Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD _______ TO _______ .
COMMISSION FILE NUMBER 001-13797
HAWK CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1608156
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
200 PUBLIC SQUARE, SUITE 30-5000, CLEVELAND, OHIO 44114
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 861-3553
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of the date of this report,
the Registrant had the following number of shares of common stock outstanding:
Class A Common Stock, $0.01 par value: 8,557,240
Class B Common Stock, $0.01 par value: None (0)
1
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 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 31
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
----------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,928 $ 3,084
Accounts receivable, less allowance of
$536 in 2002 and $455 in 2001 34,740 25,773
Inventories 31,059 29,152
Deferred income taxes 1,211 1,200
Other current assets 4,382 4,638
--------------------------
Total current assets 74,320 63,847
Property, plant and equipment:
Land and improvements 1,608 1,608
Buildings and improvements 18,657 18,657
Machinery and equipment 99,149 96,688
Furniture and fixtures 7,821 7,168
Construction in progress 3,035 1,450
--------------------------
130,270 125,571
Less accumulated depreciation and amortization 64,175 58,208
--------------------------
Total property, plant and equipment 66,095 67,363
Other assets:
Goodwill 32,495 53,877
Other intangible assets 12,105 12,828
Shareholder notes 1,010 1,010
Other 5,816 5,180
--------------------------
Total other assets 51,426 72,895
Total assets $191,841 $204,105
==========================
3
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
------------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 14,835 $ 13,432
Accrued compensation 5,518 5,233
Other accrued expenses 7,892 6,832
Current portion of long-term debt 35,347 6,862
-----------------------------
Total current liabilities 63,592 32,359
Long-term liabilities:
Long-term debt 68,593 90,957
Deferred income taxes 6,737 10,978
Other 3,609 3,374
-----------------------------
Total long-term liabilities 78,939 105,309
Shareholders' equity:
Series D preferred stock, $.01 par value; an aggregate
liquidation value of $1,530, plus any unpaid
dividends with 9.8% cumulative dividend (1,530
shares authorized, issued and outstanding) 1 1
Class E preferred stock, $.01 par value; 100,000 shares
authorized; none issued or outstanding
Class A common stock, $.01 par value; 75,000,000
shares authorized; 9,187,750 issued; and 8,557,240
and 8,552,920 outstanding in 2002 and 2001,
respectively 92 92
Class B common stock, $.01 par value; 10,000,000
shares authorized; none issued or outstanding
Additional paid-in capital 54,619 54,626
Retained earnings 1,987 19,623
Accumulated other comprehensive loss (2,717) (3,201)
Treasury stock, at cost, 630,510 and 634,830
shares in 2002 and 2001, respectively (4,672) (4,704)
-----------------------------
Total shareholders' equity 49,310 66,437
-----------------------------
Total liabilities and shareholders' equity $ 191,841 $ 204,105
=============================
Note: The balance sheet at December 31, 2001 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
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------------------------------------------------------------
Net sales $ 50,349 $ 47,419 $ 100,153 $ 101,200
Cost of sales 38,723 37,085 77,748 77,046
------------------------------------------------------------
Gross profit 11,626 10,334 22,405 24,154
Operating Expenses:
Selling, technical and administrative expenses 8,295 8,359 17,493 17,031
Restructuring costs 892 1,000
Amortization of intangibles 367 1,134 723 2,265
------------------------------------------------------------
Total operating expenses 8,662 10,385 18,216 20,296
------------------------------------------------------------
Income (loss) from operations 2,964 (51) 4,189 3,858
Interest expense (2,342) (2,391) (4,640) (4,834)
Interest income 12 61 75 103
Other expense, net (93) (324) (295) (246)
------------------------------------------------------------
Income (loss) before income taxes 541 (2,705) (671) (1,119)
Income tax provision (benefit) 302 (1,286) (310) (557)
------------------------------------------------------------
Net income (loss) before cumulative effect of change in
accounting principle 239 (1,419) (361) (562)
Cumulative effect of change in accounting principle, net of
tax of $4,252 (17,200)
------------------------------------------------------------
Net income (loss) $ 239 $ (1,419) $ (17,561) $ (562)
============================================================
Earnings (loss) per share:
Basic earnings (loss) per share:
Basic earnings (loss) before cumulative effect of change
in accounting principle $ .02 $ (.17) $ (.05) $ (.07)
Cumulative effect of change in accounting principle (2.01)
------------------------------------------------------------
Net income (loss) per basic share $ .02 $ (.17) $ (2.06) $ (.07)
============================================================
Diluted earnings (loss) per share:
Diluted earnings (loss) before cumulative effect of change
in accounting principle $ .02 $ (.17) $ (.05) $ (.07)
Cumulative effect of change in accounting principle (2.01)
------------------------------------------------------------
Net income (loss) per diluted share $ .02 $ (.17) $ (2.06) $ (.07)
============================================================
See notes to consolidated financial statements.
5
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
2002 2001
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(17,561) $ (562)
Adjustments to reconcile net loss to net cash (used)
provided by operating activities:
Depreciation and amortization 6,260 7,905
Deferred income taxes (151)
Cumulative effect of change in accounting principle, net of tax 17,200
Changes in operating assets and liabilities:
Accounts receivable (8,241) (3,347)
Inventories (1,250) 2,008
Other assets (345) (282)
Accounts payable 1,023 2,283
Other liabilities 1,191 (1,398)
---------------------------
Net cash (used in) provided by operating activities (1,723) 6,456
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (4,170) (4,830)
---------------------------
Net cash used in investing activities (4,170) (4,830)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 32,503 16,239
Payments on long-term debt (26,811) (18,436)
Payments of preferred stock dividends (75) (75)
---------------------------
Net cash provided by (used in) financing activities 5,617 (2,272)
Effect of exchange rate changes on cash 120 (126)
---------------------------
Net decrease in cash and cash equivalents (156) (772)
Cash and cash equivalents at beginning of year 3,084 4,010
---------------------------
Cash and cash equivalents at end of year $ 2,928 $ 3,238
===========================
See notes to consolidated financial statements.
6
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the period ended June 30,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto in the Form 10-K for
Hawk Corporation (the "Company") for the year ended December 31, 2001.
The Company, through its business segments, designs, engineers, manufactures and
markets specialized components used in a variety of aerospace, industrial and
commercial applications.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Beginning February 28, 2002, the financial
statements also include the Company's 100% ownership interest in Net Shape
Technologies LLC (Net Shape). Prior to that date, the Company owned a majority
interest in Net Shape. All significant intercompany accounts and transactions
have been eliminated in the accompanying financial statements.
Certain amounts have been reclassified in 2001 to conform to 2002 presentation.
NOTE 2 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AND GOODWILL AND
INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" (SFAS No.
141) and No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142). These
statements eliminate the pooling of interest method of accounting for business
combinations subsequent to June 30, 2001 and eliminate the amortization of
goodwill for all fiscal years beginning after December 15, 2001. The Company
adopted SFAS No. 141 and SFAS No. 142 with respect to new goodwill as of July 1,
2001 and adopted SFAS No. 142 with respect to existing goodwill as of January 1,
2002, the first day of its 2002 fiscal year. The adoption of SFAS No. 141 has
not impacted the Company's financial condition or results of operations. In
accordance with SFAS No. 142, existing goodwill was amortized through fiscal
2001. Upon adoption of SFAS No. 142, the Company stopped amortizing existing
goodwill. The pro forma effect of applying SFAS No. 142 for the six and three
months ended June 30, 2001 would have been to decrease amortization expense by
approximately $1,542 and $767, respectively and would result in basic and
diluted earnings (loss) per share of $0.04 and $(0.12), respectively.
