UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 2009
Commission File No. 001-13797
HAWK
CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware
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34-1608156 |
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(State of incorporation)
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(I.R.S. Employer Identification No.) |
200 Public Square, Suite 1500, Cleveland, Ohio 44114
(Address of principal executive offices) (Zip Code)
(216) 861-3553
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which Registered |
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Class A Common Stock, par value $.01
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NYSE Amex |
8 3/4% Senior Notes due 2014
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NYSE Amex |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. YES o NO þ
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and
post such files). YES
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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 registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in rule 12b-2 of the Exchange Act.
(Check one):
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-accelerated Filer o
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the
Act: YES o NO þ
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2009
was $71,220,401 (based on the closing price as quoted on the NYSE Amex Stock Exchange on that
date).
As of March 8, 2010, the registrant had 7,974,937 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 5,058,008 shares of Class A Common Stock.
TABLE OF CONTENTS
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for the annual meeting of
stockholders of Hawk Corporation to be held on May 25, 2010 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, 2009.
Part I
Our Company
Hawk Corporation is a leading supplier of friction products for industrial, aircraft,
agricultural and performance applications. 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 and mining vehicles, agricultural vehicles,
trucks, motorcycles and race cars, and brake parts for landing systems used in commercial and
general aviation. Our friction products typically provide the wear surface in a brake or clutch
application which is highly engineered to perform in a given application. They are principally
made from proprietary formulations and designs of composite materials and metal powders. We also
manufacture fuel cell components.
Founded in 1989, Hawk Corporation is a holding company that through our subsidiaries enjoys
customer relationships that span 50 years or more and has a manufacturing history dating back to
1920. Our common stock has been publicly traded since 1998 under the symbol HWK.
Our principal offices are located at 200 Public Square, Suite 1500, Cleveland, Ohio
44114-2301, and we can be reached by telephone at (216) 861-3553. Our web site address is:
www.hawkcorp.com.
Friction Products Information
Through our various subsidiaries, we operate in one reportable segment: friction products. Our
results of operations are affected by a variety of factors, including but not limited to, global
economic conditions, manufacturing efficiency, customer demand for our products, competition, raw
material pricing and availability, our ability to pass through to our customers increases in raw
material prices, labor relations with our employees and political conditions in the countries in
which we operate. We sell a wide range of products that have a correspondingly wide 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.
We believe that, based on net sales, we are one of the top worldwide manufacturers of friction
products used in off-highway, on-highway, industrial, agricultural, performance and aircraft
applications. Our friction products business 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. Our friction
products include parts for brakes, clutches and transmissions used in construction and mining
vehicles, agricultural vehicles, military vehicles, trucks, motorcycles and race cars, and brake
parts for landing systems used in commercial and general aviation. We believe we are:
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a leading domestic and international supplier of brake and clutch friction materials
for construction and mining equipment, agricultural equipment and trucks, |
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the leading North American independent supplier of metallic friction materials for
braking systems for new and existing series of many commercial and military aircraft
models, including Boeing, EADS, Lockheed and United Technologies, as well as the Canadair
regional jet series, |
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the largest supplier of metallic friction materials for the general aviation market,
including numerous new and existing series of Cessna, Hawker, Lear
and Pilatus aircrafts, and |
2
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a leading domestic supplier of friction materials into performance, defense and
specialty markets such as military vehicles, motorcycles, race cars, performance
automobiles, and ATVs. |
In
our fuel cell component business we believe we are:
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a leading supplier of critical stack components used in the manufacture of phosphoric acid fuel
cells. The fuel cells which use our stack components are a major presence in the on-site
stationary fuel cell market. |
Discontinued Operations
During 2008, we completed the divestitures of the two domestic operating facilities of our
performance racing segment. On May 30, 2008, we completed the sale of our performance racing
facility in North Carolina and reported a loss on sale of $1.9 million ($1.3 million, net of tax).
This loss is reported in (Loss) income from discontinued operations,
after income taxes in the
Consolidated Statement of Operations for the year ended December 31, 2008. On December 22, 2008,
we completed the sale of our performance racing facility in Illinois and reported no gain or loss
on the transaction.
The sale of our precision components segment closed in the first quarter of 2007, and we
reported a gain on sale of the precision components segment of $15.0 million ($11.9 million, net of
tax). This gain is reported in (Loss) income from discontinued
operations, after income taxes in the Consolidated Statement of Operations for the year ended December 31, 2007.
