payments on long-term debt (69,544) (783) Net proceeds from issuance of common stock 52,772 Deferred financing costs (850) (565) Payments of preferred stock dividend (219) (240) Prepayment premium on early retirement of debt (3,588) Other (30) -------- -------- Net cash provided by (used in) financing activities 12,935 (1,618) -------- -------- Net increase (decrease) in cash and cash equivalents 9,049 (22,145) Cash and cash equivalents at the beginning of the period 4,388 25,774 -------- -------- Cash and cash equivalents at the end of the period $ 13,437 $ 3,629 ======== ========
See notes to consolidated financial statements. 6 7 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 (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, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the condensed consolidated financial statements and footnotes thereto included in the Form S-1 (Registration No. 333-40535) for Hawk Corporation (the "Company") for the year ended December 31, 1997. The Company designs, engineers, manufactures and markets specialized components, principally made from powder metals, for aerospace, industrial and other specialty applications. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and also include, effective August 1, 1997 and June 1, 1998, the accounts of Sinterloy Corporation ("Sinterloy") and Clearfield Powdered Metals, Inc. ("Clearfield"), respectively. All significant inter-company accounts and transactions have been eliminated in the accompanying financial statements. NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. This statement establishes standards for reporting financial and descriptive information about operating segments. Under SFAS No. 131, information pertaining to the Company's operating segments will be reported on the basis that is used internally for evaluating segment performance and making resource allocation determinations. Management is currently studying the potential effects of adoption of this statement, which is required for the fiscal year ended 1998. NOTE 3 - COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income, which requires that an enterprise classify items of other comprehensive income, as defined therein, by their nature in the financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company adopted SFAS No. 130 in the first quarter of 1998. The principal difference between net income as historically reported in the consolidated statements of income and comprehensive income is foreign currency translation recorded in shareholders' equity. Comprehensive income is as follows: 7 8
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net income $ 6,383 $ 3,261 $ 2,948 $ 476 Minimum pension liability 337 337 Marketable securities (75) (75) Foreign currency translation 444 (1,296) 582 (511) ------- ------- ------- ------- Comprehensive income $ 6,752 $ 2,302 $ 3,455 $ 302 ======= ======= ======= =======
NOTE 4 - 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, 1998 1997 ---- ---- Raw materials and work-in-process $ 21,002 $ 18,690 Finished products 4,938 4,722 Inventory reserves (1,664) (1,329) -------- -------- $ 24,276 $ 22,083 ======== ========
NOTE 5 - LONG-TERM DEBT In May 1998, the Company retired all of its outstanding Senior Subordinated Notes. In June 1998, the Company redeemed $35,000 of its then outstanding $100,000, 10.25% Senior Notes due December 1, 2003. As a result of these transactions, the Company incurred an extraordinary charge of $3,079, net of income taxes, resulting from the premium paid in connection with the purchase of the 10.25% Senior Notes and the write off of debt issuance costs associated with the retirement of debt. In May 1998, the Company entered into a $35,000 Term Loan Facility, with $1,250 maturing quarterly, beginning September 30, 1998 with the remaining principal of $12,500 due on March 31, 2003. Additionally, in May 1998, the Company executed a $50,000 Revolving Credit Facility that matures March 31, 2003. The Senior Notes, Term Loan and Revolving Credit Facility are fully and unconditionally guaranteed on a joint and several basis by each of the direct or indirect wholly-owned domestic subsidiaries of the Company ("Guarantor Subsidiaries"). (See Note 10). NOTE 6 - SHAREHOLDERS' EQUITY In May 1998, the Company completed an initial public offering ("IPO") of 5,905,250 shares of common stock at an offering price to the public of $17.00 per share. In the IPO, 3,500,000 shares were sold by the Company and 2,405,250 shares were sold by certain of the Company's stockholders. The offering resulted in an increase in shareholders' equity of $57,000. 