Back to GetFilings.com

Table of Contents

UNITED STATES

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

HAWK CORPORATION

Registrant’s telephone number, including area code: (216) 861-3553

Securities registered pursuant to Section 12(b) of the Act:

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 o

      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. x

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  YES o  NO x

      The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2003 was $19,469,887 (based on the closing price as quoted on the New York Stock Exchange on that date).

      As of February 27, 2004, the Registrant had 8,624,826 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, non-affiliates held 5,705,003 shares of Class A Common Stock and 0 shares of Class B non-voting Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the 2004 Proxy Statement of Hawk Corporation are incorporated by reference into Part III of this Form 10-K.

      As used in this Form 10-K, the terms “Company,” “Hawk,” “Registrant,” “we,” “us” and “our” 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, 2003.

Table of Contents

Part I

      Hawk Corporation, founded in 1989, is a leading supplier of friction products and powder metal precision components for industrial, agricultural, powersports and aerospace applications. Our common stock has been publicly traded since 1998. We focus on designing, manufacturing and marketing products requiring sophisticated engineering and production techniques for applications in markets in which we have achieved a significant market share. Our friction products include parts for brakes, clutches and transmissions used in construction vehicles, agricultural vehicles, trucks, motorcycles and race cars, and brake parts for landing systems used in commercial and general aviation. Our precision components are used in pumps, motors, transmissions, anti-lock brake systems and other applications for industrial equipment, lawn and garden equipment, appliances, small hand tools and trucks. Our friction and precision components are made principally from proprietary formulations and designs of composite materials and metal powders.

      We benefit from a deep and diversified customer base, with approximately 2,500 total customers, none of which accounted for more than 8.5% of our net sales in 2003. We are a preferred supplier to many of the world’s largest and well known brand name original equipment manufacturers, deriving more than 80% of our sales from products for which we are the sole source provider for specific customer applications. We offer our customers full service capabilities, from design through production, and work closely with original equipment manufacturers to improve performance and develop product innovations to generate increased sales. We also benefit from a diversified product list, with over 5,000 total products, none of which accounted for more than 5% of our net sales in 2003. We do not target the cyclical consumer automotive sector. Consequently, less than 9% of our net sales in any of the last five years were to the consumer automotive market. For the year ended December 31, 2003, we generated net sales of $202.6 million and income from operations of $10.9 million. For the year ended December 31, 2002, we had net sales of $185.9 million and income from operations of $13.0 million.

      Hawk 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., S.K. Wellman SpA, S.K. Wellman of Canada Limited, Hawk Composites (Suzhou) Company Limited, Hawk International Trading (Shanghai) Company, Ltd., Helsel, Inc., Sinterloy Corporation, Allegheny Clearfield, Inc., Net Shape Technologies LLC, Quarter Master Industries, Inc., Tex Racing Enterprises, Inc. and Logan Metal Stampings, Inc. Through our subsidiaries, we operate primarily in three reportable segments: friction products, precision components and performance racing. For the year ended December 31, 2003, our sales by segment were:

2

Table of Contents

	•	Friction Products

We believe that, based on net sales, we are one of the top worldwide manufacturers of friction products used in industrial, agricultural, powersports and aerospace applications. Our friction products segment manufactures parts and components made from proprietary formulations of composite materials, primarily consisting of metal powders and synthetic and natural fibers. Friction products are used in brakes, clutches and transmissions to absorb vehicular energy and dissipate it through heat and normal mechanical wear. The principal markets served by our friction products segment include construction vehicles, agricultural vehicles, trucks, motorcycles, race cars, all-terrain vehicles (ATVs) and commercial and general aircraft. We believe we are:

	•	a leading domestic and international supplier of friction products for construction equipment, agricultural equipment and trucks,
	•	the leading North American independent supplier of friction materials for braking systems for new and existing series of many commercial aircraft models, including the Boeing 737 and 757 and the MD-80, and several regional jets used by commuter airlines, including the Canadair regional jet series,
	•	a leading domestic supplier of friction products into powersport and specialty markets such as motorcycles, race cars, ATV’s and snowmobiles, and
	•	the largest supplier of friction materials for the growing general aviation market, including numerous new and existing series of Gulfstream, Cessna, Lear and Beech aircraft.

For the years ended December 31, 2003 and 2002, our friction products segment generated net sales of $121.6 million and $106.1 million, representing 60.0% and 57.1% of our total net sales, respectively and income from operations of $8.3 million and $7.8 million, representing 76.1% and 60.0%, of our total income from operations, respectively. The foreign operations of our friction segment represented 37.3% of total friction segment net sales in 2003 compared to 30.9% in 2002.

	•	Precision Components

	We are a leading supplier of powder metal precision components for industrial equipment, lawn and garden equipment, appliances, hand tools and trucks. We use composite metal alloys in powder form to manufacture high quality custom-engineered metal components. Our precision components segment serves four specific areas of the powder metal marketplace:

	•	tight tolerance fluid power components such as pump elements and gears,
	•	large powder metal components used primarily in construction equipment, agricultural equipment and trucks,
	•	high volume parts for the lawn and garden, appliance and other markets, and
	•	metal injection molded parts for a variety of industries, including small hand tools, medical and telecommunications.

	For the years ended December 31, 2003 and 2002, our precision components segment generated net sales of $68.1 million and $67.2 million, representing 33.6% and 36.1% of our total net sales, respectively and income from operations of $2.2 million and $4.3 million, representing 20.2% and 33.1% of our total income from operations, respectively.

	•	Performance Racing

We engineer, manufacture and market premium branded clutch, transmissions and driveline systems for the performance racing market. Through this segment, we supply parts for the National Association for Stock Car Auto Racing (NASCAR) and the Indy Racing League (IRL) racing series and for the weekend enthusiasts in the Sports Car Club of America (SCCA) and the American Speed Association (ASA) racing clubs and other road racing and competition cars. For the years ended December 31, 2003 and 2002, our performance racing segment generated net sales of $12.9 million and $12.6 million,

3

Table of Contents

	representing 6.4% and 6.8% of our total net sales, respectively and income from operations of $0.4 million and $0.9 million, representing 3.7% and 6.9% of our total income from operations, respectively.

Discontinued Operations

      In the fourth quarter of 2003 we committed to a plan to sell our motor segment, which has operations in Alton, Illinois and Monterrey, Mexico. This segment, which manufactures die-cast aluminum rotors for fractional and sub-fractional horsepower electric motors, failed to achieve a certain level of profitability, and, after completing extensive analysis, we determined that a divestiture of this segment would allow us to concentrate on our major segments of friction products and precision components. We have initiated an active marketing plan and anticipate selling the segment prior to the end of 2004.

      Results of operations for this segment have been restated to reclassify its net operations, assets and liabilities as discontinued for all periods presented in this report. Certain corporate expenses and interest expense previously allocated to this segment have been reallocated to our remaining continued operations, which have resulted in a restatement of our results by business segment. The loss from discontinued operations in 2003 includes a $4.5 million pre-tax, non-cash charge to reduce the net assets of this segment to its estimated fair value, less costs to sell.