In
connection with the sale of our Monterrey, Mexico facility in 2006, we
received a note receivable of $1.2 million. During the fourth quarter of 2008, the note holder
defaulted on its repayment obligation and we recorded a reserve of $1.0 million due to our
uncertainty of collecting this remaining outstanding balance of the note receivable. During the
fourth quarter of 2009, we were able to successfully negotiate a settlement arrangement with the
note holder and realized $0.1 million of income in (Loss) income from discontinued operations,
after income taxes for the year ended December 31, 2009. During 2007, we received an audit
assessment from the Mexican tax authority related to certain tax matters associated with our
Mexican discontinued operation and recorded an after tax discontinued operations expense of
approximately $1.0 million related to this assessment in the year ended December 31, 2007. In
2008, we received a favorable ruling from the Mexican tax authority and recognized $0.8 million of
income in (Loss) income from discontinued operations, after income taxes in the year ended December
31, 2008 as a result of this favorable ruling.
There are no remaining assets or liabilities classified as discontinued operations recorded in
the Consolidated Balance Sheets at December 31, 2009 or 2008. Through December 31, 2009, we
continue to make adjustments to amounts previously reported as discontinued operations and incur
legal and professional expenses associated with the finalization of legal matters and closure of
our legal presence in Mexico. This residual activity is included in the following summary of our
results of discontinued operations:
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Year Ended December 31 |
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2009 |
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2008 |
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2007 |
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(dollars in millions) |
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Net sales |
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$ |
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$ |
7.4 |
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$ |
20.1 |
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(Loss) from discontinued operations, before income taxes |
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$ |
(0.2 |
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$ |
(1.8 |
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$ |
(3.1 |
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(Loss) gain on sale of discontinued operations, before income taxes |
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(1.9 |
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15.0 |
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Income tax (benefit) expense |
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(0.1 |
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(2.0 |
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2.4 |
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(Loss) income from discontinued operations, after income taxes |
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$ |
(0.1 |
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$ |
(1.7 |
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$ |
9.5 |
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3
Business Strategy
Our business strategy includes the following principal elements:
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Continued Product Innovation. We believe that we are an industry
leader in the development of systems, processes and technologies
that enable us to manufacture friction products with numerous
performance advantages, such as greater wear resistance, increased
stopping power, lower noise and smoother engagement. We are
committed to maintaining our technological advantages. As a
result, we are focusing our research and development efforts on
improving our existing products and developing materials and
technologies for new applications for our existing end markets. We
seek new product developments and production techniques that will
enable us to develop new applications for our existing end
markets. For the year ended December 31, 2009, we spent $4.7
million on research and development, which is a higher percentage
of our net sales than in the previous year at 2.7%, compared to
$5.4 million, or 2.0% of our net sales for the year ended December
31, 2008. |
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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. Our gross
margins were 27.5% for the year ended December 31, 2009 and 28.6%
for the year ended December 31, 2008. |
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Capitalize on Aftermarket Opportunities. We estimate that total
aftermarket sales of our friction products have comprised
approximately 40% to 50% of friction product sales in recent
years. A substantial portion of our sales to original equipment
manufacturers serve the aftermarket needs of their equipment in
the field Separately, we have an expanded aftermarket sales force
to focus on increasing direct aftermarket sales under our
VelveTouchâ and Hawk
PerformanceÒ brands, to fleets, industrial and
retail customers. For the year ended December 31, 2009, our
direct aftermarket sales were $24.5 million, or 14.2% of our
sales, a decrease of 15.2% from 2008. Our aftermarket sales
enable us to reduce our exposure to adverse economic cycles in the
original equipment markets. Sales of our friction products can
offer decades of continued sales for products such as aircraft
brakes, heavy duty trucks and construction equipment which have a
large population of equipment in the field. |
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Institute Cost-Reduction Initiatives. To maintain our profit
margins in highly competitive markets and in periods of rising raw
material costs, we aggressively manage our operating cost
structure. Through various cost reduction programs, lean
manufacturing initiatives and Six Sigma projects, we continue to
look for ways to lower the total cost of manufacturing our
products. We use an incentive-based compensation system to further
align our employees with our focus on providing products of the
highest quality and at the lowest cost. |
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Globalization. In addition to the United States, we have friction
manufacturing facilities in Italy, China and Canada and sales
representatives in Russia, India and Mexico. Through our worldwide
distribution network, we continue to selectively expand our
international operations in established markets throughout Europe,
Asia, North America, South America and Australia. Net sales from our foreign
manufacturing facilities represented $46.9 million, or 27.2%, of
our consolidated net sales for the year ended December 31, 2009,
and $112.2 million, or 41.6%, of our consolidated net sales in
2008. |
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Acquisitions. We have made a strategic decision to focus our
corporate resources on the friction products business and divested
our performance racing segment in 2008 and our precision
components segment in 2007. Currently, we are reviewing
opportunities to acquire businesses in friction products or
related to friction. |
4
Our Principal Markets and Products
We focus on supplying the off-highway, on-highway, industrial, agricultural, aircraft,
performance racing and alternative energy 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 product line expansions. We believe that
diversification has reduced our economic exposure to the cyclical effects of any particular
industry. For the years ended December 31, 2009 and 2008, our sales by principal markets were:
Sales by Principal Markets
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% of Sales |
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2009 |
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2008 |
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Construction and Mining |
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36.5 |
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47.2 |
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Aircraft and Defense |
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27.5 |
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20.3 |
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Agriculture |
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14.2 |
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15.0 |
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Truck |
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9.7 |
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9.2 |
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Performance Friction |
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6.9 |
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3.9 |
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Specialty Friction |
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3.8 |
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3.6 |
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Alternative Energy |
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1.4 |
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0.8 |
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Total |
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100.0 |
% |
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100.0 |
% |
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Friction Products
Friction products are the replacement elements used in brakes, clutches and transmissions
which make contact with an opposing surface. In the case of brakes, the material absorbs vehicular
energy and dissipates it through heat and normal mechanical wear. In the case of clutches and
transmissions, the material employs its friction characteristics to engage and control the motion
of the vehicle. Our friction products 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, mining, 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, a new friction material introduction
engineered for a new system provides us with a long-term opportunity to supply that friction
product.
