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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 001-13797
HAWK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 34-1608156
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 PUBLIC SQUARE, SUITE 30-5000, CLEVELAND, OHIO 44114
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 861-3553
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Exchange On Which Registered
------------------- ------------------------------------
Series B 10.25% Senior Notes due 2003 New York Stock Exchange
Class A Common Stock, par value $.01 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF
THE ACT:
None
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 report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 17, 2000, the registrant had 8,548,520 shares of Class A
Common Stock, net of treasury shares, and 0 shares of Class B non-voting Common
Stock outstanding. As of that date, the aggregate market value of the voting
stock of the registrant held by non-affiliates was $29,736,326 (based upon the
closing price of $5.625 per share of Class A Common Stock on the New York Stock
Exchange on March 17, 2000). For purposes of this calculation, the registrant
deems the 3,262,062 shares of Class A Common Stock held by all of its Directors
and executive officers to be the shares of Class A Common Stock held by
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1999 ("1999 Annual Report") are incorporated by reference into
Parts I, II and IV of this report.
Portions of the registrant's definitive Proxy Statement ("Proxy
Statement") to be used in connection with its Annual Meeting of Stockholders to
be held on May 16, 2000 are incorporated by reference into Part III of this Form
10-K.
As used in this Form 10-K, the terms "Company," "Hawk" and "Registrant"
mean Hawk Corporation and its consolidated subsidiaries, taken as a whole,
unless the context indicates otherwise. Except as otherwise stated, the
information contained in this Form 10-K is as of December 31, 1999.
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PART I
ITEM 1. BUSINESS.
Hawk Corporation, founded in 1989, is a holding company, the principal
assets of which consist of the capital stock of its manufacturing subsidiaries,
Friction Products Co., S.K. Wellman Corp. Helsel, Inc., Sinterloy Corporation,
Clearfield Powdered Metals, Inc., Allegheny Powder Metallurgy, Inc., Hutchinson
Products LLC, Quarter Master Industries, Inc. and Logan Metal Stampings, Inc.
Through its subsidiaries, Hawk operates primarily in two reportable segments:
Friction and Powder Metal. 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, agricultural, truck and
specialty vehicle markets. The Company's Powder metal components are made from
formulations of composite powder metal alloys. The powder metal segment
manufactures a variety of components for use in fluid power, truck, lawn and
garden, construction, agriculture, home appliance, automotive and office
equipment markets. In addition, the Company designs and manufactures die-cast
aluminum rotors for small electric motors used in appliances, business 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.
BUSINESS STRATEGY
The Company's business strategy includes the following principal
elements:
- - Focus on High-Margin, Specialty Applications. The Company operates
primarily in aerospace, industrial and commercial markets that require
sophisticated engineering and production techniques. In developing new
applications, as well as in evaluating acquisitions, the Company seeks
to compete in markets requiring such engineering expertise and
technical capability, rather than in markets in which the primary
competitive factor is price. The Company believes margins for its
products in these markets are higher than in other manufacturing
markets that use standardized products. The Company's gross margins in
1999 and 1998 were 26.5% and 32.1%, respectively.
- - New Product Introduction. A key part of the Company's strategy is the
introduction of new products, which incorporate improved performance
characteristics or reduced costs in response to customer needs. Because
friction products are the consumable, or wear, component of brake,
clutch and transmission systems, the introduction of new friction
products in conjunction with a new system provides the Company with the
opportunity to supply the aftermarket for the life of the system. For
example, the ability to service the aftermarket for a particular
aircraft braking system will likely provide the Company with a stable
market for its friction products for the life of the product, which can
be 30 years or more. The Company also seeks to grow by applying its
existing products and technologies to new specialized applications
where its products have a performance or technological advantage.
- - Pursuit of Strategic Acquisitions. Many of the markets in which the
Company competes are fragmented, providing the Company with attractive
acquisition opportunities. The Company made two acquisitions in 1999.
Allegheny, acquired in March 1999, continues the strategic expansion
into the powder metal components business, and Quarter Master acquired
in November 1999, enabled the Company to expand in high performance
markets and apply its friction material expertise to clutch system
design. The Company will continue to seek to acquire complementary
businesses with leading market positions that will enable it to expand
its product offerings, technical capabilities and customer base.
- - Expanding International Sales. Through S. K. Wellman, which has,
manufacturing facilities in Italy and Canada and a worldwide
distribution network, the Company continues to expand its international
operations in established markets throughout Europe, Asia and North
America. The Company also believes that further opportunities to expand
sales exist in emerging economies. In 1999, the Company established a
rotor manufacturing facility in Monterrey, Mexico. This facility will
service the motor manufacturers located in Mexico and Latin America.
This facility began production in early 2000. Also in 1999, the Company
began planning for a friction manufacturing facility to be located in
Suzhou, China. This facility, which is projected to open in late 2000,
will primarily service aftermarket friction customers on a worldwide
basis. Sales from the Company's international facilities have grown
from $8.1 million in 1995 when S. K. Wellman was acquired to $21.2
million in 1999.
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- - Leveraging Customer Relationships. The Company's engineers work closely
with customers to develop and design new products and improve the
performance of existing products. The Company's commitment to quality,
service and just-in-time delivery enables it to build and maintain
strong and stable customer relationships. The Company believes that
more than 80% of its sales are from products and materials for which it
is the sole source provider for specific customer applications. The
Company or its predecessors have had relationships with a number of its
customers, which date back to the 1940's. The Company believes that
strong relationships with its customers provide it with significant
competitive advantages in obtaining and securing new business
opportunities.