      Operating results from discontinued operations are summarized as follows:

      Our business strategy includes the following principal elements:

	•	Focus on High-Margin, Specialty Applications. We focus on markets that require sophisticated engineering and production techniques and in which we have achieved a significant market share. We seek to compete in markets requiring a high level of engineering expertise and technical capability, rather than in markets in which the primary competitive factor is product pricing. We believe margins for our products in these markets are higher than in other manufacturing markets that use standardized products. Our gross margins were 23.4% and 23.8% for the years ended December 31, 2003 and 2002, respectively.
	•	Introduce New Products. A key part of our strategy is the introduction of products for new applications, which incorporate improved performance characteristics or reduced costs in response to customer needs. Our engineers proactively focus on developing new product solutions that enhance performance and reduce manufacturing costs, including instances where we are the incumbent supplier. We also grow by applying our existing products and technologies to new specialized applications where our products have a performance or technological advantage.
	•	Expand Customer Relationships. We seek to provide advanced solutions to customers, enhancing our long-term relationships. Our engineers work closely with customers to develop and design new products and improve the performance of existing products. We believe that more than 80% of our net sales are from products and materials for which we are the sole source provider for specific customer applications. Our predecessors formed, and we have continued to build, relationships with a number of customers dating back over 50 years. Our commitment to quality, service and just-in-time delivery enables us to build and maintain strong and stable customer relationships. We believe that strong relationships with our customers provide us with significant competitive advantages in obtaining and maintaining new business opportunities.
	•	Capitalize on Aftermarket Opportunities. Our aftermarket sales enable us to reduce our exposure to adverse economic cycles. Because friction products are the consumable, or wear-related, component of brake, clutch and transmission systems, the use of our friction products in conjunction with a new or

4

Table of Contents

		existing system provides us with the opportunity to supply the aftermarket for the life of the system, typically through sales to the original equipment manufacturer. For example, the ability to service the aftermarket for a particular aircraft braking system will likely provide us with a stable market for our friction products for the life of the product, which can be 30 years or more. We estimate that aftermarket sales of friction products have comprised approximately 40% of our friction product sales in recent years. Additionally, in 2003 we instituted new marketing programs to expand our aftermarket sales into new markets and applications that are not served by our original equipment customers.
	•	Selectively Expand Internationally. Through our friction and precision component segments, we have foreign manufacturing facilities in Italy, Canada and China, and through our friction segment’s worldwide distribution network, we continue to selectively expand our international operations in established markets throughout Europe, Asia, North America, South America and Australia. Our international net sales represented $47.8 million, or 23.6%, of our consolidated net sales for the year ended December 31, 2003, and $34.1 million, or 18.3%, of our consolidated net sales in 2002.
	•	Lower Our Costs of Production. Through various cost reduction programs, lean manufacturing initiatives and Six Sigma projects, we continue to look for ways to lower the total cost of producing our product. In the fourth quarter of 2003, we committed to a plan to close our Brook Park, Ohio friction manufacturing facility and move all production to a new lower cost domestic facility. We expect that the annual pre-tax savings to us as a result of this relocation will be approximately $2.5 million at full production levels, primarily from reduced operating expenses in addition to various state and local incentive packages. The new leased facility is expected to begin construction in 2004 and be fully operational in 2005.

Our Principal Markets and Products

      We focus on supplying the industrial, agricultural, aerospace, and performance racing markets with components that require sophisticated engineering and production techniques for applications where we have achieved a significant market share. We have diversified our end markets through acquisitions and product line expansions. We believe that diversification has reduced our economic exposure to the cyclical effects of any particular industry. For the year ended December 31, 2003, our sales by principal markets were:

5

Table of Contents

      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 components in construction vehicles enable their braking systems to slow and stop the vehicles and enable their clutches and transmissions to function in controlling the motion of the vehicles. Our friction products 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 truck, construction, agriculture, aircraft and specialty vehicle braking systems. Our friction products segment manufactures products made from proprietary formulations of composite materials that primarily consist of metal powders and synthetic and natural fibers.

      Our 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-related, component of these systems, new friction product introduction in conjunction with a new system provides us with the opportunity to supply the aftermarket with that friction product for the life of the system.

      The principal markets served by our friction segment include manufacturers of truck clutches, transmissions, heavy-duty construction and agricultural vehicle brakes, aircraft brakes, motorcycle, snowmobile and racing and performance automotive brakes. Based on net sales, we believe that we are among the top worldwide manufacturers of friction products used in industrial and aerospace applications. We estimate that aftermarket sales of friction products have comprised approximately 40% of our net friction product sales in recent years. We believe that our aftermarket sales component enables us to reduce our exposure to adverse economic cycles.

      Construction/ Agriculture/ Trucks/ Powersport and Specialty. We supply a variety of friction products for use in brakes, clutches and transmissions on construction and agriculture equipment, trucks and specialty vehicles. These components are designed to precise friction characteristics and mechanical tolerances permitting brakes to stop or slow a moving vehicle and the clutch or transmission systems to engage or disengage. We believe we are a leading supplier to original equipment manufacturers and to the aftermarket. We also believe that our trademarks, including Velvetouch®, Fibertuff® and Hawk Performance®, are well known in the aftermarket for these components. The use of our friction products in conjunction with a new or existing brake, clutch or transmission system provides us with the opportunity to supply the aftermarket with the friction product for the life of the system.

	•	Construction Equipment. We supply friction products such as transmission discs, clutch facings and brake components to manufacturers of construction equipment, including Caterpillar. We believe we are one of the largest domestic supplier of these types of friction products. Replacement components for construction equipment are sold through original equipment manufacturers as well as various aftermarket distributors.
	•	Agriculture Equipment. We supply friction products such as clutch facings, transmission discs and brake components to manufacturers of agriculture equipment, including John Deere and CNH. We believe we are the one of the largest domestic suppliers of these friction products. Replacement components for agricultural equipment are sold through original equipment manufacturers, as well as various aftermarket distributors.
	•	Medium and Heavy Trucks. We supply friction products for clutch buttons and facings used in medium and heavy trucks to original equipment manufacturers, such as Eaton and Sachs. We believe we are the leading domestic supplier of replacement friction products used in these applications. Replacement components are sold through original equipment manufacturers and various aftermarket distributors.
	•	Powersport and Specialty Friction. We supply friction products for use in specialty applications, such as brake pads for Harley-Davidson motorcycles, General Motors’ Hummer and Bombardier, Polaris and Arctic Cat snowmobiles, race cars and performance automotive vehicles. We believe that these markets

6

Table of Contents

		are experiencing significant growth, and that we have increased our market share with our combination of superior quality and product performance. Our replacement components are sold through original equipment manufacturers and various aftermarket distributors.

      Aerospace. We believe we are a leading North American independent supplier of friction materials to the manufacturers of braking systems for the Boeing 727, 737 and 757, the DC-9, DC-10, MD-80 and Bombardier’s Canadair regional jet series used by commuter airlines. We believe we are also the largest supplier of friction materials to the general aviation (non-commercial airline, non-military) market, supplying friction materials for aircraft manufacturers such as Cessna, Lear, Gulfstream and Beech.