Additionally, upon adoption of SFAS No. 142, the Company changed the accounting
for goodwill and other indefinite-lived intangible assets from an amortization
methodology to an impairment-only methodology. SFAS No. 142 provided for a six
month transitional period from the effective date of adoption, to June 30, 2002,
for the Company to perform an initial assessment of whether there was an
indication that the carrying value of the goodwill was impaired. The Company
performed the assessment by comparing the fair value of each of its reporting
units, as determined in accordance with SFAS No. 142, to its carrying value. The
rules under SFAS No. 142 require that any initial impairment be taken as a
charge to income as a cumulative effect of change in accounting principle
retroactive to January 1, 2002.
The Company, with the assistance of independent valuation experts, has completed
its initial assessment test and has concluded that certain of its goodwill was
impaired at January 1, 2002, resulting in a charge of $21,452 ($17,200 after
tax). The fair value of goodwill was estimated using a combination of a
discounted cash flow valuation model, incorporating a discount rate commensurate
with the risks involved for each segment and a market approach of guideline
companies and similar transactions. The impairment found resulted from the
carrying value exceeding the fair value of certain operating segments. This was
due primarily to a shortfall in sales from levels anticipated at the time of the
respective acquisitions and other costs associated with the Company's global
expansion initiatives. In accordance with SFAS No. 142, this charge has been
recorded as a cumulative effect of change in accounting principle, retroactive
to January 1, 2002. The net loss after the cumulative effect of change in
accounting principle for the six month period ended June 30, 2002 was $2.06 per
diluted share. The transitional impairment charge is a one-time non-cash charge
and will not have an effect on the Company's current business activities or
existing bank covenants. There can be no assurance that future goodwill
impairments will not occur.
SFAS No. 142 requires a review at least annually of the carrying value of
indefinite-lived assets and goodwill. In addition to the transitional impairment
test completed in the second quarter of 2002, another impairment test will be
completed in the fourth quarter 2002 and at least annually thereafter.
The components of goodwill and other intangible assets and the related
accumulated amortization are as follows:
JUNE 30, DECEMBER 31,
2002 2001
------------------------------------- -------------------------------------
ACCUMULATED ACCUMULATED
GROSS AMORTIZATION NET GROSS AMORTIZATION NET
----------------------------------------------------------------------------------
Goodwill, beginning of the period $67,808 $13,931 $53,877 $67,380 $10,751 $56,629
Additions 70 70 428 428
Deletions 21,452 21,452 3,180 3,180
----------------------------------------------------------------------------------
Goodwill, end of the period $46,426 $13,931 $32,495 $67,808 $13,931 $53,877
Other intangible assets subject to
amortization:
Product certifications 20,820 9,904 10,916 20,820 9,544 11,276
Deferred financing 4,693 3,899 794 4,693 3,593 1,100
Other intangible assets 3,013 2,618 395 3,013 2,561 452
----------------------------------------------------------------------------------
Subtotal 28,526 16,421 12,105 28,526 15,698 12,828
----------------------------------------------------------------------------------
Total $74,952 $30,352 $44,600 $96,334 $29,629 $66,705
==================================================================================
A summary of the Company's net goodwill at June 30, 2002 and December 31, 2001
by reportable operating segment is as follows:
JUNE 30, DECEMBER 31,
2002 2001
--------------------------
Friction products $11,100
Precision components $28,109 28,039
Performance automotive 4,386 8,392
Motor 6,346
--------------------------
Consolidated $32,495 $53,877
==========================
The Company estimates its amortization expense for its definite-lived assets for
the next five years to be as follows: 2002-$1,422; 2003-$1,257; 2004-$789;
2005-$789; and 2006-$776.
Product certifications were acquired and valued based on the acquired company's
position as a certified supplier of friction materials to the major
manufacturers of commercial aircraft brakes.
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
----------------------------------------------------------------
Net income (loss) $ 239 $ (1,419) $(17,561) $ (562)
Foreign currency translation 813 90 484 (415)
----------------------------------------------------------------
Comprehensive income (loss) $ 1,052 $ (1,329) $(17,077) $ (977)
================================================================
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:
JUNE 30, DECEMBER 31,
2002 2001
--------------------------------
Raw materials and work-in-process $ 21,176 $ 19,360
Finished products 13,021 12,542
Inventory reserves (3,138) (2,750)
--------------------------------
$ 31,059 $ 29,152
================================
7
NOTE 5 - EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share are computed as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
-----------------------------------------------------------
Numerator:
Net income (loss) before cumulative effect of change in
accounting principle $ 239 $ (1,419) $ (361) $ (562)
Preferred stock (37) (37) (75) (75)
-----------------------------------------------------------
Net income (loss) before cumulative effect of change in
accounting principle available to common shareholders $ 202 $ (1,456) $ (436) $ (637)
===========================================================
Net income (loss) $ 239 $ (1,419) $(17,561) $ (562)
Preferred stock (37) (37) (75) (75)
-----------------------------------------------------------
Net income (loss) available to common shareholders $ 202 $ (1,456) $(17,636) $ (637)
===========================================================
Denominator:
Denominator for basic earnings (loss) per share-
Weighted average shares 8,557 8,553 8,556 8,552
Effect of dilutive securities:
Stock options 100
-----------------------------------------------------------
Denominator for diluted earnings (loss) per share-
adjusted weighted-average shares and assumed conversions 8,657 8,553 8,556 8,552
Basic earnings (loss) per share:
Basic earnings (loss) before cumulative effect of change in
accounting principle $ .02 $ (.17) $ (.05) $ (.07)
Cumulative effect of change in accounting principle (2.01)
-----------------------------------------------------------
Net income (loss) per basic share $ .02 $ (.17) $ (2.06) $ (.07)
===========================================================
Diluted earnings (loss) per share:
Diluted earnings (loss) before cumulative effect of change in
accounting principle $ .02 $ (.17) $ (.05) $ (.07)
Cumulative effect of change in accounting principle (2.01)
-----------------------------------------------------------
Net income (loss) per diluted share $ .02 $ (.17) $ (2.06) $ (.07)
===========================================================
For the six months ended June 30, 2002 and the three and six months ended June
30, 2001 outstanding stock options were not included in the computation of
diluted earnings per share since it would have resulted in an anti-dilutive
effect.
8
NOTE 6 - BUSINESS SEGMENTS
The Company operates in four primary business segments: friction products,
precision components, performance automotive and motors. The Company's
reportable segments are strategic business units that offer different products
and services. They are managed separately based on fundamental differences in
their operations.
The friction products segment engineers, manufactures and markets specialized
components, used in a variety of aerospace, industrial and commercial
applications. The Company, through this segment, is a worldwide supplier of
friction components for brakes, clutches and transmissions.
The precision component segment engineers, manufactures and markets specialized
components, used primarily in industrial applications. The Company, through this
segment, targets three areas of the powder metal component marketplace: high
precision components that are used in fluid power applications, large powder
metal parts primarily used in construction, agricultural and truck applications,
and smaller high-volume parts used in lawn and garden, appliance, automotive,
business equipment and a variety of other applications.
The performance automotive segment engineers, manufactures and markets high
performance friction material for use in premium branded clutch and drive train
components. The Company, through this segment, targets leading teams in the
NASCAR and CART racing series, as well as drivers on the SCCA and ASA racing
circuits, high-performance street vehicles and other road race and oval track
competition cars. An operating unit formerly associated with the Company's
performance automotive segment was reclassified as of January 1, 2002 to the
Company's friction products segment as a result of changes in the internal
operating responsibility of that unit. All prior periods have been reclassified
to reflect this change.