The principal markets served by our friction products segment include manufacturers of truck
clutches, transmissions, heavy-duty construction, mining 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,
agricultural and aircraft applications. We estimate that our direct and indirect aftermarket sales
of friction products have comprised approximately 40% to 50% 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.
End Markets. We supply a variety of friction products for use in brakes, clutches and
transmissions on construction, mining and agriculture equipment, aircraft, 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® and Hawk Performance®, are well known to the direct 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.
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Construction and Mining Equipment. We supply friction products such as transmission discs,
clutch facings and brake components to manufacturers of construction and mining equipment,
including Caterpillar, Volvo and Carraro. We believe we are one of the largest suppliers of
these types of friction products. Replacement components for construction equipment are sold
through original equipment manufacturers as well as directly to aftermarket distributors. |
5
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Aircraft and Defense. We believe we are a leading independent supplier of friction products
to the manufacturers of aircraft braking systems for Boeing, European Aeronautic Defense and
Space, Lockheed, United Technologies and Bombardier, as well as certain military aircraft. We
believe we are also the largest supplier of metallic friction products to the general
aviation (non-commercial airline, non-military) market, supplying friction materials for
aircraft such as Cessna, Hawker, Lear and Pilatus. |
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Each commercial aircraft braking system, including the friction products supplied by us, must
meet stringent Federal Aviation Administration (FAA) criteria and certification requirements.
New model development and FAA 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
models 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
FAA. Moreover, the FAA maintenance requirements mandate that brake lining components be
changed after a specified number of take-offs and landings, which results in a continuous and
steady market for our aircraft friction products. |
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We supply brake pads for military vehicles and for a number of military aircraft applications. |
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Agriculture Equipment. We supply friction products such as clutch facings, transmission discs
and brake components to manufacturers of agriculture equipment, including John Deere and Case
New Holland. We believe we are one of the largest domestic suppliers of these types of
friction products. Replacement components for agricultural equipment are sold through
original equipment manufacturers and directly to aftermarket distributors. |
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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 ZF 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
directly to aftermarket distributors. |
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Performance and Specialty Friction. We supply friction products for use in specialty
applications, such as brake pads for high performance street cars such as Corvettes and
BMWs, race cars, fleet vehicles such as delivery trucks, police cars and ambulances as well
as motorcycles. We believe 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 directly to aftermarket distributors through
relationships with national automotive retailers such as Tire Rack. |
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Alternative Energy. We supply critical stack components used in manufacture of phosphoric
acid fuel cells. The fuel cells that use our stack components dominate the on-site
stationary fuel cell market. We continue to work with the State of Ohio and our customer to
develop manufacturing equipment and processes that advance the state of the fuel cell
component manufacturing. |
Our Manufacturing Processes
The manufacturing processes for most of our friction products and performance brake products
are similar. In general, all use composite materials or metal alloys in powder form to make high
quality friction components. The basic manufacturing steps of blending/compounding,
molding/compacting, sintering (or bonding) and secondary machining/treatment are as follows:
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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 customers 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. |
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Molding/compacting: At room temperature, a specific amount of a
metal powder alloy and other materials are compacted under
pressure into a desired shape. |
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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. The friction composite part is also
bonded directly to a steel plate or core, creating a strong
continuous metallic part. |
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Secondary machining/treatment: If required by customer
specifications, a 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 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 cellulose 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
fuel cell manufacturing processes utilize forms of blending, molding and
the secondary machining processes described above.
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 design and 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 and a variety of electronic measuring equipment and
computer-controlled testing machines. We have also established quality control programs within each
of our facilities to detect and prevent potential quality problems.