8 9 NOTE 7 - DETACHABLE STOCK WARRANTS, SUBJECT TO PUT OPTION For financial reporting purposes at December 31, 1997, the carrying value of the warrants, including the put option, was estimated to be $9,300 and classified as detachable stock warrant, subject to put option on the accompanying balance sheet. The warrant holders exercised their detachable stock warrants on May 11, 1998 for 1,023,793 shares of the Company's Common Stock, which were then sold as part of the Company's IPO. The warrant holders' put option terminated upon the closing of the Company's IPO. NOTE 8 - INCREASE IN AUTHORIZED SHARES AND STOCK SPLIT On January 12, 1998, the Company amended its Certificate of Incorporation to increase the authorized shares of Class A and Class B Common Stock to 75,000,000 and 10,000,000, respectively. In addition, on January 12, 1998, the board of directors declared a 3.2299-for-one split of the Company's Class A and Class B Common Stock in the form of a stock dividend distributed to the holders of record on January 12, 1998. Accordingly, the number of common shares and per share data have been restated to reflect the stock split. The par value of the additional shares of common stock issued in connection with the stock split was credited to common stock and a like amount charged to additional paid in capital in the first quarter of 1998. NOTE 9 - EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share. SFAS No. 128 replaced the previously reported primary and fully-diluted earnings per share with basic earnings per share and diluted earnings per share. As required, the Company adopted SFAS No. 128 in the fourth quarter of 1997. Prior amounts have been restated to comply with SFAS No. 128 and give effect to the stock split discussed in Note 8. Basic and dilutive earnings per share is computed as follows: 9 10
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ---- ---- ---- ---- Income available to common shareholders: Income before extraordinary item $ 9,462 $ 3,261 $ 2,948 $ 476 Less: Preferred stock dividends (219) (240) (38) (80) ------- ------- ------- ------- Income before extraordinary item attributable to common shareholders 9,243 3,021 2,910 396 ======= ======= ======= ======= Net income 6,383 3,261 2,948 476 Less: Preferred stock dividends (219) (240) (38) (80) ------- ------- ------- ------- Net income attributable to common shareholders 6,164 3,021 2,910 396 ======= ======= ======= ======= Weighted average shares: Basic: Basic weighted average shares 7,017 4,664 9,188 4,664 Diluted: Basic from above 7,017 4,664 9,188 4,664 Effect of warrant conversion 492 1,024 1,024 Effect of note conversion and options 15 29 ------- ------- ------- ------- Diluted weighted average shares 7,524 5,688 9,217 5,688 ======= ======= ======= ======= Earnings per share: Basic: Earnings before extraordinary charge $ 1.32 $ .65 $ .32 $ .08 Extraordinary charge (.44) ------- ------- ------- ------- Basic earnings per share $ . 88 $ .65 $ .32 $ .08 ======= ======= ======= ======= Diluted: Earnings before extraordinary charge $ 1.23 $ .53 $ .32 $ .07 Extraordinary charge (.41) ------- ------- ------- ------- Diluted earnings per share $ .82 $ .53 $ .32 $ .07 ======= ======= ======= =======
10 11 NOTE 10 - SUPPLEMENTAL GUARANTOR INFORMATION As discussed in Note 5, each of the 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 Senior Notes. The Guarantor Subsidiaries are direct, 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, 1998 and December 31, 1997, consolidating condensed statements of income for the three and nine-month periods ended September 30, 1998 and 1997 and consolidating condensed statements of cash flows for the nine months ended September 30, 1998 and 1997. 2. Hawk Corporation (Parent), combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries (consisting of the Company's subsidiaries in Canada and Italy) 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. The Revolving Credit Facility contains covenants that, among other things, would prohibit the payment of any dividends to the Company by the subsidiaries of the Company (including Guarantor Subsidiaries) in the event of a default under the terms of the Revolving Credit Facility. 