The motor segment engineers, manufactures and markets die-cast aluminum rotors
for use in the subfractional electric motors and integral horsepower custom
motors and generators. The Company, through this segment, targets a wide variety
of applications such as business equipment, small household appliances and HVAC
systems. The company also designs and produces integral horsepower custom motors
and generators.
9
The information by segment is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
---------------------------------------------------------------
Net sales to external customers:
Friction products $ 27,102 $ 27,615 $ 53,135 $ 57,178
Precision components 17,125 14,422 34,331 32,268
Performance automotive 3,326 3,229 7,221 7,390
Motor 2,796 2,153 5,466 4,364
---------------------------------------------------------------
Consolidated $ 50,349 $ 47,419 $ 100,153 $ 101,200
===============================================================
Gross profit (loss):
Friction products $ 6,946 $ 7,323 $ 12,982 $ 15,084
Precision components 3,576 2,226 6,703 6,672
Performance automotive 1,152 916 2,565 2,320
Motor (48) (131) 155 78
---------------------------------------------------------------
Consolidated $ 11,626 $ 10,334 $ 22,405 $ 24,154
===============================================================
Depreciation and amortization:
Friction products $ 1,985 $ 2,314 $ 3,893 $ 4,620
Precision components 923 1,228 1,867 2,422
Performance automotive 48 190 86 373
Motor 211 262 414 490
---------------------------------------------------------------
Consolidated $ 3,167 $ 3,994 $ 6,260 $ 7,905
===============================================================
Operating income (loss):
Friction products $ 2,678 $ 1,413 $ 3,450 $ 4,284
Precision components 896 (635) 1,017 467
Performance automotive 111 92 935 473
Motor (721) (921) (1,213) (1,366)
---------------------------------------------------------------
Consolidated $ 2,964 $ (51) $ 4,189 $ 3,858
===============================================================
Cumulative effect of change in
accounting principle, net of tax:
Friction products $ 8,373
Performance automotive 2,484
Motor 6,343
---------------------------------------------------------------
Consolidated $ 17,200
===============================================================
NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133) as amended by SFAS No. 138 (SFAS No. 138). As
amended, SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position measure
those instruments at fair value and recognize changes in the fair value of
derivatives in earnings in the period of change unless the derivative qualifies
as an effective hedge that offsets certain exposures.
The Company periodically enters into interest-rate swap agreements to moderate
exposure to interest-rate changes and to lower the overall cost of borrowing.
During the quarter ended March 31, 2001, the Company entered into an
interest-rate swap agreement that effectively converts a portion of its floating
rate debt to a fixed rate of 5.34% on $10,000 notional amount on its
variable-rate debt maturing in 2003. Although this financial instrument did not
meet the hedge accounting criteria of SFAS No. 133, it continues to be effective
in achieving the risk management objectives for which it was intended. The
change in the fair value of the interest rate swap did not have a material
impact on the Company's financial position or results of operations for the six
months ended June 30, 2002.
10
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 supersedes FASB No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS No. 121), however it retains the fundamental
provisions of that statement related to the recognition and measurement of the
impairment of long-lived assets to be "held and used." In addition, SFAS No. 144
provides more guidance on estimating cash flows when performing a recoverability
test, requires that a long-lived asset (group) to be disposed of other than by
sale (e.g. abandoned) be classified as "held and used" until it is disposed of,
and establishes more restrictive criteria to classify an asset (group) as "held
for sale." SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The adoption of SFAS No. 144 did not have a material impact on the
Company's consolidated financial condition or results of operations.
11
NOTE 8 - SUPPLEMENTAL GUARANTOR INFORMATION
Each of the Company's Guarantor Subsidiaries has fully and unconditionally
guaranteed, on a joint and several basis, the obligation to pay principal,
premium, if any, and interest with respect to the 10.25% Senior Notes due
December 1, 2003. The Guarantor Subsidiaries are direct or indirect wholly owned
subsidiaries of the Company.
The following supplemental unaudited consolidating condensed financial
statements present (in thousands):
1. Consolidating condensed balance sheets as of June 30, 2002 and
December 31, 2001, consolidating condensed statements of
operations for the six month periods ended June 30, 2002 and
2001 and consolidating condensed statements of cash flows for
the six months ended June 30, 2002 and 2001.
2. Hawk Corporation ("Parent") combined Guarantor Subsidiaries
and combined Non-Guarantor Subsidiaries (consisting of the
Company's non-U.S. subsidiaries) with their investments in
subsidiaries accounted for using the equity method.
3. Elimination entries necessary to consolidate the Parent and
all of its subsidiaries.
Management does not believe that separate financial statements of the Guarantor
Subsidiaries of the Senior Notes are material to investors. Therefore, separate
financial statements and other disclosures concerning the Guarantor Subsidiaries
are not presented.
13
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
JUNE 30, 2002
---------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 572 $ 339 $ 2,017 $ 2,928
Accounts receivable, net 25,429 9,311 34,740
Inventories, net 22,170 8,889 31,059
Deferred income taxes 1,111 100 1,211
Other current assets 1,861 1,123 1,398 4,382
---------------------------------------------------------------------------------
Total current assets 3,544 49,061 21,715 74,320
Investment in subsidiaries 794 (1,888) $ 1,094
Inter-company advances, net 159,601 17,128 (16,109) (160,620)
Property, plant and equipment, net 14 56,682 9,399 66,095
Intangible assets 72 44,528 44,600
Other 1,010 5,760 1,066 (1,010) 6,826
---------------------------------------------------------------------------------
TOTAL ASSETS $ 165,035 $ 171,271 $ 16,071 $(160,536) $ 191,841
=================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 10,385 $ 4,450 $ 14,835
Accrued compensation $ 396 3,873 1,249 5,518
Other accrued expenses 1,738 4,071 2,083 7,892
Current portion of long-term debt 29,000 2,503 3,844 35,347
---------------------------------------------------------------------------------
Total current liabilities 31,134 20,832 11,626 63,592
Long-term liabilities:
Long-term debt 65,000 3,201 392 68,593
Deferred income taxes 6,642 95 6,737
Other 2,165 1,444 3,609
Inter-company advances, net 1,128 155,205 4,402 $(160,735)
---------------------------------------------------------------------------------
Total long-term liabilities 72,770 160,571 6,333 (160,735) 78,939
---------------------------------------------------------------------------------
Total liabilities 103,904 181,403 17,959 (160,735) 142,531
Shareholders' equity (deficit) 61,131 (10,132) (1,888) 199 49,310
---------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 165,035 $ 171,271 $ 16,071 $(160,536) $ 191,841
=================================================================================
14
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2001
----------------------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,073 $ 247 $ 1,764 $ 3,084
Accounts receivable, net 160 18,828 6,785 25,773
Inventories, net 42 22,566 6,544 29,152
Deferred income taxes 1,111 89 1,200
Other current assets 2,976 1,143 519 4,638
----------------------------------------------------------------------------------
Total current assets 5,362 42,784 15,701 63,847
Investment in subsidiaries 794 (1,080) $ 286
Inter-company advances, net 153,455 9,447 (8,555) (154,347)
Property, plant and equipment 18 58,026 9,319 67,363
Intangible assets 199 66,506 66,705
Other 1,010 5,082 1,108 (1,010) 6,190
----------------------------------------------------------------------------------
TOTAL ASSETS $ 160,838 $ 180,765 $ 17,573 $(155,071) $ 204,105
==================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 10,292 $ 3,140 $ 13,432