ACQUISITIONS
On February 26, 1999, the Company purchased the capital stock of
Allegheny. The acquisition of Allegheny continued the Company's strategic
expansion into the powder metal component business. The major markets served by
Allegheny include lawn and garden, automotive, industrial motors and power hand
tools.
On October 29, 1999, the Company purchased substantially all the assets
of Quarter Master. Quarter Master manufactures premium branded clutch assemblies
for high performance automotive racing, including National Association for Stock
Car Auto Racing (NASCAR) and Indy Racing League (IRL). In addition to clutch
assemblies, Quarter Master manufactures and sells other precision engineered
components, including gears, bearings, driveshafts, bellhousings and starters.
The Company believes that Quarter Master's expertise in the design and
manufacture of clutch systems will provide the Company with a platform for
future growth in several of its key markets. This acquisition continued the
Company's strategy of expanding its market position in high performance
products. The Company believes that the acquisition gives it the opportunity to
combine its friction material expertise with clutch system design.
Both the friction product and powder metal component industries are
fragmented and are undergoing consolidation due in part to the additional
resources needed (1) to perform the research and development necessary to
satisfy customers' increasingly stringent quality and performance criteria, and
(2) to meet just-in-time delivery requirements. As a result, the Company
believes that it can continue to make strategic acquisitions that may include
other friction product and powder metal component manufacturers. To effect its
acquisition strategy, the Company engages in discussions, from time to time,
with other manufacturers in friction products, powder metal component and other
complementary businesses. At this time, the Company has no outstanding
commitments or agreements regarding any future acquisitions.
PRODUCTS AND MARKETS
The Company focuses on supplying components to the aerospace,
industrial and commercial markets that require sophisticated engineering and
production techniques for applications in markets in which it has achieved a
significant market share. Through acquisitions and product line expansions, the
Company has diversified its end markets. The Company believes this
diversification, has reduced its economic exposure to the cyclical effects of
any particular industry.
FRICTION PRODUCTS
The Company's Friction segment manufactures products 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. For example, the
friction brake components in aircraft braking systems slow and stop airplanes
when landing or taxiing. Friction products manufactured by the Company also
include friction components for use in automatic and power shift transmissions,
clutch facings that serve as the main contact point between an engine and a
transmission, and brake components for use in many other types of braking
systems.
The Company's friction products are custom-designed to meet the
performance requirements of a specific application and must meet temperature,
pressure, component life and noise level criteria. The engineering required in
designing a friction material for a specific application dictates a balance
between the component life cycle and the performance application of the friction
material in, for example, stopping or starting movement. Friction products are
consumed through customary use in a brake, clutch or transmission system and
require regular replacement. Because the friction material is the consumable, or
wear, component of such systems, new friction product introduction in
conjunction with a new system provides the Company with the opportunity to
supply the aftermarket with that friction product for the life of the system.
The principal markets served by the Company's Friction segment include
manufacturers of aircraft brakes, truck clutches, heavy-duty construction and
agricultural vehicle brakes, clutches and transmissions, and manufacturers of
motorcycle, snowmobile and performance racing brakes. Based upon net sales, the
Company believes that it is among the top three worldwide manufacturers of
friction products used in aerospace and industrial applications. The Company
estimates that aftermarket sales of friction products have comprised
approximately 50% of the Company's net friction product sales in recent years.
The Company believes that its stable aftermarket sales component enables the
Company to reduce its exposure to adverse economic cycles.
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Aerospace. The Company believes it is the only independent supplier of
friction materials to the manufacturers of braking systems for the Boeing 727,
737 and 757, the MD DC-9, DC-10 and MD-80 and the Canadair CRJ aircraft. The
Company believes it is also the largest supplier of friction materials to the
general aviation (non-commercial, non-military) market, supplying friction
materials for aircraft manufacturers such as Cessna, Lear, Gulfstream and
Fokker. Each aircraft braking system, including the friction materials supplied
by the Company, must meet stringent Federal Aviation Administration criteria and
certification requirements. New model development and FAA testing for the
Company's aircraft braking system customers generally begins two to five years
prior to full scale production of new braking systems. If the Company and its
aircraft brake system manufacturing partner are successful in obtaining the
rights to supply a particular model of aircraft, the Company will typically
supply its friction products to that model's aircraft braking system for as long
as the model continues to fly because it is generally too expensive to redesign
a braking system and meet FAA requirements. Moreover, FAA maintenance
requirements mandate that brake components be changed after a specified number
of take-offs and landings, which the Company expects to result in a continued
and steady market for its aerospace friction products.
The Company's friction products for commercial aerospace applications
are primarily used on "single-aisle" aircraft that are flown on shorter routes,
resulting in more takeoffs and landings than larger aircraft. The Company
believes its friction products provide an attractive combination of performance
and cost effectiveness in these applications. According to Boeing's 1999 Current
Market Outlook, approximately 9,200 of the 12,600 airplanes in the world fleet
are single-aisle commercial aircraft. The report also forecasts single-aisle to
increase by approximately 4,800 to 14,000 by the end of 2008. The Boeing report
also states that world airline passenger traffic is projected to increase 4.7%
per year over the next ten years. The report also projects that world airline
cargo traffic will increase 6.0% during the same period. The Company expects
that continued growth in world airline traffic, combined with the increasing
number of single-aisle aircraft, will cause demand for the Company's aerospace
friction products to remain strong. For example, Boeing is utilizing the
Company's friction material on its 737NG (New Generation) series aircraft.