      Each aircraft braking system, including the friction materials supplied by us, must meet stringent Federal Aviation Administration criteria and certification requirements. New model development and Federal Aviation Administration testing for our aircraft braking system customers generally begins two to five years before full scale production of new braking systems. If we and our aircraft brake system manufacturing partner are successful in obtaining the rights to supply a particular model of aircraft, we will typically supply our friction products for that model’s aircraft braking system for as long as the model continues to fly because it is generally not economically feasible to redesign a braking system once it is certified by the Federal Aviation Administration. Moreover, Federal Aviation Administration maintenance requirements mandate that brake components be changed after a specified number of take-offs and landings, which we expect to result in a continued and steady market for our aerospace friction products.

      Our 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 those experienced by “wide body” aircraft. We believe our friction products provide an attractive combination of performance and cost effectiveness in these applications. According to Boeing’s 2003 Current Market Outlook, approximately 75% of the 15,612 airplanes in the world fleet are single-aisle or regional commercial aircraft. The report also forecasts single-aisle and regional aircraft to grow by approximately 9,550 to 25,162 by the end of 2022. The Boeing report also states that world airline passenger traffic is projected to increase 5.1% over the next twenty years. We expect that long-term growth in world airline traffic, combined with the increasing number of single-aisle and regional aircraft, will cause long-term demand for our aerospace friction products to be stable. However, this market remained soft in 2003 with our net aircraft sales increasing only 2.5% when compared to 2002. As a result of the continued retirement of certain older aircraft, which utilize our braking material and the continued softness in air travel since September 2001, we expect sales in this market to decline in 2004 by approximately 6% to 8% compared to 2003.

      Our precision components segment is a leading supplier of powder metal components consisting primarily of pump, motor and transmission elements, gears, pistons and other component parts for applications ranging from lawn and garden tractors to industrial equipment. Since we were founded, we have participated in the growing powder metal products industry with a focus on the North American industrial market. The Metal Powder Industries Federation, an industry trade group, estimates that the powder metal market for automotive and non-automotive applications in North America had sales of over $5 billion in 2002.

      We manufacture a variety of components made from powder metals for use in:

	•	fluid power applications, such as pumps and other hydraulic mechanisms,
	•	transmissions, other drive mechanisms and anti-lock braking systems used in trucks, off-road and lawn and garden equipment,
	•	gears and other components for use in home appliances, small hand tools, office equipment, medical, and telecommunication equipment, and
	•	components used in automotive applications.

      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

7

Table of Contents

      Our precision component segment proactively targets four specific niches in the market place:

	•	High Precision. Our pressing and finishing capabilities enable us to specialize in tight tolerance fluid power components such as pump elements and gears. In addition, we believe that our machining capabilities provide us with a competitive advantage by giving us the ability to supply a completed part to our customers, typically without any subcontracted precision machining. We expect that our growth in this niche will be driven by existing customers’ new design requirements and new product applications primarily for pumps, motors and transmissions.
	•	Large Size Capability. We have the capability to make powder metal components that are among the largest used in North America. For example, we make reactor plates, which serve as an opposing surface to friction disks made by us, having diameters up to 19 inches for use in transmissions in construction equipment. We expect our sales of large powder metal components to continue to grow as we create new designs for existing customers and benefit from market growth, primarily in current construction, agricultural and truck applications.
	•	High Volume. We also target smaller, high volume parts where we can use efficient pressing and sintering capabilities to our best advantage. In this niche, our primary markets have been powder metal components for the lawn and garden, home appliance, power hand tool, truck, automotive and business equipment markets. We believe that our high volume capabilities provide us with opportunities to cross-sell numerous of our other precision components to customers of high precision and large size parts. Several of our leading original equipment customers have a variety of applications that we supply from both our friction and precision components segments.
	•	Metal Injection Molding. We also manufacture small, complex metal injection molded parts for a variety of industries, such as small hand tools, medical and telecommunications. We believe that many of our traditional powder metal customers may also be attractive prospects for metal injected molded parts.

              Performance Racing

      We supply premium clutch, transmissions and driveline systems under our Quarter Master and Tex Racing brands. These products are used by leading teams in NASCAR, IRL and ASA racing series and by weekend enthusiasts in the SCCA racing clubs, as well as in other road racing and oval track competition cars. We supply the official brake pad of the SCCA and are a participating manufacturer sponsor of the SCCA and several other racing series.

8

Table of Contents

Our Business Segments

      The following table sets forth comparative operating results and total assets by each of our operating segments:

(1)	As of January 1, 2002, we reclassified an operating unit formerly associated with our performance racing segment to our friction products segment as a result of changes in the internal operating responsibility of that unit. We have reclassified all prior periods discussed in this Form 10-K to reflect this change.
(2)	A line of business formerly associated with our motor segment, which was discontinued as of December 31, 2003, will be retained by us and has been reclassified to our precision components segment. Net sales from this line of business were $1.2 million, $1.3 million and $1.5 million for the years ended December 31, 2003, 2002, and 2001, respectively. All prior periods have been reclassified to reflect this change.

9

Table of Contents

(3)	In accordance with the non-amortization provisions of SFAS No. 142 (see “Note 2-Significant Accounting Policies” to the accompanying consolidated financial statements beginning on page 32 of this Form 10-K), we discontinued the amortization of goodwill in 2002.

	The following table illustrates the pro forma effect on income (loss) from operations had we applied the non-amortization provisions of SFAS 142 for the year ended December 31, 2001 by segment:

Our Manufacturing Processes

      The manufacturing processes for most of our friction products, performance racing brake products and powder metal precision components are similar. In general, all use composite metal alloys in powder form to make high quality powder metal components. The basic manufacturing steps 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. The formulas are designed to produce precise performance characteristics necessary for a customer’s particular application. We often work together with our 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. Our molding presses are capable of producing pressures of up to 3,000 tons. We believe that we have some of the largest presses in the powder metal industry, enabling us to produce large, complex components. We can also create complex shapes not obtainable with conventional powder metal presses with our metal injection molding equipment.
	•	Sintering: After compacting, molded parts are heated in furnaces to specific temperatures slightly below melting, enabling metal powders to metallurgically bond, harden and strengthen 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. This processing is generally necessary to attain increased hardness or strength, tighter dimensional tolerances or corrosion resistance. To achieve these specifications, parts are heat or steam treated, precision coined or flattened, ground, machined or treated with a corrosion resistant coating.

      Some of our friction products, including those used in oil-cooled brakes and power shift transmissions, do not require all of the foregoing steps. For example, 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.

Our Quality Control Procedures

      Throughout our design and manufacturing process, we focus on quality control. For product design, each manufacturing facility uses state-of-the-art testing equipment to replicate virtually any application required by our customers. This equipment is essential to our ability to manufacture components that meet stringent customer specifications. To ensure that tolerances have been met and that the requisite quality is inherent in our finished products, we use statistical process controls, a variety of electronic measuring equipment and computer-

10

Table of Contents

      In 2001, we launched a Six Sigma initiative focused on creating a culture of continuous improvement. Six Sigma is a discipline that aims to eliminate costly process variation in a company’s operations and bring more value to its customers. To achieve this, Six Sigma managers use statistical analysis to locate process and product errors. As of December 31, 2003 we have trained approximately 260 employees under the Six Sigma initiative.