Accrued compensation $ (18) 4,440 811 5,233
Other accrued expenses 1,449 4,345 1,038 6,832
Current portion of long-term debt 5,000 1,669 193 6,862
----------------------------------------------------------------------------------
Total current liabilities 6,431 20,746 5,182 32,359
Long-term liabilities:
Long-term debt 82,450 4,765 3,742 90,957
Deferred income taxes 10,894 84 10,978
Other 2,154 1,220 3,374
Inter-company advances, net 1,350 144,786 8,425 $(154,561)
----------------------------------------------------------------------------------
Total long-term liabilities 94,694 151,705 13,471 (154,561) 105,309
----------------------------------------------------------------------------------
Total liabilities 101,125 172,451 18,653 (154,561) 137,668
Shareholders' equity (deficit) 59,713 8,314 (1,080) (510) 66,437
----------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 160,838 $ 180,765 $ 17,573 $(155,071) $ 204,105
==================================================================================
15
SUPPLEMENTAL CONSOLIDATING CONDENSED
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------
Net sales $ 85,427 $ 14,726 $ 100,153
Cost of sales 65,132 12,616 77,748
---------------------------------------------------------------------
Gross profit 20,295 2,110 22,405
Expenses:
Selling, technical and
administrative expenses $ 14 15,211 2,268 17,493
Amortization of intangible assets 4 719 723
---------------------------------------------------------------------
Total expenses 18 15,930 2,268 18,216
---------------------------------------------------------------------
(Loss) income from operations (18) 4,365 (158) 4,189
Interest income (expense), net 1,823 (5,967) (421) (4,565)
(Loss) income from equity investees (19,038) (951) $ 19,989
Other (expense) income, net (285) 7 (17) (295)
---------------------------------------------------------------------
(Loss) income before income taxes (17,518) (2,546) (596) 19,989 (671)
Income (benefit) tax provision (36) (629) 355 (310)
---------------------------------------------------------------------
Net loss before cumulative effect of
change in accounting principle (17,482) (1,917) (951) 19,989 (361)
Cumulative effect of change in
accounting principle, net of tax (79) (17,121) (17,200)
---------------------------------------------------------------------
NET LOSS $(17,561) $ (19,038) $ (951) $ 19,989 $ (17,561)
=====================================================================
16
SUPPLEMENTAL CONSOLIDATING CONDENSED
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2001
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------
Net sales $ 88,345 $ 12,855 $ 101,200
Cost of sales 65,658 11,388 77,046
---------------------------------------------------------------------
Gross profit 22,687 1,467 24,154
Expenses:
Selling, technical and
administrative expenses $ (258) 15,077 2,212 17,031
Restructuring costs 1,000 1,000
Amortization of intangible assets 9 2,256 2,265
---------------------------------------------------------------------
Total expenses (249) 18,333 2,212 20,296
---------------------------------------------------------------------
Income (loss) from operations 249 4,354 (745) 3,858
Interest income (expense), net 1,836 (6,149) (418) (4,731)
(Loss) income from equity investees (2,431) (1,306) $ 3,737
Other (expense) income, net (276) (40) 70 (246)
---------------------------------------------------------------------
Loss before income taxes (622) (3,141) (1,093) 3,737 (1,119)
Income (benefit) tax expense (60) (710) 213 (557)
---------------------------------------------------------------------
NET LOSS $ (562) $ (2,431) $ (1,306) $ 3,737 $ (562)
=====================================================================
17
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------
Net sales $ 42,671 $ 7,678 $ 50,349
Cost of sales 32,332 6,391 38,723
---------------------------------------------------------------------
Gross profit 10,339 1,287 11,626
Expenses:
Selling, technical and
administrative expenses $ (386) 7,486 1,195 8,295
Amortization of intangible assets 2 365 367
---------------------------------------------------------------------
Total expenses (384) 7,851 1,195 8,662
---------------------------------------------------------------------
Income (loss) from operations 384 2,488 92 2,964
Interest income (expense), net 912 (3,029) (213) (2,330)
Loss from equity investees (725) (370) $ 1,095
Other (expense) income, net (108) (13) 28 (93)
---------------------------------------------------------------------
Income (loss) before income taxes 463 (924) (93) 1,095 541
Income tax (benefit) expense 224 (199) 277 302
---------------------------------------------------------------------
NET INCOME (LOSS) $ 239 $ (725) $ (370) $ 1,095 $ 239
=====================================================================
18
SUPPLEMENTAL CONSOLIDATING CONDENSED
STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2001
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------
Net sales $ 41,252 $ 6,167 $ 47,419
Cost of sales 31,296 5,789 37,085
---------------------------------------------------------------------
Gross profit 9,956 378 10,334
Expenses:
Selling, technical and
administrative expenses $ 154 7,111 1,094 8,359
Restructuring costs 892 892
Amortization of intangible assets 6 1,128 1,134
---------------------------------------------------------------------
Total expenses 160 9,131 1,094 10,385
---------------------------------------------------------------------
(Loss) income from operations (160) 825 (716) (51)
Interest income (expense), net 911 (3,017) (224) (2,330)
Loss from equity investees (2,218) (889) $ 3,107
Other (expense) income, net (276) 24 (72) (324)
---------------------------------------------------------------------
(Loss) income before income taxes (1,743) (3,057) (1,012) 3,107 (2,705)
Income (benefit) tax expense (324) (839) (123) (1,286)
---------------------------------------------------------------------
NET LOSS $ (1,419) $ (2,218) $ (889) $ 3,107 $ (1,419)
=====================================================================
19
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------
Net cash (used in) provided by
operating activities $ (6,976) $ 3,367 $ 1,886 $ (1,723)
Cash flows from investing activities:
Purchase of property, plant and
equipment (3,689) (481) (4,170)
---------------------------------------------------------------------
Net cash used in investing activities (3,689) (481) (4,170)
Cash flows from financing activities:
Proceeds from debt 32,170 333 32,503
Payments on debt (25,620) (1,063) (128) (26,811)
Payment of preferred stock dividend (75) (75)
---------------------------------------------------------------------
Net cash provided by (used in)
financing activities 6,475 (730) (128) 5,617
Effect of currency rate changes 1,144 (1,024) 120
Net (decrease) increase in cash and
cash equivalents (501) 92 253 (156)
---------------------------------------------------------------------
Cash and cash equivalents
at beginning of period $ 1,073 $ 247 $ 1,764 $ 3,084
---------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 572 $ 339 $ 2,017 $ 0 $ 2,928
=====================================================================
20
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2001
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------
Net cash provided by (used in) operating
activities $ 4,474 $ 4,163 $ (2,181) $ 6,456
Cash flows from investing activities:
Purchase of property, plant and
equipment (3,860) (970) (4,830)
---------------------------------------------------------------------
Net cash used in investIng activities (3,860) (970) (4,830)
Cash flows from financing activities:
Proceeds from long-term debt 12,281 560 3,398 16,239
Payments on long-term debt (16,775) (1,482) (179) (18,436)
Payments of preferred stock
dividends (75) (75)
---------------------------------------------------------------------
Net cash (used in) provided by
financing activities (4,569) (922) 3,219 (2,272)
Net (decrease) increase in cash and
cash equivalents (95) (619) 68 (646)
Effect of exchange rate changes on
cash (126) (126)
---------------------------------------------------------------------
Cash and cash equivalents,
at beginning of period 553 1,027 2,430 4,010
---------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 458 $ 408 $ 2,372 $ 0 $ 3,238
=====================================================================
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto appearing
elsewhere in this report.