Construction/Agricultural/Trucks. The Company supplies a variety of
friction products for use in brakes, clutches and transmissions on construction
and agricultural equipment and trucks. These components are designed to precise
tolerances and permit brakes to stop or slow a moving vehicle and the clutch or
transmission systems to engage or disengage. The Company believes it is a
leading supplier to original equipment manufacturers and to the aftermarket. The
Company believes that its trademark, Velvetouch(R), is well known in the
aftermarket for these components. As with the Company's aerospace friction
products, new friction product introduction in conjunction with a new brake,
clutch or transmission system provides the Company with the opportunity to
supply the aftermarket with the friction product for the life of the system.
- - Construction Equipment. The Company supplies friction products such as
transmission discs, clutch facings and brake components to
manufacturers of construction equipment, including Caterpillar. The
Company believes it is the second largest domestic supplier of these
types of friction products. Replacement components for construction
equipment are sold through manufacturers such as Caterpillar, as well
as various aftermarket distributors.
- - Agricultural Equipment. The Company supplies friction products such as
clutch facings, transmission discs and brake components to
manufacturers of agricultural equipment, including John Deere and New
Holland. The Company believes it is the second largest domestic
supplier of such friction products. Replacement components for
agricultural equipment are sold through original equipment
manufacturers as well as various aftermarket distributors.
- - Medium and Heavy Trucks. The Company supplies friction products for
clutch facings used in medium and heavy trucks to original equipment
manufacturers, such as Eaton. The Company believes it is the leading
domestic supplier of replacement friction products used in these
applications. Replacement components are sold through the Company's
original equipment manufacturers and various aftermarket distributors.
Performance Group. The Company supplies friction products for use in
other specialty applications, such as brake pads for Harley-Davidson
motorcycles, AM General Humvees and Bombardier, Polaris Industries and Arctic
Cat snowmobiles. The Company believes that these markets are experiencing
significant growth and the Company will continue to increase its market share
with its combination of superior quality and longer product life. Under the
"Hawk Brake" tradename, the Company also supplies high performance friction
material for use in racing car brakes. The Company's high performance brake pad
for race cars can operate in temperatures of over 1,100 degrees Fahrenheit. The
Company believes that this performance racing material may have additional
applications such as braking systems for passenger and school buses, police cars
and commercial delivery vehicles.
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POWDER METAL COMPONENTS
The Company's Powder metal segment is a leading supplier of powder
metal components consisting primarily of pump, motor and transmission elements,
gears, pistons and anti-lock brake sensor rings for applications ranging from
lawn and garden tractors to industrial equipment. Since Hawk's founding in 1989,
it has participated in the growing powder metal products industry with a focus
on the North American industrial market, which the Metal Powder Industries
Federation, an industry trade group, estimates had sales of over $5.0 billion in
1999. According to the Federation, the value of iron powder shipments in North
America increased by over 5% in 1998 compared to 1997, to an industry record of
511,000 tons.
Fluid Power, Industrial and Other Applications. The Company
manufactures a variety of components made from powder metals for use in (1)
fluid power applications, such as pumps and other hydraulic mechanisms, (2)
transmissions, other drive mechanisms and anti-lock braking systems used in
trucks and off-road and lawn and garden equipment, (3) gears and other
components for use in home appliances and office equipment and (4) components
used in automotive applications. The Company believes that the market for powder
metal components will continue to grow as the Company's core powder metal
technology benefits from advances that permit production of powder metal
components with increased design flexibility, greater densities and closer
tolerances that provide improved strength, hardness and durability for demanding
applications, and enable the Company's powder metal components to be substituted
for wrought steel or iron components produced with forging, casting or stamping
technologies. Powder metal components can often be produced at a lower cost per
unit than products manufactured with forging, casting or stamping technologies
due to the elimination of, or substantial reduction in, secondary machining,
lower material costs and the virtual elimination of raw material waste. The
Company believes that the current trend of substituting powder metal components
for forged, cast or stamped components in industrial applications will continue
for the foreseeable future, providing the Company with increased product and
market opportunities.
The Company's Powder metal segment operates in five facilities, each
targeting an important aspect of the market place:
- - High Precision. Helsel's pressing and finishing capabilities enable it
to specialize in tight tolerance fluid power components such as pump
elements and gears. In addition, the Company believes that Helsel's
machining capabilities provide it with a competitive advantage by
giving it the ability to supply a completed part to its customers,
typically without any subcontracted precision machining. The Company
believes that Helsel's growth will be driven by existing customers' new
design requirements and new product applications primarily for pumps,
motors and transmissions.
- - Large Size Capability. The Powder metal segment operation, at the
Friction Products Co. facility, has the capability to make structural
powder metal components that are among the largest used in North
America. The Company expects its sales of larger powder metal
components to continue to grow as the Company creates new designs for
existing customers and benefits from market growth, primarily in
current construction, agricultural and truck applications. For example,
the Company believes that sales of its powder metal components used in
anti-lock braking systems will benefit as domestic trucks comply with
the U.S. Department of Transportation's regulations requiring the
installation of anti-lock braking systems on new trucks.