11 12 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1998 --------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Assets Current assets: Cash and cash equivalents $ 12,088 $ 47 $ 1,302 $ 13,437 Marketable securities 4,000 4,000 Accounts receivable, net 304 20,489 6,682 27,475 Inventories, net 18,790 5,486 24,276 Deferred income taxes 2,490 427 2,917 Other current assets 66 548 850 1,464 --------- --------- --------- --------- --------- Total current assets 18,948 39,874 14,747 73,569 Other assets: Investment in subsidiaries 791 6,535 $ (7,326) Inter-company advances, net 142,562 (410) 6 (142,158) Property, plant and equipment 54,986 8,243 63,229 Intangible assets 225 60,892 61,117 Other 1,010 6,592 415 (1,113) 6,904 --------- --------- --------- --------- --------- Total other assets 144,588 128,595 8,664 (150,597) 131,250 --------- --------- --------- --------- --------- Total assets $ 163,536 $ 168,469 $ 23,411 $(150,597) $ 204,819 ========= ========= ========= ========= ========= Liabilities and shareholders' equity Current liabilities: Accounts payable $ 8,839 $ 3,095 $ 11,934 Short term borrowings 1,189 1,189 Accrued compensation $ 44 7,092 1,265 8,401 Other accrued expenses 3,329 2,800 385 6,514 Current portion of long-term debt 5,000 1,070 643 6,713 --------- --------- --------- --------- --------- Total current liabilities 8,373 19,801 6,577 34,751 Long-term liabilities: Long-term debt 93,750 2,533 1,593 97,876 Deferred income taxes 5,888 417 185 6,490 Other 772 1,233 2,005 Inter-company advances, net 1,125 134,858 7,288 $(143,271) --------- --------- --------- --------- --------- Total long-term liabilities 100,763 138,580 10,299 (143,271) 106,371 --------- --------- --------- --------- --------- Total liabilities 109,136 158,381 16,876 (143,271) 141,122 Shareholders' equity 54,400 10,088 6,535 (7,326) 63,697 --------- --------- --------- --------- --------- Total liabilities and shareholders' equity $ 163,536 $ 168,469 $ 23,411 $(150,597) $ 204,819 ========= ========= ========= ========= =========
12 13 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997 --------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Assets Current assets: Cash and cash equivalents $ 3,103 $ 469 $ 816 $ 4,388 Accounts receivable, net 77 19,013 6,656 25,746 Inventories, net 17,455 4,628 22,083 Deferred income taxes 890 1,545 398 2,833 Other current assets 142 560 734 $ (61) 1,375 --------- --------- --------- --------- --------- Total current assets 4,212 39,042 13,232 (61) 56,425 Other assets: Investment in subsidiaries 790 4,971 (5,761) Inter-company advances, net 132,490 1,300 11 (133,801) Property, plant and equipment 46,115 6,365 52,480 Intangible assets 231 56,308 56,539 Other 1,675 7,352 445 (1,830) 7,642 --------- --------- --------- --------- --------- Total assets $ 139,398 $ 155,088 $ 20,053 $(141,453) $ 173,086 ========= ========= ========= ========= ========= Liabilities and shareholders' equity (deficit) Current liabilities: Accounts payable $ 7,156 $ 3,213 $ 10,369 Short term borrowings 1,744 1,744 Accrued compensation $ 64 7,189 816 8,069 Other accrued expenses (3,219) 8,582 247 $ (116) 5,494 Current portion of long-term debt 1,432 523 1,955 --------- --------- --------- --------- --------- Total current liabilities (3,155) 24,359 6,543 (116) 27,631 Long-term liabilities: Long-term debt 127,025 2,001 1,167 130,193 Deferred income taxes 5,665 223 434 6,322 Other 780 1,031 1,811 Inter-company advances, net 2,986 126,683 5,907 (135,576) --------- --------- --------- --------- --------- Total long-term liabilities 135,676 129,687 8,539 (135,576) 138,326 --------- --------- --------- --------- --------- Total liabilities 132,521 154,046 15,082 (135,692) 165,957 Detachable stock warrants, subject to put option 9,300 9,300 Shareholders' equity (deficit) (2,423) 1,042 4,971 (5,761) (2,171) --------- --------- --------- --------- --------- Total liabilities and shareholders' equity (deficit) $ 139,398 $ 155,088 $ 20,053 $(141,453) $ 173,086 ========= ========= ========= ========= =========
13 14 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------ COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 123,494 $ 16,626 $ 140,120 Cost of sales 81,467 13,518 94,985 ----------- ------------ ------------ ------------ ------------ Gross profit 42,027 3,108 45,135 Selling, technical and administrative expenses $ 7 15,260 1,946 17,213 Amortization of intangibles 7 2,641 2,648 ----------- ------------ ------------ ------------ ------------ Total expenses 14 17,901 1,946 19,861 Income (loss) from operations (14) 24,126 1,162 25,274 Interest expense 238 9,016 383 $ (106) 9,531 Interest income (847) 106 (741) Income from equity investees 8,118 468 (8,586) Other (income) expense, net (17) 36 19 ----------- ------------ ------------ ------------ ------------ Income before extraordinary item and income taxes 8,713 15,595 743 (8,586) 16,465 Income taxes 267 6,461 275 7,003 Income before extraordinary item 8,446 9,134 468 (8,586) 9,462 Extraordinary items 2,063 1,016 3,079 ----------- ------------ ------------ ------------ ------------ Net income $ 6,383 $ 8,118 $ 468 $ (8,586) $ 6,383 =========== ============ ============ ============ ============