GENERAL
Hawk operates in four primary reportable segments: friction products, precision
components, performance automotive and motors. 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.
The Company's friction products are made from proprietary formulations of
composite materials that primarily consist of cold-rolled steel, metal powders,
resins and 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
engineered, manufactured and marketed by the Company include friction components
for use in brakes, transmissions and clutches in aerospace, agriculture,
construction, truck and specialty vehicle markets.
The Company's precision components are made from formulations of composite
powder metal alloys. The precision components segment targets three specific
areas of the powder metal marketplace:
- High precision components specializing in tight tolerance
fluid power components;
- Large powder metal components, primarily used in agriculture,
construction and truck applications; and
- Smaller, higher volume parts, utilizing efficient pressing and
sintering capabilities, primarily for, appliance, automotive,
business equipment and lawn and garden markets.
In its performance automotive segment, the Company engineers, manufactures and
markets high performance premium branded clutch and drive train components for
the performance automotive markets. The Company, through this segment, targets
teams in the NASCAR and CART racing series, as well as drivers in the SCCA and
ASA racing circuits, high-performance street vehicles and other road race and
oval track competition cars.
Through its motor segment, the Company designs and manufactures die-cast
aluminum rotors for fractional and subfractional horsepower electric motors for
use in a wide variety of applications, including appliances, business equipment,
pumps and HVAC equipment. The Company also designs and produces integral
horsepower custom motors and generators.
As of June 30, 2002, Hawk had approximately 1,600 employees and 16 manufacturing
sites in five countries.
SIGNIFICANT ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to bad debts, inventories, intangible assets,
income taxes, financing operations, pensions and contingencies and litigation.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual
22
results may differ from these estimates under different assumptions or
conditions. Hawk's significant accounting policies include the following:
Revenue Recognition and Credit Risk. The Company's revenue recognition policy is
to recognize revenues when products are shipped and title has transferred. The
Company maintains an allowance for trade accounts receivable for which
collection on specific customer accounts is doubtful. In determining
collectibility, management reviews available customer financial statement
information, credit rating reports as well as other external documents and
public filings. When it is deemed probable that a specific customer account is
uncollectible, that balance is included in the reserve calculation set by the
Company. Actual results could differ from these estimates.
Foreign Currency Translation and Transactions. Assets and liabilities of the
Company's foreign operations are translated using period-end exchange rates and
revenues and expenses are translated using average exchange rates as determined
throughout the period. Gains or losses resulting from translation are included
in a separate component of shareholder's equity. Gains or losses resulting from
foreign currency transactions are translated to local currency at the rates of
exchange prevailing at the dates of the transactions. Accounts receivable or
payable in foreign currencies, other than the subsidiary's local currency, are
translated at the rates of exchange prevailing at the balance sheet date. The
effect of the transaction's gain or loss in included in other (expense) income
in the Company's statement of operations.
SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001
Net Sales. Consolidated net sales for the second quarter of 2002 were $50.3
million, an increase of $2.9 million or 6 percent from the comparable period in
2001. The increase in net sales was primarily the result of improving conditions
in most of its markets, increased sales and production levels at the Company's
Mexican motor components facility, and new product introductions leading to
market share gains.
- Friction Segment. Net sales in the friction segment during the
second quarter of 2002 were $27.1 million, a decrease of 2
percent compared to the second quarter of 2001. The major
markets served by this segment, with the notable exception of
aerospace, experienced improving operating conditions during
the quarter when compared to the first quarter of 2001. Net
sales to the aerospace market declined 33 percent during the
second quarter of 2002 compared to the same period in 2001,
primarily as a result of the continuing softness in worldwide
air travel. The Company experienced increases in net sales to
the heavy truck, agriculture and construction markets as a
result of the generally improving operating conditions in the
United States and Europe. The Company continues to expect that
most of the markets it serves other than aerospace will
continue to experience gradual economic improvement during the
remainder of 2002. Volumes in the aerospace market for all of
2002 are expected to decline approximately 10 to 20 percent
compared to 2001, as a result of the decline in air travel.
- Precision Component Segment. Net sales in the precision
components segment for the second quarter of 2002 were $17.1
million, an increase of $2.7 million, or 19 percent compared
to the second quarter of 2001. The increase in net sales was
primarily attributable to increased sales to customers in the
lawn and garden, truck and fluid power markets, as the general
industrial segments of the domestic economy continued to show
improvement during the quarter. The Company expects the
markets served by this segment to show gradual improvement
during the remainder of 2002.
- Performance Automotive. Net sales in the Company's performance
automotive segment during the second quarter of 2002 were $3.3
million, an increase of 3 percent compared to net sales of
$3.2 million in the second quarter of 2001. The increase in
net sales was primarily attributable to new drive train
product introductions at the Company's Tex Racing division,
which were partially offset by declines in clutch sales during
the quarter.
23
- Motor Segment. Net sales in the Company's motor segment during
the second quarter of 2002 were $2.8 million, an increase of
$0.6 million or 27 percent from the same period in 2001. The
sales growth in the motor segment came primarily from the
Company's rotor manufacturing facility in Monterrey, Mexico
and new product introductions at its U.S. facility.
Gross Profit. Gross profit increased $1.3 million to $11.6 million during the
second quarter of 2002, a 13 percent increase compared to gross profit of $10.3
million in the comparable period of 2001. The gross profit margin increased to
23 percent of net sales in the second quarter of 2002 from 22 percent of net
sales in the comparable period in 2001. The Company experienced margin
improvement in all of its segments, with the exception of the motor segment,
primarily as a result of higher sales volumes and cost containment programs
partially offset by changes in product mix, especially as a result of the
reduction in sales to the aerospace market during the quarter.
- Friction Segment. The Company's friction segment reported
gross profit of $6.9 million or 25 percent of its net sales in
the second quarter of 2002 compared to $7.3 million or 26
percent of its net sales in the second quarter of 2001. The
decline in the Company's gross profit margin was primarily the
result of product mix during second quarter of 2002.
- Precision Components Segment. Gross profit in the precision
components segment during the second quarter of 2002 was $3.6
million or 21 percent of net sales in second quarter of 2002
compared to $2.2 million or 15 percent of net sales in 2001.
The increase in this segment's margins was primarily the
result of volume improvements to the end markets served by the
segment and the ability of the Company to leverage the fixed
manufacturing costs associated with this segment to the volume
increase.
- Performance Automotive Segment. The Company's performance
automotive segment reported gross profit of $1.2 million or 36
percent of its net sales in the second quarter of 2002
compared to $0.9 million or 28 percent of its net sales in
2001. The increase in gross profit margin was primarily the
result of new drive train product introductions at the
Company's Tex Racing division as well as manufacturing
efficiencies achieved by the segment.
- Motor Segment. The Company's motor segment reported a gross
margin loss of $0.1 million during the second quarter of 2002
and for the second quarter of 2001. The gross margin loss was
primarily the result of the Company's continued support of its
new rotor manufacturing facility in Mexico. Additionally, new
product introduction costs during the quarter at the Company's
U.S. manufacturing facility had a negative effect on margins
during the second quarter of 2002.
Selling, Technical and Administrative Expenses. ST&A expenses decreased $0.1
million, or 1 percent, to $8.3 million in the second quarter of 2002 from $8.4
million in the comparable period of 2001. The decrease in ST&A expenses was
primarily attributable to cost reductions implemented by the Company partially
offset by legal expenses related to litigation that was resolved during the
quarter in the Company's performance automotive segment and personnel costs
associated with the Company's long-term sales and growth initiatives.