- - High Volume. Sinterloy, Clearfield and Allegheny target smaller, high
volume parts where they can utilize their efficient pressing and
sintering capabilities to their best advantage. Sinterloy's primary
market has been powder metal components for the business equipment
market. Clearfield's market focus has been primarily to the lawn and
garden, home appliance, power hand tool, and truck markets. Allegheny's
market focus has been primarily the lawn and garden and automotive
markets. The Company believes that the high volume capabilities of
Sinterloy, Clearfield and Allegheny will provide the Company with
cross-selling opportunities from the Company's other powder metal
facilities.
DIE-CAST ALUMINUM ROTORS
The Company believes that Hutchinson is the largest independent U.S.
manufacturer of die-cast aluminum rotors for use in subfractional electric
motors. These motors are used in a wide variety of applications such as business
equipment, small household appliances and exhaust fans. Hawk accounts for
Hutchinson in its other segment category. Hutchinson does not meet the
quantitative threshold for creating its own reportable segment.
The Company estimates that approximately 50% of all rotors in the
subfractional motor market are made internally by motor manufacturers such as
Emerson and General Electric. However, the Company believes Hutchinson has
growth opportunities arising from the trend by original equipment motor
manufacturers to outsource their production of rotors. In 1999, the Company
expanded its rotor manufacturing capabilities into Mexico, where a large portion
of subfractional motors are manufactured. Production at this facility began in
February, 2000.
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OTHER
In addition to providing metal stampings for the Friction segment, the
Company's Logan subsidiary also sells transmission plates and other components
to the automotive and trucking industries. Additionally, Quarter Master
manufactures premium branded clutch assemblies for the high performance
automotive racing market. The Company also accounts for both Logan and Quarter
Master in the other segment category, as they do not meet the quantitative
threshold for creating their own reportable segment.
BUSINESS SEGMENT INFORMATION
(in thousands)
Year Ended December 31
---------------------------------
1999 1998 1997
---- ---- ----
Revenues
Friction $ 100,260 $ 109,624 $ 107,679
Powder metal 68,326 53,483 31,360
Other 18,770 19,024 20,047
--------- --------- ---------
Consolidated $ 187,356 $ 182,131 $ 159,086
Operating Income
Friction $ 8,554 $ 18,313 $ 13,236
Powder metal 11,003 13,359 7,193
Other (993) 1,146 1,644
--------- --------- ---------
Consolidated $ 18,564 $ 32,818 $ 22,073
DECEMBER 31
------------------------
1999 1998
--------- ---------
Total Assets
Friction $ 107,304 $ 99,302
Powder metal 71,816 53,034
Other 30,500 51,110
--------- ---------
Consolidated $ 209,620 $ 203,446
========= =========
MANUFACTURING
The manufacturing processes for most of the Company's friction products
and powder metal components are essentially similar. In general, both use
composite metal alloys in powder form to make high quality powder metal
components. The basic manufacturing steps, consisting of blending/compounding,
molding/compacting, sintering (or bonding) and secondary machining/treatment,
are as follows:
- - Blending/compounding: Composite metal alloys in powder form are blended
with lubricants and other additives according to scientific formulas,
many of which are proprietary to the Company. The formulas are designed
to produce precise performance characteristics necessary for a
customer's particular application. The Company often works together
with its customers to develop new formulas that will produce materials
with greater energy absorption characteristics, durability and
strength.
- - Molding/compacting: At room temperature, a specific amount of a powder
alloy is compacted under pressure into a desired shape. The Company's
molding presses are capable of producing pressures of up to 3,000 tons.
The Company believes that it has some of the largest presses in the
powder metal industry, enabling it to produce large, complex
components.
- - Sintering: After compacting, molded parts are heated in furnaces to
specific temperatures, enabling metal powders to metallurgically bond,
harden and strengthen the molded parts while retaining their desired
shape. For friction materials, the friction composite part is also
bonded directly to a steel plate or core, creating a strong continuous
metallic part.
- - Secondary machining/treatment: If required by customer specifications,
a sintered part undergoes additional processing. These processing
operations are generally necessary to attain increased hardness or
strength, tighter dimensional tolerances or corrosion resistance. To
achieve these specifications, parts are heat-treated, precision coined,
ground, drilled or treated with a corrosion resistant coating, such as
oil.
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Certain of the Company's friction products, which are primarily used in
oil-cooled brakes and power shift transmissions, do not require all of the
foregoing steps. For example, molded composite friction materials are molded
under high temperatures and cured in electronically-controlled ovens and then
bonded to a steel plate or core with a resin-based polymer. Cellulose composite
friction materials are blended and formed into continuous sheets and then
stamped into precise shapes by computer-controlled die cutting machines. Like
molded composite friction materials, cellulose composite friction materials are
then bonded to a steel plate or core with a resin-based polymer.
The Company's die-cast aluminum rotors are produced in a three-step
process. Steel stamped disks forming the laminations of the rotors are first
skewed (stacked) and then loaded into dies into which molten aluminum is
injected to create the rotors. The rotor castings created in the dies are then
machined to produce finished rotors. These rotors are manufactured in a variety
of sizes and shapes to customers' design specifications.