14 15 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------ COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 101,113 $ 15,249 $ 116,362 Cost of sales 70,609 12,331 82,940 ----------- ----------- ----------- ----------- ----------- Gross profit 30,504 2,918 33,422 Selling, technical and administrative expenses 12,053 2,188 14,241 Amortization of intangibles $ 8 2,528 39 2,575 Plant consolidation expense 50 50 ----------- ----------- ----------- ----------- ----------- Total expenses 8 14,631 2,227 16,866 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations (8) 15,873 691 16,556 Interest expense 487 10,738 322 $ (240) 11,307 Interest income (908) 240 (668) Income from equity investees 3,173 285 (3,458) Other (income) expense, net 273 (151) 122 ----------- ------------ ----------- ----------- ----------- Income before income taxes 3,313 5,571 369 (3,458) 5,795 Income taxes 52 2,398 84 2,534 ----------- ----------- ----------- ----------- ----------- Net income $ 3,261 $ 3,173 $ 285 $ (3,458) $ 3,261 =========== ============ ============ ============ ============
15 16 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 38,583 $ 4,818 $ 43,401 Cost of sales 25,705 3,902 29,607 ----------- ----------- ----------- ----------- ----------- Gross profit 12,878 916 13,794 Selling, technical and administrative expenses (33) 5,061 604 5,632 Amortization of intangibles $ 3 877 880 ----------- ----------- ----------- ----------- ----------- Total expenses (30) 5,938 604 6,512 Income from operations 30 6,940 312 7,282 Interest expense 2,291 115 2,406 Interest income (250) (250) Income from equity investees 2,841 75 $ (2,916) Other (income) expense, net 70 (90) 22 2 ----------- ------------ ----------- ----------- ----------- Income before income taxes 3,051 4,814 175 (2,916) 5,124 Income taxes 103 1,973 100 2,176 ----------- ----------- ----------- ----------- ----------- Net income $ 2,948 $ 2,841 $ 75 $ (2,916) $ 2,948 =========== ============ ============ ============ ============
16 17 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 34,610 $ 4,771 $ 39,381 Cost of sales 24,972 3,923 28,895 ----------- ----------- ----------- ----------- ----------- Gross profit 9,638 848 10,486 Selling, technical and administrative expenses 3,987 807 4,794 Amortization of intangibles $ 3 937 9 949 Plant consolidation expense 50 50 ----------- ----------- ----------- ----------- ----------- Total expenses 3 4,974 816 5,793 Income (loss) from operations (3) 4,664 32 4,693 Interest expense 162 3,559 117 $ (80) 3,758 Interest income (248) 80 (168) Income (loss) from equity investees 469 (58) (411) Other (income) expense, net 78 63 (59) 82 ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes 474 984 (26) (411) 1,021 Income taxes (credit) (2) 515 32 545 ----------- ----------- ----------- ----------- ----------- Net income (loss) $ 476 $ 469 $ (58) $ (411) $ 476 =========== ============ ============ ============ ============
17 18 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------ COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net cash provided by operating activities $ 3,835 $ 12,852 $ 3,119 $ 19,806 Cash flows from investing activities: Purchase of marketable securities (4,130) (4,130) Business acquisitions (9,100) (9,100) Purchase of property, plant and equipment (9,645) (1,482) (11,127) Payments received on shareholder loans 665 665 ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities (12,565) (9,645) (1,482) (23,692) Cash flows from financing activities: Payments on short term borrowings (636) (636) Proceeds from borrowings on long-term debt 35,000 35,000 Net proceeds from issuance of common stock 52,722 52,772 Payments on long term debt (66,250) (2,779) (515) (69,544) Deferred financing costs (850) (850) Payment of preferred stock dividend (219) (219) Payments on early retirement of debt (3,588) (3,588) ------------ ----------- ----------- ----------- ------------ Net cash provided by financing activities 17,715 (3,629) (1,151) 12,953 ----------- ------------ ------------ ----------- ----------- Net (decrease) increase in cash and cash equivalents 8,985 (422) 486 9,049 Cash and cash equivalents at beginning of period 3,103 469 816 4,388 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 12,088 $ 47 $ 1,302 $ 13,437 =========== ============ ============ =========== ============