We utilize Six Sigma and lean manufacturing initiatives focused on creating a culture of
continuous improvement. These tools are data-driven programs of continuous improvement designed to
eliminate waste, reduce process variations, improve productivity, and eliminate costs throughout
the organization.
Our Global Operations
Net sales from our international manufacturing facilities represented $46.9 million, or 27.2%
of our consolidated net sales in 2009 compared to $112.2 million or 41.6% of our consolidated net
sales in 2008. In addition to the United States, we operate friction manufacturing facilities in
Orzinuovi, Italy, Suzhou, China, and Ontario, Canada. We also operate sales offices in Russia,
India and Mexico.
Sales by Geographic Location of our Manufacturing Facilities
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% of Sales |
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Location |
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2009 |
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2008 |
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United States |
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72.8 |
% |
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58.4 |
% |
Italy |
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22.9 |
% |
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36.4 |
% |
Other foreign |
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4.3 |
% |
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5.2 |
% |
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Total |
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100.0 |
% |
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100.0 |
% |
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For
information regarding our net sales and total assets by geographic area see Note 16
Principal Markets and Geographic Disclosures in the accompanying Consolidated Financial
Statements of this Form 10-K. Information related to economic, regulatory and other risks
associated with international operations is included in Item 1A. Risk Factors.
7
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 Boeing Companys commercial aircraft and certain of Bombardiers
Canadair regional jet series of commuter aircraft. Our product is also being installed on 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.
Our expenditures for product research and development and engineering were $4.7 million, or
2.7% of net sales, for the year ended December 31, 2009 compared with $5.4 million, or 2.0% of net
sales, in 2008.
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 products. We believe that more than 80% of our sales are from products and
materials for which we are the sole source provider for the specific customer application. Our
predecessors developed, and we continued to build relationships with a number of customers dating
back over 50 years. Our commitment to quality, service and on-time delivery has enabled 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.
We sell our friction products to a diversified group of original equipment manufacturers,
second tier component suppliers, retailers and distributors in a wide variety of markets. Our top
five customers represented 44.5% of our consolidated net sales in 2009 compared to 43.9% of our
consolidated net sales in 2008. Our largest customer, Caterpillar, represented approximately 17.3%
of our consolidated net sales in 2009 and 19.1% in 2008.
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 Russia, India and Mexico. 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.
Our Competition
Our success depends on our ability to provide superior solutions for customer applications
while providing timely delivery and consistent quality capability, particularly for original
equipment manufacturing customers. For the aftermarket we must offer a quality product,
consistent with Hawks reputation, together with prompt delivery for a wide variety of aftermarket
applications.
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, developing brake and transmission systems can begin
several years before full-scale production due to the testing
regiments required by the manufacturers.
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 for which we supply friction materials, however they are generally more expensive. The
carbon-carbon brakes are typically used on wide-body aircraft, such as the Boeing 747, 767, 777 and
787, and on military aircraft, where the advantages in reduced weight may justify the additional
expense.
8
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. 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 allocation among their customers to other purchasers, interruptions in
production by suppliers and changes in exchange rates and worldwide price and demand levels.
Recently, we have experienced an increase in our lead times related to deliveries of certain grades of steel
because many mills continue to ration their capacity levels. We have taken actions to address these market dynamics
such as dual-sourcing the supply of our key raw materials. Although alternate sources generally
exist for most of our key raw materials, qualification of these sources could take a year or more.
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 position or results of operations
by decreasing our profit margins and by hindering our ability to deliver products to our customers
on a timely basis.
Government Regulation of Our Businesses
Each aircraft braking system, including the friction products supplied by us, must meet
stringent FAA criteria and testing requirements. We have been able to meet these requirements in
the past, and we continuously review FAA compliance procedures to help ensure our continued and
future compliance.
Environmental, Health and Safety Matters
We are subject to 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 reviewed 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. We are not aware of any instance in which we
have contravened federal, state, or local provisions enacted for or relating to protection of the
environment or in which we otherwise may be subject under environmental laws to liability for
environmental conditions that could materially affect operations. Our costs of complying with
environmental, health and safety requirements have not been material.
We do not believe that existing or pending climate change legislation, regulation, or
international treaties or accords are reasonably likely to have a material effect in the
foreseeable future on our business or markets that we serve, nor on our results of operations,
capital expenditures or financial position. We will continue to monitor emerging developments in
this area.
Our Intellectual Property
We own or are licensed to use various intellectual property rights, including patents,
trademarks and trade secrets. Our federally registered trademarks include Hawk®,
Wellman Friction Products®, Wellman Products Group®, SK Wellman®,
Hawk Brake®, Hawk Performance®, Fibertuff®, Feramic®
and VelveTouch®. 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. While such intellectual property rights are
important to us, we do not believe that the loss of any individual property right would have a
material adverse impact on our overall business.