Quality Control. Throughout its design and manufacturing process, the
Company focuses on quality control. For product design, each Company
manufacturing facility uses state-of-the-art testing equipment to replicate
virtually any application required by the Company's customers. This equipment is
essential to the Company's ability to manufacture components that meet stringent
customer specifications. To ensure that tight tolerances have been met and that
the requisite quality is inherent in its finished products, the Company uses
statistical process controls, a variety of electronic measuring equipment and
computer-controlled testing machinery. The Company has also established programs
within each of its facilities to detect and prevent potential quality problems.
TECHNOLOGY
The Company believes that it is an industry leader in the development
of systems, processes and technologies which enable it to manufacture friction
products with numerous performance advantages, such as greater wear resistance,
increased stopping power, lower noise and smoother engagement. The Company's
expertise is evidenced by its aircraft brake components, which are currently
being installed on many of the braking systems of the Boeing 737-NG series of
aircraft.
The Company maintains an extensive library of proprietary friction
product formulas that serve as starting points for new product development. Each
formula has a specific set of ingredients and processes to generate
repeatability in production. Some formulas may have as many as 15 different
components. A slight change in a mixture can produce significantly different
performance characteristics. The Company uses a variety of technologies and
materials in developing and producing its products, such as graphitic and
cellulose composites. The Company believes its expertise in the development and
production of products using these different technologies and materials gives it
a competitive advantage over other friction product manufacturers, which
typically have expertise in only one or two types of friction material.
The Company also believes that its powder metal components business is
able to produce a wide range of products from small precise components to large
structural parts. The Company has presses that produce some of the largest
powder metal parts in the world, and its powder metal technology permits the
manufacture of complex components with specific performance characteristics and
close dimensional tolerances that would be impractical to produce using
conventional metalworking processes.
CUSTOMERS
The Company's engineers work closely with customers to develop and
design new products and improve the performance of existing products. The
Company's working relationship with its customers on development and design, and
the Company's commitment to quality, service and just-in-time delivery have
enabled it to build and maintain strong and stable customer relationships. The
Company or its predecessors has had relationships with many of its customers
which date back to the 1940's, and the Company believes that more than 80% of
its sales are from products and materials for which it is the sole source
provider for specific customer applications. Management believes the Company's
relationships with its customers are good.
The Company's recent acquisitions have broadened product lines,
increased its technological capabilities and will further enhance its customer
relationships and expand its preferred supplier status. As a result of the
Company's commitment to customer service and satisfaction, the Company's is
preferred supplier to many of the world's leading original equipment
manufacturers, including Aircraft Braking Systems, BFGoodrich Aerospace,
Caterpillar, Eaton, John Deere, Case, New Holland, Hydro-Gear and
Sauer-Sundstrand.
The Company's top five customers accounted for 27.6% of the Company's
consolidated net sales in 1999 and 32.7% of the Company's consolidated net sales
in 1998.
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MARKETING AND SALES
The Company markets its friction products globally through 18 product
management and sales professionals, who operate from the Company's facilities in
the United States, Italy, and Canada and sales offices in the United Kingdom and
China. The Company's product managers and sales force work directly with the
Company's engineers who provide the technical expertise necessary for the
development and design of new products and for the improvement of the
performance of existing products. The Company's friction products are sold both
directly to original equipment manufacturers and to the aftermarket through its
original equipment customers and a network of distributors and representatives
throughout the world.
The Company's marketing and sales of its powder metal components and
die-cast aluminum rotors are directed by 12 product management and sales
professionals. The Company also sells its powder metal components and rotors to
original equipment manufacturers through independent sales representatives.
COMPETITION
The principal segments in which the Company competes are competitive
and fragmented, with many small manufacturers and only a few manufacturers that
generate sales in excess of $50 million. The larger competitors may have
financial and other resources substantially greater than those of the Company.
The Company competes for new business principally at the beginning of the
development of new applications and at the redesign of existing applications by
its customers. For example, new model development for the Company's aircraft
braking system customers generally begins two to five years prior to full-scale
production of new braking systems. Product redesign initiatives by customers
typically involve long lead times as well. Although the Company has been
successful in the past in obtaining this new business, there is no assurance
that the Company will continue to obtain such business in the future. The
Company also competes with manufacturers using different technologies, such as
carbon composite ("carbon-carbon") friction materials for aircraft braking
systems. Carbon-carbon braking systems are significantly lighter than the
metallic aircraft braking systems for which the Company supplies friction
materials, but are more expensive. The carbon-carbon brakes are typically used
on wide-body aircraft, such as the Boeing 747 and military aircraft, where the
advantages in reduced weight justify the additional expense.
In addition, as the Company's core powder metal technology improves,
enabling its components to be substituted for wrought steel or iron components,
the Company increasingly competes with companies using forging, casting or
stamping technologies. Powder metal components can often be produced at a lower
cost per unit than products manufactured with forging, casting or stamping
technologies due to the elimination of, or substantial reduction in, secondary
machining, lower material costs and the virtual elimination of raw material
waste. As a result, powder metal components are increasingly being substituted
for metal parts manufactured using more traditional technologies.
SUPPLY AND PRICE OF RAW MATERIALS
The principal raw materials used by the Company are copper, steel and
iron powders and custom-fabricated cellulose sheet. The Company has no long-term
supply agreements with any of its major suppliers. However, the Company has
generally been able to obtain sufficient supplies of raw materials for its
operations, and changes in prices of such supplies over the past few years have
not had a significant effect on its operations.