Our International Operations

      We operate friction manufacturing facilities in Orzinuovi, Italy, Ontario, Canada and Suzhou, China. We operate a powder metal manufacturing facility in Suzhou, China. Our international operations are subject to the usual risks of operating in foreign jurisdictions. Risks inherent in international operations include the following:

	•	Foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including exchange controls,
	•	Fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U. S. dollars of products and services provided by us in foreign markets where payment for our products is made in local currency,
	•	Unexpected adverse changes in foreign laws or regulatory requirements may occur,
	•	Compliance with a variety of foreign laws and regulations may be difficult, and
	•	Overlap of different tax laws may subject us to additional taxes.

      Our international net sales represented $47.8 million, or 23.6% of our consolidated net sales in 2003 compared $34.1 million, or 18.3% of our consolidated net sales in 2002.

Our Technology

      We believe we are an industry leader in the development of systems, processes and technologies that enable the manufacturing of friction products with numerous performance advantages, such as greater wear resistance, increased stopping power, lower noise and smoother engagement. Our expertise is evidenced by our aircraft brake components, which are currently being installed on many of the braking systems of the Boeing 737-600, -700, -800 and -900 commercial airliners and Bombardier’s Canadair regional jet series of commuter aircraft, as well as new series of industrial equipment from various original equipment manufacturers.

      We maintain 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. A slight change in a mixture can produce significantly different performance characteristics. We use a variety of technologies and materials in developing and producing our products, such as graphitic and cellulose composites. We believe our expertise in the development and production of products using these different technologies and materials gives us a competitive advantage over other friction product manufacturers, which typically have expertise in only one or two types of friction material.

      We also believe that our precision components business is able to produce a wide range of products from small precise components to large parts. We have presses that produce some of the largest powder metal parts in the world, and our 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 such as forging, casting or stamping. With our metal injection molding technology, we are able to create complex shapes previously not available using conventional powder metal technology.

Our Customers

      We seek to provide advanced solutions to customers, enhancing our long-term relationships. Our engineers work closely with our customers to develop and design new products and improve the performance of existing

11

Table of Contents

      Through various acquisitions since our formation, we have broadened our product lines, increased our technological capabilities, further enhanced our customer relationships and further expanded our preferred supplier status. As a result of our commitment to customer service and satisfaction, we are a preferred supplier to many of the world’s leading original equipment manufacturers, including Aircraft Braking Systems, Goodrich, Caterpillar, Eaton, Deere, CNH, Hydro-Gear, Sauer-Danfoss, Parker Hannifin, Electrolux and Haldex.

      Our top five customers accounted for 26.6% of our consolidated net sales in 2003 and 25.1% of our consolidated net sales in 2002.

      The following table describes some of our key customers in each of our business segments, the approximate number of years they have been our customers, the principal products we sell to them and selected applications for those products:

12

Table of Contents

How We Market and Sell Our Products

      We market our products globally through product managers and direct sales professionals, who operate primarily from our facilities in the United States, Italy, China and Canada and sales offices in Germany and Argentina. Our product managers and sales force work directly with our 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. Our friction products are sold both directly to original equipment manufacturers and to the aftermarket through our original equipment customers and a network of distributors and representatives throughout the world. We also sell our precision components to original equipment manufacturers through independent sales representatives. Sales to customers in our performance racing segment are sold directly to race teams and distributors throughout the United States.

Our Competition

      The principal segments in which we operate are competitive and fragmented, with many small manufacturers and only a few manufacturers that generate annual sales in excess of $50 million. Our success will depend on our ability to continue to meet our customers’ changing specifications with respect to reliability and timeliness of delivery, technical expertise, product design capability, manufacturing expertise, operational flexibility and customer service.

      We compete for new business principally at the beginning of the development of new applications and at the redesign of existing applications by our customers. For example, new model development for our aircraft braking system customers generally begins two to five years before full-scale production of new braking systems. Initiatives by customers to upgrade existing products typically involve long lead times as well. We also compete 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 that we supply friction materials for, but are generally more expensive. The carbon-carbon brakes are typically used on wide-body aircraft, such as the Boeing 747 and 777, and on military aircraft, where the advantages in reduced weight may justify the additional expense.

      In addition, as our powder metal components are increasingly substituted for wrought steel or iron components due to advances in our powder metal technology, we increasingly compete with companies using forging, casting or stamping technologies to produce precision components. 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 Suppliers and Prices of Raw Materials We Use

      We require substantial amounts of raw materials, including copper and iron powders, steel and custom-fabricated cellulose sheet and substantially all of the raw materials we require are purchased from third party suppliers and are generally in adequate supply. However, the availability and costs of raw materials may be subject to change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers and changes in exchange rates and worldwide price and demand levels. We are not currently party to any long-term supply agreements. Our inability to obtain adequate supplies of raw materials for our products at favorable prices could have a material adverse effect on our business, financial

13

Table of Contents

Government Regulation of Our Businesses

      Our sales to manufacturers of aircraft braking systems represented 11.1% of our consolidated net sales in 2003 and 11.8% of our consolidated net sales in 2002. Each aircraft braking system, including the friction products supplied by us, must meet stringent Federal Aviation Administration criteria and testing requirements. We have been able to meet these requirements in the past and we continuously review Federal Aviation Administration compliance procedures to help ensure our continued and future compliance.

Environmental, Health and Safety Matters

      We 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. Some 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. Our compliance with environmental laws also may require the acquisition of permits or other authorizations for some kinds of activities and compliance with various standards or procedural requirements. We are also subject to the federal Occupational Safety and Health Act and similar foreign and state laws. The nature of our operations, the long history of industrial uses at some of our current or former facilities, and the operations of predecessor owners or operators of some of the businesses expose us to risk of liabilities or claims with respect to environmental and worker health and safety matters. We review our procedures and policies for compliance with environmental and health and safety laws and regulations and believe that we are in substantial compliance with all material laws and regulations applicable to our operations. Our costs of complying with environmental, health and safety requirements have not been material.

Our Intellectual Property

      Our federally registered trademarks include Hawk®, Wellman Friction Products®, Velvetouch®, Fibertuff®, Feramic®, Velvetouch Feramic®, Velvetouch Organik®, Hawk Brake®, Hawk Performance®, Hawk Precision Components®, Quarter Master® and Tex Racing®. Velvetouch®, Fibertuff® and Hawk Performance® are our principal trademarks for use in the friction products aftermarket segment. We have applied for the registration of the Hawk Precision Components Group, Hawk Racing International, Pro V and Wellman Products Group trademarks. Although we maintain patents related to our business, we do not believe that our competitive position is dependent on patent protection or that our operations are dependent on any individual patent. To protect our intellectual property, we rely 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, 2003, we had approximately 1,170 domestic employees and 390 international employees at our continuing operations. Approximately 185 employees at our Brook Park, Ohio plant are covered under a collective bargaining agreement with the Paper, Allied Industrial, Chemical and Energy Workers International Union expiring in October 2005; approximately 25 employees at our Akron, Ohio facility are covered under a collective bargaining agreement with the United Automobile Workers expiring in July 2005; and approximately 225 employees at our Orzinuovi, Italy plant are represented by a national mechanics union agreement that expires in December 2005. The Italian employees are also covered by a local union agreement that expires in December 2004. We have experienced no material work stoppages and believe we have good relations with our employees and their unions. We have previously announced our intention to close our Brook Park, Ohio facility. We expect this closure to be completed in 2005.