Restructuring Costs. During the second quarter of 2001, the Company recorded an
expense of $0.9 million to support its cost cutting initiatives. The costs
incurred during the quarter represent corporate-wide severance costs. There were
no restructuring costs incurred by the Company during the comparable quarter of
2002.
Amortization of Intangibles. Amortization of intangibles decreased by $0.7
million during the second quarter of 2002 as a result of the implementation by
the Company of SFAS No. 142 on January 1, 2002. Upon adoption of SFAS No. 142,
the Company stopped amortizing existing goodwill.
24
Income from Operations. Income from operations increased to $3.0 million in the
second quarter of 2002 from a loss of $0.1 million in 2001. The increase was
primarily the result of the sales volume increases, the reduction of goodwill
amortization expense as a result of the implementation of SFAS No. 142, and
costs reductions achieved during the quarter. This improvement was partially
offset by legal expenses associated with litigation that was resolved during the
quarter. Income from operations as a percentage of net sales was 6 percent in
2002 compared to a loss in 2001.
As a result of the items discussed above, results from operations at the
Company's segments were as follows:
- The friction segment's income from operations
increased $1.3 million or 93 percent to $2.7 million
in the second quarter of 2002 from $1.4 million in
the comparable period in 2001.
- Income from operations in the precision components
segment was $0.9 million in the second quarter of
2002, an increase of $1.5 million compared to a loss
of $0.6 million in the comparable period in 2001.
- Income from operations at the performance automotive
segment was flat at $0.1 million in the second
quarter of 2002 and 2001.
- The loss from operations in the motor segment
decreased to $0.7 million in the second quarter of
2002 from $0.9 million in the comparable period in
2001.
Interest Expense. Interest expense decreased $0.1 million or 4 percent to $2.3
million in the second quarter of 2002 from $2.4 million in the comparable period
of 2001. The decrease is primarily attributable to lower borrowing costs
partially offset by increased borrowing levels incurred by the Company during
the quarter.
Other (Expense) Income. Other expense was $0.1 million in the second quarter of
2002. The expense in the second quarter of 2002 consisted primarily of expense
recorded in a mark to market adjustment from the Company's swap agreement
partially offset by foreign currency transaction income due to the strength of
the Euro during the quarter.
Income Taxes. The Company's recorded a provision for income taxes in the second
quarter of 2002 of $0.3 million compared to a credit of $1.3 million in the
comparable quarter of 2001. The Company's effective tax rate during the quarter
was 56 percent compared to a tax rate benefit of 48 percent in the comparable
quarter of 2001.
Net Income (Loss). As a result of the factors noted above, the Company reported
net income of $0.2 million in the second quarter of 2002, compared to a net loss
of $1.4 million in 2001.
FIRST SIX MONTHS OF 2002 COMPARED TO FIRST SIX MONTHS OF 2001
Net Sales. Consolidated net sales for the first six months of 2002 were $100.1
million, a decrease of $1.1 million or 1 percent from the comparable period in
2001. The decrease in net sales was primarily the result of significant weakness
in the aerospace market during the six month period ended June 30, 2002. This
decline in net sales was partially offset by more favorable conditions in the
truck, fluid power, lawn and garden markets as well increased sales from the
Company's Mexican rotor manufacturing facility.
- Friction Segment. Net sales in the friction segment during the
first six months of 2002 were $53.1 million, a decrease of 7
percent compared to 2001. While the major markets served by
this segment experienced improving operating conditions during
the first six months of 2002 when compared to the comparable
period 2001, they were not able to overcome the declines
experienced by the Company's aerospace segment for the same
period. Net sales to the aerospace market declined 30 percent
during the first six months of 2002 compared to the same
period in 2001, primarily as a result of the continuing
softness in worldwide air travel. The Company experienced
increases in net sales to the heavy truck, agriculture and
construction markets as a result of the generally improving
operating conditions in the United States and Europe
25
- Precision Component Segment. Net sales in the precision
components segment for the first six months of 2002 were $34.3
million, an increase of $2.0 million, or 6 percent compared to
the first six months of 2001. The increase in net sales was
primarily attributable to increased sales to customers in the
lawn and garden, truck and fluid power markets, as the general
industrial segments of the domestic economy continued to show
improvement during the quarter.
- Performance Automotive. Net sales in the Company's performance
automotive segment during the first six months of 2002 were
$7.2 million, a decrease of 3 percent compared to net sales of
$7.4 million in the first six months of 2001. The decrease in
net sales was primarily attributable to declines in clutch
sales during the period partially offset by new drive train
product introductions at the Company's Tex Racing division.
- Motor Segment. Net sales in the Company's motor segment during
the first six months of 2002 were $5.5 million, an increase of
$1.2 million, or 28 percent from the same period in 2001. The
sales growth during the period came primarily from the
Company's rotor manufacturing facility in Monterrey, Mexico
and new product introductions at its U.S. facility.
Gross Profit. Gross profit declined $1.8 million to $22.4 million during the
first six months of 2002, a 7 percent decrease compared to gross profit of $24.2
million in the comparable period of 2001. The gross profit margin decreased to
22 percent of net sales in the first six months of 2002 from 24 percent of net
sales in the comparable period in 2001.
- Friction Segment. The Company's friction segment reported
gross profit of $12.9 million or 24 percent of net sales in
the first six months of 2002 compared to $15.1 million or 26
percent of net sales in the comparable period of 2001. The
decline in the Company's gross profit margin was primarily the
result of the decline in aerospace sales during period.
- Precision Components Segment. Gross profit in the precision
components segment during the first six months of 2002 was
$6.7 million or 20 percent of net sales compared to $6.7
million or 21 percent of net sales in 2001. The decrease in
this segment's margins were primarily the result of volume
declines in the first three months of the period, partially
offset by the economic improvements in the end markets served
by the segment and the ability of the Company to leverage the
fixed manufacturing costs associated with this segment to the
volume increase during the latter half of the period.
- Performance Automotive Segment. The Company's performance
automotive segment reported gross profit of $2.6 million or 36
percent of net sales in the first six months of 2002 compared
to $2.3 million or 31 percent of net sales in 2001. The
increase in gross profit margin was primarily the result of
new drive train product introductions at the Company's Tex
Racing division as well as manufacturing efficiencies achieved
by the segment during the period.
- Motor Segment. The Company's motor segment reported gross
profit of $0.2 million or 4 percent of net sales in the first
six months of 2002 compared to $0.1 million or 2 percent of
net sales in 2001. The increase in gross margin was primarily
the result of the reduced support required by the Company of
its new rotor manufacturing facility in Mexico as a result of
increasing production levels. Partially offsetting the
improvement were new product introduction costs during the
last half of the period at the Company's U.S. manufacturing
facility which had a negative effect on margins.
Selling, Technical and Administrative Expenses. ST&A expenses increased $0.5
million, or 3 percent, to $17.5 million in the first six months of 2002 from
$17.0 million in the comparable period of 2001. The increase in ST&A expenses
was primarily attributable to legal expenses related to litigation incurred in
the Company's performance automotive segment and personnel costs associated with
the Company's long-term sales and growth initiatives. These
26
increases were partially offset by cost reduction programs implemented by the
Company during the latter half of 2001.
Amortization of Intangibles. Amortization of intangibles decreased by $1.6
million during the first six months of 2002, to $0.7 million from $2.3 million
in the comparable period of 2001, as a result of the implementation by the
Company of SFAS No. 142 on January 1, 2002. Upon adoption of SFAS No. 142, the
Company stopped amortizing existing goodwill.