9
Personnel
At December 31, 2009, we had 619 domestic employees and 334 international employees at our
operations.
Approximately 210 employees at our Orzinuovi, Italy facility are represented by a national
mechanics union agreement that expires in December 2012 and approximately 25 employees at our
Akron, Ohio facility are covered under
a collective bargaining agreement with the United Automobile Workers expiring in July 2012.
Additionally, 205 of our Italian employees are also covered by an internal facility agreement that
expires in December 2012. Our labor relations are generally satisfactory, and there have been no
significant work stoppages in recent years.
This discussion includes forward-looking statements which are subject to certain risks and
uncertainties as discussed in Item 2 Managements Discussion and Analysis of Financial Position
and Results of Operations and elsewhere in this report.
Worldwide economic conditions and credit tightening could adversely affect our results of
operations and financial position.
Our business may be adversely impacted by changes in the United States or global economic
conditions, including inflation, deflation, interest rates, the ability of capital, consumer
spending rates, energy availability and costs, and the effects of governmental initiatives to
manage economic conditions. Volatility in financial markets and the deterioration of national and
global economic conditions could materially adversely impact our operations, financial results or
liquidity including the following: the financial stability of our customers or suppliers may be
compromised, which could result in additional bad debt for us or non-performance by suppliers; it
may become more costly or difficult to obtain financing or refinance our debt in the future; the
value of our assets held in pension plans may decline; and/or our assets may be impaired and
subject to write down or write off.
Uncertainty about global economic conditions may cause decrease in purchases or usage of our
products by customers; reduction in purchases of our products by our customers due to their efforts
to reduce inventory and conserve cash or their inability to obtain financing; disruption in our
business due to our inability to obtain raw material from our suppliers; and/or decreased profit
margins due to less demand for our products. A further deterioration in economic conditions would
likely exacerbate these adverse effects and could result in a wide-ranging and prolonged impact on
general business conditions, thereby negatively impacting our business, results of operations and
financial position.
We may not fully realize the benefits from our cost reduction initiatives and efforts to increase productivity
Our ongoing cost reduction initiatives may not produce anticipated results. No assurance can
be given that the implementation of the cost reduction initiatives will generate all of the
anticipated cost savings and other benefits or that future or additional measures are not required.
We may have incorrectly anticipated the extent and term of the market decline and weakness for our
products and we may be forced to restructure further or may incur future operating charges due to
poor business conditions.
We are the subject of investigations by the Securities and Exchange Commission (SEC) and the
Department of Justice (DOJ) which may harm our business and results of operations.
As we have previously disclosed, the SEC provided Hawk with a formal order of private
investigation that relates to the informal inquiry commenced by the SEC. The investigation
concerns activity from June 2006 involving (1) Hawks preparations for compliance with Section 404
of the Sarbanes-Oxley Act of 2002 (Section 404), (2) the maintenance and evaluation of the
effectiveness by Hawk of disclosure controls and procedures and internal controls over financial
reporting, (3) transactions in Hawks common stock by a stockholder that is not affiliated with
Hawk, including the impact of those transactions on the date when Hawk would have been required to
comply with Section 404, (4) the calculation of the amount of Hawk common stock held by
non-affiliates and the effect of the calculation on the date when Hawk would have been required to
comply with Section 404, (5) communications between Hawk and third parties regarding Section 404
compliance and (6) Hawks periodic disclosure requirements related to the foregoing. We fully
cooperated with the informal inquiry and continue to cooperate fully with the formal investigation
by the SEC.
10
The
staff of the SEC (the Staff) has orally confirmed that it does not intend to recommend that any enforcement action
be instituted against Hawk. However, there can be no assurance that the Staff will not reverse its
decision and ultimately decide to recommend such an action, or that the SEC itself will not
institute such an action.
As previously disclosed, Hawk has also been contacted by the DOJ in connection with the DOJs
investigation.
We cannot predict the outcome of any of these investigations. We will continue to incur
additional expenses related to the SEC and DOJ investigations, and the expenses may be substantial,
including indemnification costs for which we may be responsible. In the event that there is an
adverse development in connection with the SEC or DOJ investigations, our business and results of
operations may be adversely impacted. Furthermore, responding to the SEC and DOJ investigations
may require significant diversion of managements attention and resources.
We have broad discretion over the use of our cash and short-term investments.
We have broad discretion over the use of our cash and short-term investments, provided we
comply with the terms of our senior notes and our bank facility. We continue to explore options to
utilize our cash and short-term investments, including stock repurchases, senior note repurchases
and acquisitions. The terms of any investment or transaction including acquisitions have not yet
been determined, and no assurances can be made as to the structure, price or other terms of such
investment or transaction, the impact of such investment or transaction on our business, results of
operations and financial position or that such investment or transaction will be available to us on
favorable terms or at all. If we fail to apply these funds effectively, our business, results of
operations and financial position may be adversely affected.