14

Table of Contents

      Hawk’s world headquarters is located in Cleveland, Ohio. We maintain manufacturing and research and development facilities at our continuing operations in 15 locations in 4 countries. We are a lessee under operating leases for some of our properties and equipment. Hawk’s principal research facility is located in Solon, Ohio. In addition, research is also performed in a number of the operating divisions’ facilities. We believe that substantially all of our property and equipment is maintained in good condition, adequately insured and suitable for its present and intended use.

      We are involved in several lawsuits that have arisen in the ordinary course of our business. We are contesting each of these lawsuits vigorously and believe we have defenses to the allegations that have been made. In our opinion, the outcome of these legal actions will not have a material adverse effect on our financial condition or results of operations.

      No matters were submitted to a vote of security holders during the fourth quarter of 2003.

Part II

      Our Class A Common Stock has traded on the American Stock Exchange under the symbol “HWK” since January 7, 2004. From the period May 12, 1998 through January 6, 2004, the stock traded on the New York Stock Exchange. The following table sets forth, for the fiscal periods indicated, the high and low closing prices of our Common Stock as reported on the New York Stock Exchange.

Quarterly Stock Prices

      The closing sale price for our common stock on December 31, 2003 was $3.65.

      Shareholders of record as of February 27, 2004 numbered 86. We estimate that an additional 1,000 shareholders own stock in their accounts at brokerage firms and other financial institutions.

      We have never declared or paid, and do not intend to declare or pay, any cash dividends for the foreseeable future and intend to retain earnings for the future operation and expansion of our business. Currently, our Bank Facility and Senior Note indenture prohibit the payment of cash dividends on the Class A Common Stock.

15

Table of Contents

(1)	Reflects a one-time, non-cash charge related to the pension curtailment and contractual termination benefit costs associated with the announced closure of the Brook Park, Ohio friction segment facility.
(2)	Reflects primarily a work force reduction at our domestic facilities of approximately 160 salaried and production personnel.
(3)	In accordance with the non-amortization provisions of SFAS 142 (see “Note 2 — Significant Accounting Policies” to the accompanying consolidated financial statements beginning on page 32 of this Form 10-K), we discontinued the amortization of goodwill in 2002.
(4)	Amortization outlined in this table does not include deferred financing amortization of $0.8 million in 2003; $0.6 million in 2002; $0.6 million in 2001; $0.6 in 2000 and $0.6 in 1999, which is included in interest expense on the Statement of Operations.
(5)	Working capital is defined as current assets less current liabilities. Beginning in 2002, as required by EITF 95-22, the Bank Facility is included in working capital. As of December 31, 2003 and 2002, there was $24.1 million and $36.3 million outstanding under the Bank Facility, respectively. See “Note 6 — Financing Arrangements” in the accompanying audited consolidated financials statements beginning on page 32 of this Form 10-K.

16

Table of Contents

      You should read this discussion in conjunction with the consolidated financial statements, notes and tables included in Part II, Item 8 of this Form 10-K. Management’s discussion and analysis may contain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, this performance involves risks and uncertainties that may cause actual results to differ materially from those expressed in the forward-looking statements. Some of the important factors that could cause our actual results or outcomes to differ from those discussed are listed under “Forward-Looking Statements.”

Results of Operations

      Through our subsidiaries, we operate primarily in three reportable segments: friction products, precision components and performance racing. Our results of operations are affected by a variety of factors, including but not limited to, general economic conditions, customer demand for our products, competition, raw material pricing and availability, labor relations with our personnel and political conditions in the countries in which we operate. We sell a wide range of products that have a corresponding range of gross margins. Our consolidated gross margin is affected by product mix, selling prices, material and labor costs as well as our ability to absorb overhead costs resulting from fluctuations in demand for our products.

      In the fourth quarter of 2003, we committed to a plan to sell our motor segment, which has operations in Alton, Illinois and Monterrey, Mexico. This segment, which manufactures die-cast aluminum rotors for fractional and sub-fractional horsepower electric motors, failed to achieve a certain level of profitability, and, after completing an extensive analysis, we determined that a divestiture of this segment would allow us to concentrate on our core segments of friction products and precision components. We initiated an active marketing plan and anticipate selling the segment prior to the end of 2004. Results of operations for this segment have been restated to reclassify its net operations, assets and liabilities as discontinued for all periods presented in this report and are not included in this discussion of our results of operations.

      Also in the fourth quarter of 2003, we committed to a restructuring program to achieve cost savings in our friction products segment by moving operations at its Brook Park, Ohio location to a new U.S. production facility. We have signed a formal, non-binding letter of intent agreeing to the terms on the construction of a new approximately 240,000 square foot leased facility. The letter of intent is subject to due diligence and other customary terms and conditions. In connection with the planned closure of the Brook Park, Ohio facility, we recorded a $1.9 million charge in the fourth quarter of 2003 related to the curtailment and contractual termination benefit costs of a defined benefit pension plan covering certain union employees of the facility. In addition, we anticipate future pre-tax charges of approximately $2.0 million in 2004 and $3.0 million to $3.5 million in 2005 related to the relocation of the Brook Park, Ohio facility and employee severance expense.

      In 2003, our income from operations decreased $2.1 million to $10.9 million, or 16.2%, from the prior year. This decrease was attributable primarily to the $1.9 million pension curtailment and contractual termination benefit costs we recorded in the fourth quarter of 2003, increased defined benefit pension costs of approximately $1.3 million in 2003, increased incentive compensation expense of $1.7 million and $1.0 million in discretionary profit sharing contributions compared to no contributions in 2002. Partially offsetting this decrease were sales volume increases and improved absorption of fixed costs, primarily in our friction segment, as well as cost reduction initiatives.

Outlook for 2004

      Based on a gradually improving economy and the strength of our new product introductions, market share gains and foreign operations, we expect full year 2004 revenues from continuing operations to increase approximately 6% from 2003 revenues from continuing operations. We expect this increase, despite our anticipation that 2004 sales to the aerospace market will be 6% to 8% lower than 2003.