Income from Operations. Income from operations increased to $4.2 million, or 8
percent, in the first six months of 2002 from $3.9 million in 2001. The increase
was primarily the result of the reduction of goodwill amortization expense as a
result of the implementation of SFAS No. 142, and costs reductions achieved
during the quarter partially offset by the impact of the economic slowdown
affecting net sales in the first quarter of the year, product mix and legal
expenses associated with litigation that was resolved during the period.
Additionally, the Company incurred a restructuring charge of $1.0 million during
the 2001 reporting period. Income from operations as a percentage of net sales
was flat at 4 percent in 2002 and 2001.
As a result of the items discussed above, results from operations at the
Company's segments were as follows:
- The friction segment's income from operations
decreased $0.8 million or 19 percent to $3.5 million
in the first six months of 2002 from $4.3 million in
the comparable period in 2001.
- Income from operations in the precision components
segment was $1.0 million in the first six months of
2002, an increase of $0.5 million compared to $0.5
million in the comparable period in 2001.
- Income from operations at the performance automotive
segment was $0.9 million in the first six months of
2002 compared to $0.5 million in the comparable
period of 2001.
- The loss from operations in the motor segment
decreased to $1.2 million in the first six months of
2002 from $1.4 million in the comparable period in
2001.
Interest Expense. Interest expense decreased $0.2 million, or 4 percent, to $4.6
million in the first six months of 2002 from $4.8 million in the comparable
period of 2001. The decrease is primarily attributable to lower borrowing costs
partially offset by increased borrowing levels incurred by the Company during
the period.
Other (Expense) Income. Other expense was $0.3 million in the first six months
of 2002. The expense in the period consisted primarily of fees paid by the
Company to effect an amendment of its bank credit facility during the first
quarter of 2002 partially offset by income recorded in a mark to market
adjustment from the Company's swap agreement and foreign currency transaction
income due to the strength of the Euro during the period.
Income Taxes. The Company's recorded a benefit for income taxes in the first six
months of 2002 of $0.3 million compared to a benefit of $0.6 million in the
comparable period of 2001. The Company's effective tax rate benefit during the
period was 46 percent compared to a tax rate benefit of 49 percent in the
comparable period of 2001.
Cumulative Effect of Change in Accounting Principle. In accordance with the
requirements of SFAS No. 142 "Goodwill and Other Intangible Assets," the
Company recorded a charge for the cumulative effect of change in accounting
principle of $17.2 million in the six months ended June 30, 2002. (See "Notes
to Consolidated Financial Statements" for additional information on this
charge.) This charge represents the write-off of $21.5 million of goodwill
($17.2 million, net of income taxes).
Net Income (Loss). As a result of the factors noted above, the Company reported
a net loss of $17.6 million in the first six months of 2002, compared to a net
loss of $0.6 million in 2001.
27
LIQUIDITY AND CAPITAL RESOURCES
The primary financing requirements of the Company are (1) for capital
expenditures for maintenance, replacement and acquisitions of equipment,
expansion of capacity, productivity improvements and product development, (2)
for funding the Company's day-to-day working capital requirements and (3) to pay
interest on, and to repay principal of, indebtedness. The Company's primary
source of funds for conducting its business activities and servicing its
indebtedness has been cash generated from operations and borrowings under its
bank credit facility.
The Company's senior notes, which had an outstanding balance of $65.0 million at
June 30, 2002, bear interest at 10.25% per annum and mature December 1, 2003.
The senior notes are general unsecured senior obligations of the Company and are
fully and unconditionally guaranteed, on a joint and several basis, by all
domestic wholly owned subsidiaries of the Company. The Company has the option to
redeem the senior notes in whole or in part during the twelve months beginning
December 1, 2001 at 102.563%, and beginning December 1, 2002 at 100% together
with any interest accrued and unpaid to the redemption date. Upon a change of
control as defined in the senior note indenture, each holder of the senior notes
will have the right to require the Company to repurchase all or any part of such
holder's senior notes at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest to the date of
purchase.
The senior note indenture permits the Company and its subsidiaries to incur
additional indebtedness without limitation, provided that it continues to meet a
cash flow coverage ratio. As of June 30, 2002, the Company did not meet the
prescribed ratio. The failure to meet the ratio does not constitute a default
under the senior note indenture. Rather, the senior note indenture continues to
permit certain other types of indebtedness subject to certain limitations. The
Company's bank credit facility, which is secured by liens on all of the assets
and the assets of the subsidiaries, is permitted. The Company does not believe
that its operations will be materially impacted by the limitation on
indebtedness arising under the senior note indenture.
The senior note indenture prohibits the payment of cash dividends on the
Company's Class A Common Stock. The senior note indenture also contains other
covenants limiting the Company's ability and its subsidiaries to, among other
things, make certain other restricted payments, make certain investments, permit
liens, incur dividend and other payment restrictions affecting subsidiaries,
enter into consolidation, merger, conveyance, lease or transfer transactions,
make asset sales, enter into transactions with affiliates or engage in unrelated
lines of business. These covenants are subject to certain exceptions and
qualifications. The senior note indenture considers non-compliance with the
limitations events of default. In addition to non-payment of interest and
principal amounts, the senior note indenture also considers default with respect
to other indebtedness in excess of $5.0 million an event of default. In the
event of a default, the principal and interest could be accelerated upon written
notice by 25% or more of the holders of the senior notes. As of June 30, 2002,
the Company was in compliance with these covenants.
In addition, the Company has available a bank credit facility which may be used
for general corporate purposes. At June 30, 2002, the facility was comprised of
a $25.0 million revolving credit component and a $15.0 million amortizing term
loan subject to a borrowing base formula. The term loan has quarterly maturities
of $1.25 million and the facility has a maturity date of March 31, 2003. As of
June 30, 2002, the Company had $17.8 million outstanding under the revolving
credit component of the facility. The credit facility is collateralized by a
security interest in the accounts receivable, inventory, equipment and real
estate and other assets of the Company and its subsidiaries, and the Company has
pledged the stock of all of its U.S. subsidiaries and certain stock of its
foreign subsidiaries as collateral. Restrictive terms of the credit facility
require that the Company maintain specified financial ratios including leverage,
interest coverage and fixed charge ratios, and comply with other loan covenants.
The Company was in compliance with the financial covenants as of June 30, 2002.
As of June 30, 2002, the Company had approximately $4.5 million available for
future borrowings, as determined by the borrowing base under its credit
facility.
Net cash used in operating activities was $1.7 million for the six month period
ended June 30, 2002. Net cash provided by operating activities was $6.4 million
for the comparable six month period of 2001. The decline in cash
28
from operations was caused primarily by the net loss for the period, reduction
in amortization expense and an increase in working capital assets during the
quarter. The increase in working capital was caused primarily by the increase in
accounts receivables due to increased net sales by the Company during the six
month period compared to the fourth quarter of 2001, as well as customary
extended payment term programs to the lawn and garden markets in the Company's
precision component segment. Customer payments under these programs are due
during the second and third quarter.
Net cash used in investing activities was $4.2 million and $4.8 million for the
six month period ended June 30, 2002 and 2001, respectively. The cash used in
investing activities during the six month periods ended June 30, 2002 and 2001,
was for the purchase of property, plant and equipment. To achieve long-term
growth prospects and enhance product quality, the Company planned for its
capital spending program in 2002 to be approximately $12.0 million.