Our gross profit margins are subject to fluctuation because of product mix.
Certain of our products have lower gross profit margins than our other products. Our
consolidated gross margin has benefited from the impact of the sale of higher gross margin
products. We cannot guarantee that our product mix will continue to be made up of higher gross
margin product sales in the future.
We operate in a highly competitive industry, which may prevent us from growing and may decrease our
business.
We operate in an industry that is highly competitive and fragmented, and there are many small
manufacturers in our industry. Our larger competitors may have greater financial resources to
devote to manufacturing, promotion and sales, which could adversely affect our customer
relationships or product mix.
We compete for new business primarily when our existing customers develop new applications or
redesign existing applications, which may involve lengthy periods of development and testing. For
example, developing brake and transmission systems can begin several years before full-scale
production due to the testing regiments required by the manufacturers. Although we have
successfully obtained this business from our customers in the past, we may be unable to obtain this
business in the future, which could adversely affect our financial position, results of operations
and prospects. 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, customer service and overall
management.
Some of our competitors use different technologies, such as carbon composite friction material
for aircraft braking system components. Our competitors use of different technology may adversely
affect our ability to compete and negatively impact our financial position, results of operations
and prospects.
In addition, we may lose business to competitors that may be able to offer products at lower
costs. Some competitors may be able to transfer the manufacturing of their products to lower wage
locations resulting in lower production costs which may be passed through to customers. Increased
competition may exert strong pressures on our profitability and impair our ability to successfully
grow.
11
Labor disputes and work stoppages at our unionized facilities could delay or impede our production,
reduce sales of our products and increase costs.
The costs of labor are generally increasing, including the costs of employee medical and
benefit plans. As of December 31, 2009, approximately 25.0% of our employees were represented by
unions, the majority of our which are located in our Orzinuovi, Italy facility. We cannot be
certain that we will be able to negotiate new agreements or extensions with the unions on favorable
terms when they expire. In particular, renewal of collective bargaining agreements typically
involves negotiations, with the potential for work stoppages or increased costs at affected
facilities. Instability in our union relationships could delay the production and/or development
of our products, which could strain relationships with customers and cause a loss of revenues which
would adversely affect our operations.
We are subject to governmental regulations that may affect our ability to implement our business objectives.
Every aircraft braking system, including those containing components supplied by us, must
satisfy FAA criteria and testing requirements. If we fail to meet these requirements or any new or
changed requirements, then our results of operations may be adversely affected or we may not be
able to meet our business objectives. There can be no assurance that FAA review of an aircraft
braking system containing components supplied by us will result in a favorable determination or
that we or our customers will continue to meet FAA criteria and testing requirements, which are
subject to change at the discretion of the FAA.
Environmental and health and safety liabilities and requirements could require us to incur material costs.
We are subject to various U.S. and foreign laws and regulations relating to environmental
protection and worker health and safety, including those governing:
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Discharges of pollutants into the air and water; |
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The management and disposal of hazardous substances; and |
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The cleanup of contaminated properties |
The nature of our operations exposes us to the risk of liabilities or claims with respect to
environmental matters, including on-site and off-site disposal matters. Future events could require
us to make additional expenditures to modify or curtail our operations, install pollution control
equipment or investigate and clean up contaminated sites, such as:
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the discovery of new information concerning past releases of hazardous substances; |
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the discovery or occurrence of compliance problems relating to our operations; and |
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changes in existing environmental laws or their interpretation. |
We are also subject to the federal Occupational Safety and Health Act and similar foreign and
state laws. The nature of our operations, the extensive uses of our existing and former facilities,
and the operations of prior owners and operators expose us to the risk of liabilities or claims
concerning environmental and health and safety laws and regulations. We are not aware of any
instance in which we have contravened federal, state, or local provisions enacted for or relating
to protection of the environment or in which we otherwise may be subject under environmental laws
to liability for environmental conditions that could materially affect operations.
We are dependent upon the availability of raw materials, and we may not be able to receive
favorable prices for, or continued supplies of, raw materials, which may affect our ability to
obtain enough supplies to conduct our business.
We require substantial amounts of raw materials, including copper powders, steel and
custom-fabricated cellulose sheet. 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 allocation to other purchasers, interruptions in production by suppliers
and changes in exchange rates and worldwide price and demand levels. 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 position or results or operations by decreasing our
profit margins and by hindering our ability to deliver products to our customers on a timely basis.
12
Recently, we have experienced an increase in our lead times related to deliveries of certain
grades of steel because many mills continue to ration their capacity levels. We have taken actions
to address these market dynamics such as dual-sourcing the supply of our key raw materials.