9
GOVERNMENT REGULATION
The Company's sales to manufacturers of aircraft braking systems
represented 15.1% and 16.5% of the Company's consolidated net sales in 1999 and
1998, respectively. Each aircraft braking system, including the friction
products supplied by the Company, must meet stringent FAA criteria and testing
requirements. The Company has been able to meet these requirements in the past
and continuously reviews FAA compliance procedures to help ensure continued and
future compliance.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Manufacturers such as the Company are subject to stringent
environmental standards imposed by federal, state, local and foreign
environmental laws and regulations, including those related to air emissions,
wastewater discharges, chemical and hazardous waste management and disposal.
Certain of these environmental laws hold owners or operators of land or
businesses liable for their own and for previous owners' or operators' releases
of hazardous or toxic substances, materials or wastes, pollutants or
contaminants. Compliance with environmental laws also may require the
acquisition of permits or other authorizations for certain activities and
compliance with various standards or procedural requirements. The Company is
also subject to the federal Occupational Safety and Health Act and similar
foreign and state laws. The nature of the Company's operations, the long history
of industrial uses at some of its current or former facilities, and the
operations of predecessor owners or operators of certain of the businesses
expose the Company to risk of liabilities or claims with respect to
environmental and worker health and safety matters. The Company reviews its
procedures and policies for compliance with environmental and health and safety
laws and regulations and believes that it is in substantial compliance with all
such material laws and regulations applicable to its operations. The costs of
compliance with environmental, health and safety requirements have not been
material to the Company.
INTELLECTUAL PROPERTY MATTERS
Wellman Friction Products(R), Velvetouch(R), Fibertuff(R), Feramic(R),
Velvetouch Feramic(R), Velvetouch CERAMIC(R), Velvetouch Organik(R) and
Velvetouch Metalik(R) are among the federally registered trademarks of the
CompaNY. Velvetouch(R) is the Company's principal trademark for use in the
Friction segment aftermarket and is registered iN 26 countries.
Although the Company maintains patents related to its business, the
Company does not believe that its competitive position is dependent on patent
protection or that its operations are dependent on any individual patent.
To protect its intellectual property, the Company relies on a
combination of internal procedures, confidentiality agreements, patents,
trademarks, trade secrets law and common law, including the law of unfair
competition.
PERSONNEL
At December 31, 1999, the Company had approximately 1,320 domestic
employees and 210 international employees, consisting of 225 management,
supervisory and administrative personnel, 106 engineering, quality control and
laboratory personnel, 37 sales and marketing personnel and 1,162 manufacturing
personnel.
Approximately 240 employees at the Company's Brook Park, Ohio plant are
covered under a collective bargaining agreement with the Paper, Allied
Industrial, Chemical and Energy Workers International Union (PACE) expiring in
October 2000; approximately 75 employees at the Company's Akron, Ohio facility
are covered under a collective bargaining agreement with the United Automobile
Workers expiring in July 2000; approximately 190 employees at the Company's
Orzinuovi, Italy plant are represented by a national mechanics union under an
agreement that expires in December 2000 and by a local union under an agreement
that also expires in December 2000; and approximately 60 hourly employees at the
Company's Alton, Illinois facility are covered under a collective bargaining
agreement with the International Association of Machinists and Aerospace Workers
expiring in June 2001. The Company has experienced no strikes and believes its
relations with its employees and their unions to be good.
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ITEM 2. PROPERTIES.
The Company's material operations are conducted through the following
facilities, all of which are owned, except as noted:
LOCATION SQ. FT. SEGMENT PRINCIPAL FUNCTIONS
-------- ------- ------- -------------------
Medina, Ohio................... 177,300 Friction / Powder metal Manufacturing of friction products and
powder metal components, sales and
marketing, research and development, product
engineering, and administration
Brook Park, Ohio............... 111,000 Friction Manufacturing of friction products, sales
and marketing, research and development,
product engineering, customer service and
support, and administration
Orzinuovi, Italy (1)........... 97,000 Friction Manufacturing of friction products,
international sales and marketing, research
and development, and administration
Concord, Ontario, Canada (2)... 15,000 Friction Manufacturing of friction products,
distribution and warehousing
Solon, Ohio (2) ............... 38,000 Friction Research and development
Campbellsburg, Indiana......... 75,000 Powder metal Manufacturing of powder metal components,
sales and marketing, product engineering,
customer service and support, and
administration
Solon Mills, Illinois (2)...... 42,000 Powder metal Manufacturing of powder metal components,
sales and marketing, customer service and
support
Clearfield, Pennsylvania....... 53,800 Powder metal Manufacturing of powder metal components,
sales and marketing, product engineering,
customer service and support and warehousing
Falls Creek, Pennsylvania...... 52,000 Powder metal Manufacturing of powder metal components,
product engineering, customer service and
support and warehousing
Alton, Illinois................ 37,000 Other Manufacturing of die-cast aluminum rotors,
sales and marketing, customer service and
support, and administration
Lake Zurich, Illinois (2)...... 24,000 Other Manufacturing of high performance clutches,
sales and marketing, product engineering,
customer service and support, and
administration
Akron, Ohio.................... 81,000 Other Manufacturing of metal stampings
Monterrey, Mexico (2).......... 41,000 Other Manufacturing of die-cast aluminum rotors,
sales and marketing, customer service and
support, and administration
Cleveland, Ohio (3)............ 6,200 Principal executive offices
(1) The Company's Italian facility is subject to certain security interests
granted to its lenders.
(2) Leased.