Net cash provided by (used in) financing activities was $5.6 million and $2.3
million for the six month period ended June 30, 2002 and 2001, respectively, as
a result of increased borrowings by the Company. The increase in borrowings
during the six month period ended June 30, 2002 was used primarily to support
the increase in the Company's working capital assets and the purchases of
property plant and equipment.
The Company believes that if it is able to improve its working capital, through
the active management of its working capital assets, along with its available
cash, anticipated cash flow from operations, and availability under its credit
facility, the Company will be able to fund its operations for at least the next
twelve months. However, should the Company not achieve its working capital
initiatives, its operations and its capital expenditures program may be
adversely impacted, including the ability to borrow under its credit facility.
The Company believes it is taking appropriate steps, including the reduction of
operating expenses which are not critical to meeting the Company's business
objectives to ensure that it has adequate sources of cash to meet its working
capital needs for at least the next twelve months. In addition, the Company is
pursuing strategic financing alternatives, including the modification, extension
or refinancing of its senior notes and bank facility both of which are due
during 2003. There can be no assurance that the Company will be able to modify,
extend or refinance its senior notes and bank facility. Nor can there be any
assurance that if the Company is able to modify, extend or refinance its senior
notes and bank facility that the new terms will be as favorable to the Company
as its existing facilities. If the Company is unable to modify, extend or
refinance its senior notes and bank facility, the Company's financial position
will be materially and adversely effected.
ACCOUNTING CHANGES
Refer to Note 7, "Recently Issued Accounting Pronouncements," of the Notes to
Consolidated Financial Statements for a discussion of recent accounting
pronouncements.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence in its prospects and strategies and its expectations about
growth of existing markets and its ability to expand into new markets, to
identify and acquire complementary businesses and to attract new sources of
financing, are forward-looking statements that involve risks and uncertainties.
In addition to statements which are forward-looking by reason of context, the
words "believe," "expect," "anticipate," "intend," "designed," "goal,"
"objective," "optimistic," "will" and other similar expressions identify
forward-looking statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of the forward-looking statements should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially and adversely from those in
the forward-looking statements, including the following:
29
- the ability of the Company to continue to meet the terms of
its senior notes and bank facility which contain a number of
significant financial covenants and other restrictions;
- the ability of the Company to modify, extend or refinance its
senior notes and bank facility, both of which mature in 2003;
- the effect of the Company's debt service requirements on funds
available for operations and future business opportunities and
the Company's vulnerability to adverse general economic and
industry conditions and competition;
- the continuing impact of the decline in the aerospace market
on the Company's gross margins;
- the ability of the Company to utilize all of its manufacturing
capacity in light of continuing softness in the commercial
and industrial end-markets served by the Company;
- continuing start-up costs at the Company's facilities in
Mexico and China, as well as the ability of the company to
generate a profit at the start-up operations at the Company's
Hawk MIM subsidary;
- the effect of any additional impairment of goodwill as a
result of the change in accounting treatment under SFAS
No. 142;
- the effect of competition by manufacturers using new or
different technologies;
- the effect on the Company's international operations of
unexpected changes in regulatory requirements, export
restrictions, currency controls, tariffs and other trade
barriers, difficulties in staffing and managing foreign
operations, political and economic instability, fluctuations
in currency exchange rates, difficulty in accounts receivable
collection and potentially adverse tax consequences;
- the ability of the Company to negotiate new agreements, as
they expire, with its unions representing certain of its
employees, on terms favorable to the Company or without
experiencing work stoppages;
- the effect of any interruption in the Company's supply of raw
materials or a substantial increase in the price of any of the
raw materials;
- the continuity of business relationships with major customers;
and
- the ability of the Company's aircraft brake products to meet
stringent Federal Aviation Administration criteria and testing
requirements.
These risks and others that are detailed in this Form 10-Q and other filings by
the Company with the Securities and Exchange Commission must be considered by
any investor or potential investor in the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk Disclosures. The following discussion about the Company's market
risk disclosures involves forward-looking statements. Actual results could
differ materially from those projected in the forward-looking statements. The
Company is exposed to market risk related to changes in interest rates and
foreign currency exchange rates. The Company does not use derivative financial
instruments for speculative or trading purposes.
Interest Rate Sensitivity. At June 30, 2002, approximately 32 percent, or $32.8
million, of the Company's debt obligations bear interest at a variable rate. To
mitigate the risk associated with interest rate fluctuations, in January 2001,
the Company entered into an interest rate swap essentially converting $10.0
million notional amount of its variable rate debt to a fixed base rate of 5.34
percent. The notional amount is used to calculate the contractual cash flow to
be exchanged and does not represent exposure to credit loss. Although this
financial instrument did not meet the hedge accounting criteria of SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," it continues to
be effective in achieving the risk management objectives for which it was
intended. The carrying value and the fair value of the interest rate swap at
June 30, 2002 is $0.4 million (liability). The change in the fair value is
reflected in the Consolidated Statement of Operations in other (expense) income,
net. The Company's primary interest rate risk exposure results from floating
rate debt. If interest rates were to increase 100 basis points (1.0%) from June
30, 2002 rates, and assuming no changes in debt from June 30, 2002 levels, the
additional annual interest expense to the Company would be approximately $0.2
million. The Company does not engage in activities using complex or highly
leveraged instruments.
30
Foreign Currency Exchange Risk. The majority of the Company's receipts and
expenditures are contracted in U.S. dollars, and the Company does not consider
the market risk exposure relating to currency exchange to be material at this
time. The Company currently does not hedge its foreign currency exposure and,
therefore, has not entered into any forward foreign exchange contracts to hedge
foreign currency transactions. The Company has operations outside the United
States with foreign-currency denominated assets and liabilities, primarily
denominated in Italian lira, Canadian dollars, Mexican pesos and Chinese
renminbi. Because the Company has foreign-currency denominated assets and
liabilities, financial exposure may result, primarily from the timing of
transactions and the movement of exchange rates. The unhedged foreign currency
balance sheet exposures as of June 30, 2002 are not expected to result in a
significant impact on earnings or cash flows.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the ordinary course of
business. In the Company's opinion, the outcome of these matters is not
anticipated to have a material adverse effect on the Company's financial
condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 15, 2002, the Company held its 2002 Annual Meeting of Stockholders to act
on a proposal to elect Directors for a one year term expiring in 2003. The
following table sets forth the number of shares voted for and withheld with
respect to each nominee.
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
Jeffrey H. Berlin 7,713,700 10,816
Paul R. Bishop 7,712,363 12,153
Jack Kemp 7,684,986 39,530
Dan T. Moore, III 7,711,863 12,653
Pursuant to the terms of the Company's Series D Preferred Stock, the holders of
the Series D Preferred Stock have the right to elect a majority of the Company's
Board of Directors. The holders of the Series D Preferred Stock are Norman C.
Harbert, Ronald E. Weinberg, Byron S. Krantz, the Harbert Family Limited
Partnership, the Weinberg Family Limited Partnership and the Krantz Family
Limited Partnership. The holders of the Series D Preferred Stock elected Norman
C. Harbert, Ronald E. Weinberg and Byron S. Krantz at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1* Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2* Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
----------
* filed herewith
31
(b) Reports on Form 8-K:
Hawk Corporation filed one report on Form 8-K since
March 31, 2002. A report dated July 24, 2002 reported
information relating to the Company's adoption of
Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets."
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2002 HAWK CORPORATION
By: /s/ RONALD E. WEINBERG
----------------------
Ronald E. Weinberg,
Chairman and CEO
By: /s/ THOMAS A. GILBRIDE
----------------------
Thomas A. Gilbride,
Vice President- Finance and
Treasurer (Principal Financial
Officer)
33