18 19 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------ COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net cash provided by operating activities $ 6,299 $ 3,640 $ 257 $ 10,196 Cash flows from investing activities: Business acquisitions (26,088) (26,088) Purchase of property, plant and equipment (4,603) (195) (4,798) Payments received on shareholder loans 163 163 ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities (25,925) (4,603) (195) (30,723) Cash flows from financing activities: (Payments) proceeds on long-term debt (1,751) 1,591 (623) (783) Deferred financing costs (565) (565) Payment of preferred stock dividend (240) (240) Other (30) (28) 28 (30) ----------- ----------- ----------- ----------- ----------- Net cash (used in) provided by financing activities (2,021) 998 (595) (1,618) ----------- ----------- ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (21,647) 35 (533) (22,145) Cash and cash equivalents at beginning of period 25,187 5 582 25,774 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 3,540 $ 40 $ 49 $ 3,629 =========== ============ ============ =========== ============
19 20 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 designs, engineers, manufactures and markets specialized components, principally made from powder metals, used in a wide variety of aerospace, industrial and commercial applications. The Company is a leading worldwide supplier of friction products for brakes, clutches and transmissions used in aerospace, industrial and specialty applications. Friction products represented 61.0% of Company sales in the first nine months of 1998. Hawk is also a leading supplier of powder metal components for industrial applications, including pump, motor and transmission elements, gears, pistons and anti-lock brake sensor rings. Powder metal components represented 28.7% of Company sales in the first nine months of 1998. In addition, the Company designs and manufactures die-cast aluminum rotors for small electric motors used in appliances, business machines and exhaust fans. The Company focuses on manufacturing products requiring sophisticated engineering and production techniques for applications in markets where it has achieved a significant market share. Since its formation in 1989, Hawk has pursued a strategic growth plan by making complementary acquisitions and broadening its customer base. All these acquisitions were accounted for under the purchase method of accounting, with the purchase price allocated to the estimated fair market value of the assets acquired and liabilities assumed. In the acquisitions, any excess of the purchase price paid over the estimated fair value of the net assets acquired was allocated to goodwill, which resulted in approximately $49.2 million of goodwill reflected on the September 30, 1998 balance sheet. The annual amortization of goodwill will result in non-cash charges to future operations of approximately $2.1 million per year (of which the majority of such amortization is deductible for tax purposes) based on amortization periods ranging from 15 to 40 years. Year 2000 Compliance - -------------------- The Company is continuing its efforts to assess and remediate issues caused by the inability of certain of its information systems to properly process transactions using dates beginning in the Year 2000. During 1998, the Company completed an assessment of its information systems relative to Year 2000 deficiencies. Each of the Company's operating units is now engaged in the remediation of its Year 2000 issues which includes upgrading or replacing older software with new programs and systems, which will handle the Year 2000 and beyond. In addition, the Company has requested and gathered information about the Year 2000 compliance status of its significant suppliers and continues to monitor their compliance. There can be no assurance that the systems of other companies that interact with the Company will be sufficiently Year 2000 compliant so as to avoid an adverse impact on the Company's operations, financial condition and results of operations. The Company has budgeted the necessary funds to address its Year 2000 related projects. The Company believes that the incremental cost of Year 2000 compliance efforts is not material due to its use of third-party developed software which is now date compliant or can be made date compliant by purchasing vendor supplied upgrades. All of the costs related to achieving Year 2000 compliance will be funded through the Company's operating cash flows. The Company expects that most of its remediation efforts will be in place before mid-1999. However, there can be no assurance that the Company will be successful in implementing its Year 2000 remediation according to the anticipated schedule. 