17

Table of Contents

Critical Accounting Policies

      Hawk’s critical accounting policies, including the assumptions and judgments underlying them are more fully described in “Note 2 — Significant Accounting Policies” of the notes to the accompanying audited consolidated financial statements beginning on page 32 of this Form 10-K. Some of our accounting policies require the application of significant judgment by us in the preparation of our financial statements. In applying these policies, we use our best judgment to determine the underlying assumptions that are used in calculating the estimates that affect the reported values on our financial statements. On an ongoing basis, the Company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

      Hawk reviews its financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment. We base our estimates and assumptions on historical experience and other factors that we consider relevant. If these estimates differ materially from actual results, the impact on our consolidated financial statements may be material. However, historically our estimates have not been materially different from actual results. Hawk’s critical accounting policies include the following:

	•	Revenue Recognition. Revenues are recognized when products are shipped and title has transferred to the customer.
	•	Allowance for Doubtful Accounts. Our policy regarding the collectibility of accounts receivable is based on a number of factors. In circumstances where a specific customer is unable to pay its obligations, we record a specific allowance for bad debts against amounts due to reduce the net recognized receivable to the amount that we reasonably expect to collect. If circumstances change, estimates of the recoverability of the amounts due us could change.
	•	Inventory Reserves. Reserves for slow moving and obsolete inventories are developed based on historical experience and product demand. We continuously evaluate the adequacy of our inventory reserves and make adjustments to the reserves as required.
	•	Goodwill. Goodwill represents the excess of the cost of companies we acquired over the fair value of their net assets as of the date of acquisition. In accordance with Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), our policy is to evaluate the carrying value of our goodwill and indefinite-lived intangible assets at least annually, or more frequently if there is a significant adverse event or change in the environment in which one of our business unit operates. An impairment loss would be recorded in the period such determination is made. In assessing the recoverability of our goodwill, we consider changes in economic conditions and make assumptions regarding estimated future discounted cash flows and other factors. Estimates of future cash flows are highly subjective based on our experience and knowledge of operations. These estimates could be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation and economic trends. If actual results are materially different than the assumptions used, impairment could result. See “Note 2 — Significant Accounting Policies” of the notes to the accompanying audited consolidated financial statements beginning on page 32 of this Form 10-K.
	•	Long-Lived Assets. Long-lived assets (excluding goodwill) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future undiscounted cash flows and other factors. Estimates of future cash flows are highly subjective judgments based on our experience and knowledge of operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation and competitive trends. If our estimates or underlying assumptions change in the future, we may be required to record impairment charges. Based on our review, we recorded a pre-tax, non-cash impairment charge of $4.5 million in the fourth quarter of 2003 to our motor segment, which was reported as a discontinued operation for the year ended December 31, 2003. There were no impairment charges recorded in 2002 or 2001. (See “Note 3 —

18

Table of Contents

		Discontinued Operations” to the accompanying audited consolidated financial statements beginning on page 32 of this Form 10-K).
	•	Pension Benefits. We account for our defined benefit pension plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” (SFAS 87) which requires that amounts recognized in financial statements be determined on an actuarial basis. The most significant element in determining our pension income (expense) in accordance with SFAS 87 is the expected return on plan assets. We assumed that the expected weighted average long-term rate of return on plan assets will be 8.6% for 2004 compared to 8.6% for 2003 and 9.3% for 2002. Based on our existing and forecasted asset allocation and related long-term investment performance results, we believe that our assumption of future returns is reasonable. However, should the rate of return differ materially from our assumed rate we could experience a material adverse effect on the funded status of our plans and our future pension expense. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. This produces the expected return on plan assets that is included in pension income (expense). The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension income (expense). Our cumulative unrecognized net actuarial loss on pension assets as of December 31, 2003 and 2002 was $8.0 million and $8.9 million, respectively.

           We determine the discount rate to be used to discount plan liabilities at their measurement date, December 31. The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. At December 31, 2003, we determined this rate to be 6.25%. Changes in discount rates over the past three years have not materially affected pension income (expense), and the net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, has been deferred as permitted by SFAS 87.

          We expect pension expense to be approximately $1.2 million in 2004. This compares to $3.6 million (including pension curtailment and contractual termination benefit costs of $1.9 million) in 2003 and $0.4 million in 2002.

           We expect cash contributions to our pension plans to be $1.9 million in 2004. This compares to contributions of $1.1 million in 2003 and $1.3 million in 2002.

	•	Insurance. We use a combination of insurance and self-insurance for a number of risks including property, general liability, directors’ and officers’ liability, workers’ compensation, vehicle liability and employee-related health care benefits. Liabilities associated with the risks that are retained are estimated by considering various historical trends and forward-looking assumptions. The estimated accruals for self-insured liabilities were $1.1 million in 2003 and $0.6 million in 2002. These accruals could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
	•	Contingencies. Our treatment of contingent liabilities in the financial statements is based on the expected outcome of the applicable contingency. In the ordinary course of business, we consult with legal counsel on matters related to litigation and other experts both within and outside of the Company. We will accrue a liability if the likelihood of an adverse outcome is probable of occurrence and the amount is estimable. We will not accrue a liability if either the likelihood of an adverse outcome is only reasonably possible or an estimate is not determinable.
	•	Income Taxes. Our effective tax rate, taxes payable and other tax assets and liabilities reflect the current tax rates in the domestic and foreign tax jurisdictions in which we operate. Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for reporting and income tax purposes. As of December 31, 2003 and 2002, we had net federal operating loss carryforwards of $7.9 million and $0, respectively, and alternative minimum tax (AMT) credit carryforwards of $1.1 million and $1.0 million, respectively.
	•	Foreign Currency Translation and Transactions. Assets and liabilities of our foreign operations are translated using year-end exchange rates, and revenues and expenses are translated using exchange rates as determined throughout the year. Gains or losses resulting from translation are included in a separate

19

Table of Contents

		component of our shareholder’s equity. As of December 31, 2003 we recorded a translation gain through shareholders’ equity of $2.3 million. This gain was attributable to the strength of the Euro throughout 2003. In 2002, we reported a translation gain of $0.7 million. 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 date of the transaction. The effect of the transaction’s gain or loss is included in other income (expense), net in our Statement of Operations. Foreign currency transaction losses were $0.1 million in 2003 compared to $0.2 million in 2002.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

      Our manufacturing operations are organized into three product focused strategic business units. These units include friction products, precision components and performance racing. In the fourth quarter of 2003 we committed to selling our motor segment. As a result, we have classified this business as discontinued. An operating component of the motor segment will be retained by the Company as part of its continuing operations. This line of business had net sales of $1.2 million in 2003 and $1.3 million in 2002 and has been reclassified into the results of the precision components segment for all of the years presented.

Segment Sales Analysis

      Net Sales. Our consolidated net sales from continuing operations for 2003 were $202.6 million, an increase of $16.7 million or 9.0% from the same period in 2002. We experienced sales increases in all of our segments, primarily a result of a gradual economic recovery in 2003 in the industrial markets we serve, new product introductions and market share gains in our friction segment during the year. Foreign currency exchange rates caused net sales from continuing operations for the full year 2003 to increase by 3.2%.