Although alternate sources generally exist for most of our key raw materials, qualification of
these sources could take a year or more. The loss of a significant supplier or the inability of a
supplier to meet our performance and quality specifications or delivery schedules could affect our
ability to complete our
contractual obligations to our customers on a satisfactory, timely or profitable basis. These
events may adversely affect our operating results or damage our reputation and relationships with
our customers, which could have a material adverse effect on our business, financial position or
results of operations.
We are subject to risks associated with international operations.
We conduct business outside the United States which subjects us to the risks inherent in
international operations. Our net sales from our international manufacturing facilities represented
$46.9 million, or 27.2% of our consolidated net sales, for the year ended December 31, 2009
compared to $112.2 million, or 41.6% of our consolidated net sales for the year ended December 31,
2008.
Risks inherent in international operations include the following:
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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; |
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fluctuations in international currency 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; |
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unexpected adverse changes in foreign laws or regulatory requirements may occur; |
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there are difficulties inherent in the management and operation of an enterprise spread over various countries; |
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there are complexities associated with the necessity of using non-U.S. representatives and consultants; |
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there may be uncertainty in the ability of non-U.S. customers to finance purchases; |
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compliance with a variety of foreign laws and regulations, as well as U.S. laws affecting the activities of
U.S. companies abroad may be difficult; and |
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the overlap of different tax laws may subject us to additional taxes. |
While the impact of these factors is difficult to predict, any one or more of these factors
could adversely affect our operations in the future.
We are dependent on a small number of customers for a large portion of our sales.
In 2009, our top five customers made up approximately 44.5% of our total net sales. Our
largest customer, Caterpillar, accounted for approximately 17.3% of our total net sales in 2009.
While we sell multiple product applications to each of our top five customers, the loss of any of
those customers or significant changes in prices or other terms with any of those customers could
adversely affect our business, results of operations and financial position. Additionally,
business layoffs, downsizing, industry slowdowns and other similar factors that affect our
customers may adversely impact our business and financial position.
13
We depend on our senior management team and other skilled and experienced personnel to operate our
business effectively, and the loss of any of these individuals could adversely impact our business
and our future financial conditions or results of operations.
Our performance depends on our ability to retain and motivate our executive officers and key
employees. The loss of any of our executive officers or other key employees could materially and
adversely affect our financial position, results of operations and prospects. We have employment
agreements with Ronald E. Weinberg, Chairman of the Board and Chief Executive Officer, B.
Christopher Disantis, President and Chief Operating Officer and Joseph J. Levanduski, Senior Vice
President Director of Corporate Development. Hawk maintains a key person life insurance policy
on the life of Mr. Weinberg in the face amount of $1.0 million.
We are also dependent on the skills and experience of other skilled and experienced personnel.
These individuals possess sales, marketing, manufacturing, logistical, financial, business
strategy and administrative skills that are important to the operation of our business. The loss
of any of these individuals or an inability to attract, retain and maintain additional personnel
could prevent us from implementing our business strategy and could adversely impact our business
and our future financial condition or results of operations. We cannot assure that we will be able
to retain all of our existing senior management team or to attract additional qualified personnel
when needed.
Our existing preferred shareholders have the ability to exert voting control
with respect to the election of directors.
Ronald E. Weinberg, Chairman of the Board and Chief Executive Officer, Norman C. Harbert,
Chairman Emeritus and Founder, and Byron S. Krantz, Secretary and Director, beneficially own 45%,
45% and 10%, respectively, of the outstanding shares of our Series D preferred stock as well as
16%, 14% and 3%, respectively, of our Class A common stock and to vote as a separate class on
fundamental corporate transactions. The holders of our Series D preferred stock are entitled to
elect a majority of the members of our Board of Directors. Accordingly, if any two of these
shareholders vote their shares of Series D preferred stock in the same manner, they will have
sufficient voting power (without the consent of our holders of Class A common stock) to elect a
majority of the Board of Directors and to thereby control and direct the policies of the Board of
Directors and, in general, to determine the outcome of various matters submitted to the
stockholders for approval, including fundamental corporate transactions.
Significant changes in discount rates, actual investment return on pension assets and other factors
could affect our earnings, equity and pension contributions in future periods.
We have defined benefit pension plans for certain of our employees in the United States and
Canada. Our earnings may be positively or negatively impacted by the amount of income or expense we
record for our pension benefit plans. Generally accepted accounting principles in the United
States of America (GAAP) require that we calculate income or expense for the plans using actuarial
valuations. These valuations reflect assumptions relating to financial market and other economic
conditions. Changes in key economic indicators can change these assumptions. The most significant
year-end assumptions used to estimate pension income or expense for the following year are the
discount rate and the expected long-term rate of return on plan assets. In addition, we are
required to make an annual measurement of plan assets and liabilities, which may result in a
significant change to equity through a reduction or increase in Other comprehensive (loss) income.