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(3) Leased. The Company is party to an expense sharing arrangement under
which the Company shares the expenses of its corporate headquarters
located in Cleveland with a company owned by Ronald E. Weinberg, the
Co-Chairman and Co-CEO of the Company.
The Company believes that substantially all of its property and
equipment is in good condition, adequately insured and suitable for their
present and intended use. Several of the Company's powder metal facilities are
operating at or near capacity. With its capital expansion program, the Company
believes that it will have sufficient capacity to accommodate its needs through
2000. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in lawsuits that arise in the ordinary course
of its business. In the Company's opinion, the outcome of these matters will not
have a material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A common stock has been traded on the New York
Stock Exchange since the Company's initial public offering on May 12, 1998 under
the symbol "HWK." The following table sets forth for the fiscal periods
indicated the high and low prices of the Common Stock as reported on the New
York Stock Exchange.
QUARTERLY STOCK PRICES
- ----------------------
QUARTER ENDED HIGH LOW
------------- ---- ---
1999
March 31, 1999 $ 8.750 $ 6.500
June 30, 1999 $ 11.750 $ 7.438
September 30, 1999 $ 9.063 $ 5.250
December 31, 1999 $ 6.188 $ 3.813
1998
June 30, 1998 $ 19.500 $ 17.313
September 30, 1998 $ 18.188 $ 8.750
December 31, 1998 $ 12.500 $ 6.250
The closing sale price for the common stock on December 31, 1999 was
$5.813
Shareholders of record as of March 17, 2000 numbered 83. The Company
estimates that an additional 1,000 shareholders own stock held for their
accounts at brokerage firms and financial institutions.
The Company has never declared or paid, and does not intend to declare
or pay, any cash dividends for the foreseeable future and intends to retain
earnings for the future operation and expansion of the Company's business. In
addition, the Company's senior note indenture and its credit facility prohibit
the payment of cash dividends on the Class A common stock except upon compliance
with certain conditions.
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ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is set forth on page 12 of the
1999 Annual Report under the caption entitled "Financial Summary", which is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is set forth on pages 13 through
17 of the 1999 Annual Report under the caption entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operation," which is
incorporated herein by reference. Any investor or potential investor must
consider the risks that are set forth under the caption "Forward-Looking
Statements" contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on Page 17 of the 1999 Annual Report which
is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is set forth under the sub
caption "Market Risk Disclosures" contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 16 of the
1999 Annual Report which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth on pages 18 through
34 of the 1999 Annual Report under the captions entitled "Consolidated Balance
Sheets," "Consolidated Statements of Income," "Consolidated Statements of
Shareholders' Equity (Deficit)," "Consolidated Statements of Consolidated Cash
Flows," and "Notes to Consolidated Financial Statements," which is incorporated
herein is incorporated by reference. The Report of Independent Auditors is set
forth on page 13 of this Form 10-K.
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13
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Hawk Corporation
We have audited the accompanying consolidated balance sheets of Hawk Corporation
and subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of income, shareholders' equity (deficit), and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hawk Corporation
and subsidiaries at December 31, 1999 and 1998 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 14, 2000
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated herein by reference
to the Registrant's definitive Proxy Statement relating to its 2000 Annual
Meeting of Stockholders (the "Proxy Statement"), under the captions "Board of
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance." This Proxy Statement will be filed with the SEC prior to
April 28, 2000.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is contained under the caption
"Executive Compensation and Other Information' in the Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is contained under the caption
"Principal Stockholders" in the Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is contained under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
The following consolidated financial statements of the Company
included in the 1999 Annual Report are incorporated by
reference in Item 8. The Report of Independent Auditors is set
forth on page 13 of this Form 10-K.
(i) Consolidated Balance Sheets at December 31, 1999 and
1998 (page 18 of the 1999 Annual Report)
(ii) Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 (page 19 of the 1999
Annual Report)
(iii) Consolidated Statements of Shareholders' Equity
(Deficit) for the years ended December 31, 1999, 1998
and 1997 (page 20 of the 1999 Annual Report)
(iv) Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 (page 21 of
the 1999 Annual Report)
(v) Notes to Consolidated Financial Statements for the
years ended December 31, 1999, 1998 and 1997 (pages
22 through 34 of the 1999 Annual Report)
(2) Consolidated Financial Statement Schedules
All consolidated financial schedules are omitted because they
are inapplicable, not required by the instructions or the
information is included in the consolidated financial
statements or notes thereto.
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(b) Reports on Form 8-K:
None.
(c) Exhibits:
3.1 Form of the Company's Second Amended and Restated Certificate
of Incorporation (Incorporated by reference to the Company's
Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission (Reg. No. 333-40535))
3.2 The Company's Amended and Restated By-laws (Incorporated by
reference to the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission (Reg. No.
001-13797))
4.1 Form of Rights Agreement between the Company and Continental
Stock Transfer & Trust Company, as Rights Agent (Incorporated
by reference to the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission (Reg.
No. 333-40535))
4.2 Indenture, dated as of November 27, 1996, by and among the
Company, Friction Products Co., Hawk Brake, Inc., Logan Metal
Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc.,
S.K. Wellman Corp., Wellman Friction Products U.K. Corp.,
Hutchinson Products Corporation, and Bank One Trust Company,
NA, as Trustee (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
4.3 Form of 10 1/4% Senior Note due 2003 (Incorporated by
reference to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (Reg. No.