	•	Friction Products. Net sales in the friction segment, our largest, were $121.6 million in 2003, an increase of $15.5 million, or 14.6%, compared to $106.1 million 2002. As a result of new product introductions and market share gains, we experienced increases in most of our major markets, including construction, agriculture, heavy truck, aftermarket and fleet markets. This segment also experienced strong sales growth from our international operations in 2003. Net sales, exclusive of any translation gains, at our Italian facility increased 24.2% in 2003 compared to 2002, as a result of new product introductions and market share gains. Net sales at our Chinese facility were up 111.0% in 2003 compared to 2002. Foreign currency exchange rates caused the friction segment’s sales for the full year 2003 to increase by 5.6%. Our sales to the aerospace market increased approximately 2.5% in 2003 compared to 2002. However, sales to the aerospace market were down 7.9% during the last six months of 2003 when compared to the same period of 2002. When compared to the full year 2003, we expect sales to the aerospace market will be down approximately 6% to 8% in 2004 compared to 2003. Additionally, net sales in this segment decreased approximately $2.1 million from full year 2002 results, as a result of our decision to exit the automotive stamping market in June 2003.
	•	Precision Components. Net sales in our precision components segment were $68.1 million in 2003, an increase of 1.3% compared to 2002. The increase in net sales was primarily attributable to gradually improving conditions in the general industrial segments of the domestic economy. We experienced sales increases in the lawn and garden, fluid power and power tool markets served by this segment. These increases were partially offset by declines in the automotive market as a result of vehicle production declines during the year as well as a decline in sales to the appliance market that we serve. Our precision

20

Table of Contents

		component segment began production and sale of product from its new powder metal production facility in China during the fourth quarter of 2003.
	•	Performance Racing. Net sales in our performance racing segment were $12.9 million, an increase of 2.4% compared to net sales of $12.6 million in 2002. The increase in revenues was primarily attributable to the introduction of new clutch products.

      Gross Profit. Gross profit from continuing operations increased $3.2 million to $47.4 million during 2003, a 7.2% increase compared to gross profit of $44.2 million in 2002. The gross profit margin decreased to 23.4% of net sales in 2003 from 23.8% of net sales in the prior year period.

	•	Friction Products. Our friction products segment reported gross profit of $29.5 million or 24.3% of its net sales in 2003 compared to $25.4 million or 23.9% of its net sales in 2002. The increase in our gross profit margin was primarily the result of sales volume increases, product mix, our exit from the automotive stamping market and continued emphasis on cost reduction programs, as well as utilization of Six Sigma tools to lower our manufacturing costs. We achieved an increase in gross margin in 2003 despite increased defined benefit pension costs of $0.6 million as well as increased incentive compensation expense of $0.3 million and discretionary profit sharing contributions of $0.3 million in 2003 that were not made in 2002.
	•	Precision Components. Gross profit in our precision components segment was $14.5 million or 21.3% of its net sales in 2003 compared to $15.1 million or 22.5% of its net sales in 2002. The decrease in this segment’s margins was primarily the result of profit sharing contributions of $0.3 million that were made in 2003 compared to no contributions in 2002. Other factors that impacted gross profit were product mix, start-up and training costs associated with the installation of new equipment as well as start-up costs associated with this segment’s new operations in China. We will continue to provide start-up support to the China operation in 2004 and expect this operation to achieve profitability during 2005.
	•	Performance Racing. Our performance racing segment reported gross profit of $3.4 million or 26.4% of net sales in 2003 compared to $3.7 million or 29.4% of net sales in 2002. The decline in gross profit was primarily the result of product mix.

      Selling, Technical and Administrative Expenses. Selling, technical and administrative (ST&A) expenses increased $3.2 million, or 10.5%, to $33.7 million in 2003 from $30.5 million during 2002. As a percentage of net sales, ST&A increased to 16.6% in 2003 compared to 16.4% in 2002. The increase in ST&A expenses resulted primarily from increased defined benefit pension costs of $0.2 million, increased incentive compensation expense of $1.5 million and discretionary profit sharing contributions of $1.0 million in 2003 that were not made in 2002. We spent $4.1 million, or 2.0% of our net sales on product research and development compared to $3.5 million, or 1.9%, in 2002.

      Pension Curtailment and Contractual Termination Benefit Costs. In 2003, we recorded a charge of $1.9 million to reflect the curtailment and contractual termination benefit costs relating to a defined benefit pension plan resulting from our decision to close our Brook Park, Ohio friction manufacturing facility. There were no charges recorded in 2002.

      Income from Operations. Income from operations decreased $2.1 million or 16.2% to $10.9 million in 2003 from $13.0 million in 2002. Income from operations as a percentage of net sales decreased to 5.4% in 2003 from 7.0% in 2002. The decrease was primarily the result of increased defined benefit pension costs of $1.3 million, a $1.9 pension curtailment and contractual termination benefit cost recorded by the friction segment during 2003, increased incentive compensation expense of $1.7 million and discretionary profit sharing

21

Table of Contents

      As a result of the items discussed above, income from operations at each of our segments was as follows:

      Other Income (Expense), net. Other income was $0.2 million in 2003 compared to expense of $0.7 million in 2002. The primary source of income in 2003 was foreign exchange transaction gains generated primarily from our Italian facility. The major expense items in 2002 included, fees paid by us in the first quarter of 2002 to effect an amendment to our Term Loan and Revolving Credit Facility, costs associated with our termination of a product licensing agreement in our precision components segment, and to a lesser extent, foreign exchange transaction losses.

      Interest Expense. Interest expense increased $0.4 million, or 3.8%, to $10.8 million in 2003 from $10.4 million in 2002. The increase is primarily attributable an increase in the interest rate on our Senior Notes. Following our exchange offer in October 2002, the interest rate on our Senior Notes increased from 10.25% to 12%. This increase was partially offset by reduced borrowings during the year as well as lower interest rates paid under our Bank Facility, which we also entered into in October 2002. Additionally, we recorded $0.1 million in interest expense in December 2003 and 2002 respectively, to reflect the issuance of payment in kind (PIK) interest in both periods under the terms of the Senior Notes leverage ratio test for the periods ended December 31.

      Income Taxes. We recorded a tax provision for continuing operations of $0.9 million in 2003 compared to a benefit of $0.7 million in 2002. An analysis of changes in our income taxes and our effective tax rate is contained in “Note 11 — Income Taxes” in the accompanying audited consolidated financial statements beginning on page 32 of this Form 10-K.

      Discontinued Operations, net of tax. In the fourth quarter of 2003, we committed to a plan to divest of our motor segment operations. In accordance with accounting principles generally accepted in the United States

22

Table of Contents

      Net Loss. As a result of the factors noted above, we reported a net loss of $5.4 million in 2003, compared to a net loss of $18.3 million in 2002.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      Net Sales. Our consolidated net sales from continuing operations for 2002 were $185.9 million, an increase of $9.0 million or 5.1% percent from the same period in 2001. The increase in net sales, primarily a result of a gradual economic recovery during the year in the industrial markets we serve, positively impacted the friction and precision components segments.