20 21 In addition, the Company may be adversely affected by the inability of other companies whose systems interact with the Company to become Year 2000 compliant and by potential interruptions of utility, communications or transportation systems as a result of Year 2000 issues. Although the Company expects its internal information systems to be Year 2000 compliant as described above, the Company intends to prepare a contingency plan that will specify what it plans to do if it or significant external companies are not Year 2000 complaint in a timely manner. The Company expects to prepare its contingency plan during 1999. RECENT EVENTS On November 12, 1998, the Board of Directors of the Company authorized the repurchase of up to $2.0 million of its common stock. The Company expects to purchase the shares from time to time in the open market, as market conditions warrant. All shares repurchased will be held as treasury shares available for reissue in connection with the Company's stock option plan and for general corporate purposes. THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997 Net Sales. Net sales increased $4.0 million, or 10.2%, to $43.4 million in the third quarter of 1998 from $39.4 million in the comparable quarter of 1997. The sales increase was attributable to the acquisition of Clearfield in June 1998, and to a lesser extent, Sinterloy in August 1997, and strong customer demand in the Company's powder metal product lines. Sales in the Company's powder metal lines increased $5.1 million, or 60.7%, to $13.5 million in the third quarter of 1998 from $8.4 million in the comparable quarter of 1997. Sales in the Company's powder metal lines, exclusive of Clearfield and Sinterloy, increased $1.8 million, or 21.4%, to $10.2 million in the third quarter of 1998 from $8.4 million in the comparable quarter of 1997. The increase was attributable to the strong customer demand in the truck, motor and transmission components, and lawn and garden markets, as well as increased demand in the fluid power markets served by the Company. Sales of friction products, affected by decreased demand in agriculture markets decreased $0.7 million, or 2.7%, to $25.6 million in the third quarter of 1998 from $26.3 million in the comparable quarter of 1997. Gross Profit. Gross profit increased $3.3 million, or 31.6%, to $13.8 million in the third quarter of 1998 from $10.5 million in the comparable quarter of 1997. The gross profit margin increased to 31.8% in the third quarter of 1998 from 26.6% in the comparable period of 1997. The increase is primarily attributable to the inclusion of Clearfield in the recent quarter, product mix and manufacturing efficiencies resulting from the Company's capital expenditure program. Selling Technical and Administrative ("ST&A") Expenses. ST&A expenses increased $0.8 million, or 17.5%, to $5.6 million in the third quarter of 1998 from $4.8 million in the comparable period of 1997. The acquisition of Sinterloy and Clearfield represented 92.2% of the total increase in ST&A during the third quarter of 1998. As a percentage of sales, ST&A expenses increased to 13.0% of sales in the third quarter of 1998 from 12.2% in the comparable quarter of 1997. This increase was due primarily to increased spending in the Company's research & development efforts, and the hiring of additional personnel required to support the Company's growth. Income from Operations. Income from operations increased by $2.6 million, or 55.2%, to $7.3 million in the third quarter of 1998, from $4.7 million in the comparable quarter of 1997. Income from operations as a percent of net sales increased to 16.8% in the third quarter of 1998 from 11.9% in the comparable quarter of 1997, reflecting increased sales activity, product mix, manufacturing efficiencies and gross margin improvement. Interest Expense. Interest expense decreased $1.4 million, or 36.0%, to $2.4 million in the third quarter of 1998 from $3.8 million in the comparable