333-18433))
4.4 Form of Series B 10 1/4% Senior Note due 2003 (Incorporated by
reference to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (Reg. No.
333-18433))
4.5 Stockholders' Voting Agreement, effective as of November 27,
1996, by and among the Company, Norman C. Harbert, the Harbert
Family Limited Partnership, Ronald E. Weinberg, the Weinberg
Family Limited Partnership, Byron S. Krantz and the Krantz
Family Limited Partnership (Incorporated by reference to the
Company's Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
4.6 Letter agreement, dated January 5, 1998, amending the
Stockholders' Voting Agreement, effective as of November 27,
1996, by and among the Company, Norman C. Harbert, the Harbert
Family Limited Partnership, Ronald E. Weinberg, the Weinberg
Family Limited Partnership, Byron S. Krantz and the Krantz
Family Limited Partnership (Incorporated by reference to the
Company's Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission (Reg. No. 333-40535))
10.1 Employment Agreement, dated as of November 1, 1996, between
the Company and Norman C. Harbert (Incorporated by reference
to the Company's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission (Reg. No.
333-18433))
10.2 Form of Amended and Restated Wage Continuation Agreement
between the Company and Norman C. Harbert (Incorporated by
reference to the Company's Registration Statement on Form S-1
as filed with the Securities and Exchange Commission (Reg. No.
333-40535))
10.3 Employment Agreement, dated as of November 1, 1996, between
the Company and Ronald E. Weinberg (Incorporated by reference
to the Company's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission (Reg. No.
333-18433))
10.4 Employment Agreement, dated July 1, 1994, between Helsel, Inc.
and Jess F. Helsel (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
15
16
10.5 Consulting Agreement, dated July 1, 1994, between Helsel, Inc.
and Jess F. Helsel (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
10.6 Letter agreement, dated as of June 1997, amending the
Employment Agreement and the Consulting Agreement, each dated
July 1, 1994, between Helsel, Inc. and Jess F. Helsel
(Incorporated by reference to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (Reg. No. 333-40535))
10.7 Letter agreement, dated as of March 26, 1998, amending the
Employment Agreement and the Consulting Agreement, each dated
July 1, 1994, between Helsel, Inc. and Jess F. Helsel
(Incorporated by reference to the Company's Form 10-K for the
year ended December 31, 1998 as filed with the Securities and
Exchange Commission)
10.8 Form of the Promissory Notes, each dated June 30, 1995, issued
by of Norman C. Harbert and Ronald E. Weinberg to the Company
(Incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission (Reg. No. 333-18433))
10.9 Letter agreement, dated October 1, 1996, amending the
Promissory Notes, dated June 30, 1995, issued by each of
Norman C. Harbert and Ronald E. Weinberg to the Company
(Incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission (Reg. No. 333-18433))
10.10 Form of Convertible Promissory Note, dated January 2, 1997, in
the aggregate principal amount of $1.5 million, issued by the
Company to each of Timothy Houghton, CFB Venture Fund II,
L.P., MorAmerica Capital Corporation, Community Investment
Partners II, L.P. and St. Louis Community Foundation
(Incorporated by reference to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (Reg. No. 333-40535))
10.11 Credit Agreement, dated as of May 1, 1998, among the Company
and KeyBank National Association, as Swing Line Lender,
Administrative Agent and as Syndication Agent (Incorporated by
reference to the Company's Form 10-Q for the quarterly period
ended June 30,1998 as filed with the Securities and Exchange
Commission)
10.12 Subsidiary Guaranty, dated as of May 1, 1998, among the
subsidiaries of the Company, as guarantors, and KeyBank
National Association, as Administrative Agent (Incorporated by
reference to the Company's Form 10-Q for the quarterly period
ended June 30,1998 as filed with the Securities and Exchange
Commission)
10.13 Hawk Corporation 1997 Stock Option Plan (Incorporated by
reference to the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission
(Reg. No. 333-40535))
13* Portions of the 1999 Annual Report to Shareholders
incorporated herein by reference
21.1* Subsidiaries of the Registrant
23.1* Consent of Ernst & Young LLP
27* Financial Data Schedule
* Filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Hawk Corporation
By: /s/ Thomas A. Gilbride
---------------------
Thomas A. Gilbride
Vice President - Finance
Date March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Norman C. Harbert Co-Chairman of the Board, Co-Chief March 30, 2000
- ------------------------------- Executive Officer and Director
Norman C. Harbert (principal executive officer)
/s/ Ronald E. Weinberg Co-Chairman of the Board, Co-Chief March 30, 2000
- ------------------------------- Executive Officer, Treasurer and
Ronald E. Weinberg Director
(principal financial officer)
/s/ Thomas A. Gilbride Vice President - Finance March 30, 2000
- ------------------------------- (principal accounting officer)
Thomas A. Gilbride
/s/ Byron S. Krantz Secretary and Director March 30, 2000
- -------------------------------
Byron S. Krantz
/s/ Paul R. Bishop Director March 30, 2000
- -------------------------------
Paul R. Bishop
/s/ Dan T. Moore, III Director March 30, 2000
- -------------------------------
Dan T. Moore, III
/s/ William J. O'Neill, Jr. Director March 30, 2000
- -------------------------------
William J. O'Neill, Jr.
/s/ Jack Kemp Director March 30, 2000
- -------------------------------
Jack Kemp
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