	•	Friction Products. Net sales in the friction products segment, our largest, were $106.1 million in 2002, an increase of 1.9% compared to 2001. As a result of improved operating environments in the United States and Europe, we experienced increases in most of our major markets, including construction, agriculture and automotive. The notable exception was our aerospace market. As a result of the continuing softness in the commercial aerospace market during 2002, our sales to this market were down 16.0% from the comparable period in 2001. This segment also experienced strong sales growth out of our international operations in 2002. Net sales, exclusive of any translation gains, at our Italian facility increased 14.1% compared to 2001, as a result of new product introductions and market share gains. Net sales at our Chinese facility were up 292.1% compared to 2001.
	•	Precision Components. Net sales in the precision components segment were $67.2 million, an increase of 12.4% compared to 2001. The increase in net sales was primarily attributable to gradually improving conditions in the general industrial segments of the domestic economy. We experienced sales increases in nearly all of the major markets served by this segment, including pump and motor, lawn and garden, truck and appliance.
	•	Performance Racing. Net sales in our performance racing segment were $12.6 million, a decrease of 3.1% compared to net sales of $13.0 million in 2001. The decrease in revenues was primarily attributable to the softness in the end markets we serve from our clutch manufacturing operation. Net sales at our transmission and driveline systems manufacturing facility benefited from the continued popularity of racing, particularly in the NASCAR racing series.

      Gross Profit. Gross profit increased $3.5 million to $44.2 million during 2002, an 8.6% increase compared to gross profit of $40.7 million in 2001. The gross profit margin increased to 23.8% of net sales in 2002 from 23.0% of net sales in the comparable period of 2001.

23

Table of Contents

	•	Friction Products. Our friction products segment reported gross profit of $25.4 million or 23.9% of net sales in 2002 compared to $24.9 million or 23.9% of net sales in 2001. The flat gross profit margin was primarily the result of product mix, especially in our aerospace market, as older aircraft, which have higher margins for us, were retired or put out of service by the commercial airlines. We also continued to support our new facility in China during 2002. Although the facility operated at negative margins for the full year, it achieved break even results for the last half of 2002. Gross margin benefited by reductions in incentive compensation costs during the period compared to 2001.
	•	Precision Components. Gross profit in our precision components segment was $15.1 million or 22.5% of net sales in 2002 compared to $12.0 million or 20.1% of net sales in 2001. The increase in this segment’s margins was primarily the result of the volume increases and our ability to leverage and absorb the fixed charges generated by the segment and reductions in incentive compensations costs.
	•	Performance Racing. Our performance racing segment reported gross profit of $3.7 million or 29.4% of net sales in 2002 compared to $3.8 million or 29.2% of net sales in 2001. The decline in gross profit was primarily the result of volume declines at our performance clutch manufacturing facility.

      Selling, Technical and Administrative Expenses. ST&A expenses increased $1.7 million, or 5.6%, to $30.5 million in 2002 from $28.8 million during 2001. As a percentage of net sales, ST&A increased slightly to 16.4% of net sales in 2002 compared to 16.3% in 2001. The increase in ST&A expenses resulted primarily from continuing start-up expenditures incurred at our Chinese friction material facility, increased insurance and personnel costs associated with our long-term sales and growth initiatives. Additionally, we incurred legal expenses in our performance racing segment related to litigation that was resolved in the second quarter of 2002. These cost increases were partially offset by reductions in incentive compensation costs. In 2002, we spent $3.5 million, or 1.9% of our net sales on product research and development compared to $3.9 million in 2001.

      Amortization of Finite-Lived Intangible Assets. Results for the year ended December 31, 2002 were favorably impacted by the adoption of SFAS 142 on January 1, 2002, which permitted us to discontinue the amortization of goodwill and definite-lived intangible assets. This accounting change reduced our amortization expense for the year by $2.9 million compared to 2001.

      Income from Operations. Income from operations increased $5.8 million or 80.6% to $13.0 million in 2002 from $7.2 million in 2001. Income from operations as a percentage of net sales increased to 7.0% in 2002 from 4.1% in 2001. The increase was primarily the result of the increased sales volume, improved absorption of fixed costs as a result of the volume increases, cost reduction initiatives and a reduction of amortization expense of $2.9 million as a result of the adoption of SFAS 142. This improvement to income from operations was partially offset by continuing support of our operations in China and continued support of our metal injection molding facility during the year. During the year ended December 31, 2001, we recognized an expense of $1.1 million in restructuring charges to adjust our business plan to reflect the economic slowdown. No such charge was taken in 2002.

      As a result of the items discussed above, income from operations at our segments was as follows:

      Interest Expense. Interest expense increased $0.3 million, or 3.0%, to $10.4 million in 2002 from $10.1 million in 2001. The increase is primarily attributable to increased borrowings during the year and an increase in the interest rate on our Senior Notes. Following our exchange offer in October 2002, the interest rate on our Senior Notes increased from 10.25% to 12%. This increase was partially offset by lower interest rates paid under our new Bank Facility, which was also entered into in October 2002. Additionally, we recorded

24

Table of Contents

      Exchange Offer Costs. During the year ended December 31, 2002, we incurred third-party fees and expenses of $1.9 million related to the exchange of our Senior Notes for our then outstanding Old Senior Notes.

      Other Income (Expense), net. Other expense was $0.7 million in 2002 compared to $0.5 million in 2001. The major expense items in 2002 included fees paid by us in the first quarter of 2002 to effect an amendment to our Term Loan and Revolving Credit Facility, costs associated with our termination of a product licensing agreement in our precision components segment, and to a lesser extent, foreign exchange transaction losses. In 2001, other expense was primarily comprised of the recognition of the fair value of our then outstanding swap agreement, in addition to foreign currency transaction losses.

      Income Taxes. We recorded a tax benefit of $0.7 million in 2002 compared to a benefit of $0.9 million. An analysis of changes in our income taxes and our effective tax rate is contained in “Note 11 — Income Taxes” in the accompanying audited consolidated financial statements beginning on page 32 of this Form 10-K.

      Cumulative Effect of Change in Accounting Principle. In accordance with the requirements of SFAS 142, we recorded a charge for the cumulative effect of change in accounting principle of $17.2 million for the year ended December 31, 2002. See “Note 2 — Significant Accounting Policies” in the accompanying audited consolidated financial statements beginning on page 32 of this Form 10-K. This charge represents the write-off of $21.5 million of goodwill ($17.2 million, net of income taxes of $4.3 million).

      Discontinued Operations, net of tax. In the fourth quarter of 2003, we committed to a plan to sell our motor segment. In accordance with GAAP, we have accounted for the discontinued operations in our financial statements on the line item “Discontinued operations, net of tax for all periods. In 2002, we reported a pre-tax net loss of $2.7 million from discontinued operations compared to $3.0 million in 2001. An analysis of Discontinued Operations is contained in “Note 3 – Discontinued Operations” in the accompanying audited consolidated statements beginning on page 32 of this Form 10-K.

      Net Loss. As a result of the factors noted above, we reported a net loss of $18.3 million in 2002, compared to a net loss of $4.3 million in 2001.

25

Table of Contents

Liquidity and Capital Resources

     Primary Financing Requirements

      Our primary financing requirements are:

	•	for capital expenditures for maintenance, replacement and acquisition of equipment, expansion of capacity, productivity improvements and product development,
	•	for funding our day-to-day working capital requirements and
	•	to pay interest on, and to repay principal of, our indebtedness.

      Hawk’s primary source of funds for conducting its business activities and servicing its indebtedness has been cash generated from operations and borrowings under our Bank Facility. The following selected measures of liquidity and capital resources outline various metrics that are reviewed by our management and are provided to enhance the understanding of our business.

Selected Measures of Liquidity and Capital Resources from Continuing Operations