quarter of 1997. The decrease in 1998 compared to the comparable quarter of 1997 is attributable to lower debt levels, a result of the repayment of debt from the proceeds of the Company's IPO, as well as lower interest rates during the third quarter of 1998 attributable to the refinancing of the Company's debt at the time of the IPO. Income Taxes. The provision for income taxes increased to $2.2 million in the third quarter of 1998 from $0.6 million in the comparable quarter of 1997, reflecting the increase in pre-tax income as well as an increase in the Company's effective tax rate, due to the non deductibility of goodwill 21 22 amortization resulting from the acquisition of Hutchinson and Clearfield. Net Income. As a result of the factors discussed above, net income increased $2.4 million, or 519.3%, to $2.9 million in the third quarter of 1998 from $0.5 million in the comparable period of 1997. FIRST NINE MONTHS OF 1998 COMPARED TO FIRST NINE MONTHS OF 1997 Net Sales. Net sales increased by $23.8 million, or 20.4%, to $140.1 million during the first nine months of 1998 from $116.4 million during the first nine months of 1997. The net sales increase in the first nine months of 1998 was attributable to the acquisition of Clearfield and Sinterloy, and strong customer demand in most product lines served by the Company. Sales of friction products increased to $85.5 million for the nine months ended September 1998 from $80.2 million in the comparable period of 1997, or 6.7%. The Company experienced strong demand for the first nine months of 1998, led by the Company's aerospace and truck markets, which was partially offset by a decrease in its agricultural markets. Sales in the Company's powder metal lines increased 87.4% to $40.1 million for the first nine months of 1998 from $21.4 million in the comparable period of 1997. Exclusive of Sinterloy and Clearfield, sales of powder metal products increased by 23.8%. This increase was led by strong customer demand in the truck, motor and transmission components, lawn and garden and the fluid power markets served by the Company. Gross Profit. Gross profit increased $11.7 million to $45.1 million during the first nine months of 1998, a 35.1% increase over gross profit of $33.4 million during the first nine months of 1997. The gross profit margin increased to 32.2% during the first nine months of 1998 from 28.7% during the comparable period of 1997. The increase is primarily due to the inclusion of Sinterloy for the entire nine months of 1998, product mix, and manufacturing efficiencies resulting from the Company's capital expenditure program. Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased $3.0 million, or 20.9%, to $17.2 million during the first nine months of 1998. The acquisition of Sinterloy and Clearfield represented 61.3% of the total increase in ST&A during the first nine months of 1998. ST&A increased to 12.3% of sales during the first nine months of 1998 from 12.2% during the comparable period of 1997. Income from Operations. Income from operations increased by $8.7 million, or 52.7%, to $25.3 million during the first nine months of 1998 from $16.6 million in the comparable quarter of 1997. Income from operations as a percent of net sales increased to 18.0% in the first nine months of 1998 from 14.2% in the comparable nine month period of 1997, reflecting increased sales activity, product mix, manufacturing efficiencies and margin improvement. Interest Expense. Interest expense decreased $1.8 million, or 15.7%, to $9.5 million in the first nine months of 1998 from $11.3 million in the comparable nine month period of 1997. The decrease is attributable to lower debt levels, a result of the repayment of debt from the proceeds of the Company's IPO during the second quarter of 1998 and, to a lesser extent, lower interest rates incurred by the Company. Income Taxes. The provision for income taxes increased to $7.0 million in the first nine months of 1998 from $2.5 million in the comparable period of 1997, reflecting the increase in pre-tax income. The Company's effective tax rate during the first nine months of 1998 was 42.5% compared to 43.7% in the comparable nine month period of 1997. Income before Extraordinary Items. As a result of the items discussed above, income before extraordinary items increased $6.2 million, or 190.2%, to $9.5 million for the nine months ended September 30, 1998 from $3.3 million in the comparable period of 1997. 22 23 Net Income. Net income increased $3.1 million to $6.4 million, or 95.7%, in the first nine months of 1998 from $3.3 million in the comparable period of 1997. 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 $50.0 million under the terms of its revolving credit facility entered into in May 1998 which may be used for general corporate purposes or to finance future acquisitions. Net cash from operating activities was $19.8 million for the nine month period ended September 30, 1998 as compared to net cash from operating activities of $10.2 million in the comparable period of 1997. The increase in net income and non-cash charges in addition to an improved working capital position at September 30, 1998 accounted for the increased operating cash flow. Net cash used in investing activities was $23.7 million and $30.7 million for the nine month periods ended September 30, 1998 and 1997, respectively. The cash used in investing activities during the nine month period ended September 1998, consisted of the acquisition of Clearfield, purchase of short term marketable securities and $11.1 million for the purchases of property, plant and equipment. In the comparable period of 1997, cash used in investing activities consisted of the acquisition of Hutchinson and Sinterloy and $4.8 million for the purchases of property, plant and equipment. Net cash provided by financing activities was $12.9 million for the nine month period ended September 30, 1998 received primarily from the proceeds of the Company's IPO and proceeds from a $35.0 million term loan. These proceeds were used to retire $69.5 million of outstanding debt. In the comparable nine month period of 1997, net cash used in financing activities of $1.6 was primarily used for the payment of debt and dividends. The primary uses of capital by the Company are (1) to pay interest on, and to repay principal of, indebtedness, (2) for capital expenditures for maintenance, replacement and acquisitions of equipment, expansion of capacity, productivity improvements and product development, and (3) making additional strategic acquisitions of complementary businesses. As of September 30, 1998, the Company was in compliance with the terms of its indebtedness. The Company believes that cash flow from operating activities, and additional funds available under the Company's revolving credit facility, will be sufficient to meet its currently anticipated operating and capital expenditure requirements and service its indebtedness for the next 12 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 expansion into new markets and growth in existing markets, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties include, but are not limited to (1) the ability of the Company to continue to meet the terms of the Company's credit documents which contain a number of significant financial covenants and other restrictions; (2) the Company's reliance on significant customers; (3) changes in market conditions in the end-markets served by the Company; (4) supplies and prices of raw materials used by the Company; (5) the effect of product mix on margins; (6) whether the Company's aerospace friction products will be able to continue to meet stringent Federal Aviation Administration criteria and testing requirements; (7) whether the Company will be able to successfully integrate Clearfield into its operations; and (8) the Company's continued expansion into international markets, with all the risks inherent in doing business internationally, including unexpected changes in regulatory requirements, export restrictions, 23 24 unexpected changes in regulatory requirements, export restrictions, currency controls, tariffs and other trade barriers, potential instability, fluctuation in currency exchange rates and potential adverse tax consequences. 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. Not applicable. 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 (b) Reports on Form 8-K: None 24 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 13, 1998 HAWK CORPORATION By: /s/ RONALD E. WEINBERG ----------------------- Ronald E. Weinberg, Chairman of the Executive Committee and Treasurer By: /s/ THOMAS A. GILBRIDE ----------------------- Thomas A. Gilbride, Vice President- Finance (Chief Accounting Officer) 25 EX-27 2 EXHIBIT 27
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 13,437 4,000 27,880 405 24,276 73,569 90,011 26,782 204,819 34,751 97,876 0 1 92 63,604 204,819 140,120 140,120 94,985 19,861 19 0 9,531 16,465 7,003 9,462 0 3,079 0 6,383 .88 .82
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