For a discussion of how our financial statements can be affected by pension plan accounting
policies, see Managements Discussion and Analysis of Financial Position and Results of
Operations Critical Accounting Policies Pension Benefits. Although GAAP expense and pension
contributions are not directly related, the key economic factors that affect GAAP expense would
also likely affect the amount of cash we would contribute to the pension plans. Potential pension
contributions include both mandatory amounts required under federal law and discretionary
contributions to improve the plans funded status.
Business disruptions could seriously affect our future sales and financial condition or increase
our costs and expenses.
Our business may be impacted by disruptions including, but not limited to, threats to physical
security, information technology attacks or failures, damaging weather or other acts of nature and
pandemics or other public health crises. Any of these disruptions would affect our internal
operations or the ability to provide products to our customers, and could impact our sales,
increase our expenses or adversely affect our reputation or our stock price.
14
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ITEM 1B. |
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UNRESOLVED STAFF COMMENTS |
None.
Hawks world headquarters is located in Cleveland, Ohio. We maintain manufacturing, research
and development, sourcing, sales and administrative facilities at 11 locations in 7 countries.
Our manufacturing, research and development and administrative operations are conducted
through the following facilities, all of which are owned by us except as noted below:
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Approximate |
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Location |
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Square Footage |
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Principal Functions |
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Catoosa (Tulsa), Oklahoma(1) |
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240,000 |
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Manufacturing of friction products, metal stampings and support |
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Medina, Ohio |
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219,000 |
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Manufacturing of friction products, product engineering, and support |
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Orzinuovi, Italy |
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106,000 |
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Manufacturing of friction products, sales and marketing, product application development, customer service and support and administration |
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Suzhou, China(1) |
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73,000 |
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Manufacturing of friction products, sales and marketing, customer service and support, and administration |
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Akron, Ohio |
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71,000 |
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Manufacturing of metal stampings |
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Solon, Ohio(1) |
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58,000 |
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Research and development, sales and marketing, customer service and support, and administration |
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Concord, Ontario, Canada(1) |
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15,000 |
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Manufacturing of friction products, distribution and warehousing, customer service and support |
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Cleveland, Ohio(1) |
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9,000 |
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Principal executive offices |
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. Utilization of our
manufacturing and research and development facilities may vary with sales to customers and other
business conditions; however, no major facility is significantly idle. We do not anticipate any
difficulty in renewing existing leases as they expire or in finding alternative facilities.
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ITEM 3. |
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LEGAL PROCEEDINGS |
We are involved in 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.
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As we previously disclosed, the Division of Enforcement of the SEC provided Hawk with a formal
order of private investigation that relates to an investigation commenced by the SEC. The
investigation concerns activity beginning in June 2006 involving (1) Hawks preparations for
compliance with Section 404 of the Sarbanes-Oxley Act of 2002, (2) the maintenance, and evaluation
of the effectiveness, by Hawk of disclosure controls and procedures and internal control over
financial reporting, (3) transactions in Hawks common stock by a stockholder that is not
affiliated with Hawk, including the impact of those transactions on when Hawk would have been
required to comply with Section 404, (4) the calculation of the amount of Hawk common stock held by
non-affiliates and the effect of the calculation on the date when Hawk would have been required to
comply with Section 404, (5) communications between Hawk and third parties regarding Section 404
compliance and (6) Hawks periodic disclosure requirements related to the foregoing. As previously
disclosed, Hawk has also been contacted by the DOJ in connection with the DOJs related
investigation. |
15
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On August 4, 2009, Joseph J. Levanduski, our then Chief Financial Officer, received a
notification from the Staff, commonly referred to as a Wells Notice. This
notice indicates that the Staff intends to recommend to the Commissioners of the SEC that the SEC
bring a civil injunctive action and institute a follow-on public administrative proceeding pursuant
to Rule 102(e) of the SECs Rules of Practice against Mr. Levanduski alleging that he aided and
abetted violations of Section 17(a) of the Securities Act of 1933, as amended, and Sections 9(a)(2)
and 10(b) of the Exchange Act and Rule 10b-5 thereunder and violated SEC Regulation FD. Hawk
believes that the violations alleged to have been committed by Mr. Levanduski relate to events that
are alleged to have occurred on June 30, 2006. However, the SEC allegations may relate to a
different date or time period. There can be no assurance that the SEC will not issue a Wells
Notice to Hawk in connection with the SEC investigation. |
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Under the process established by the SEC, before the Staff can make a formal recommendation
regarding what action, if any, should be taken by the Commissioners of the SEC with respect to Mr.
Levanduski, he has the opportunity to engage in discussions with, and make a submission to, the SEC
regarding whether a civil injunctive action should be filed. Mr. Levanduski has made this
submission to the SEC on October 2, 2009. |
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The Staff has orally confirmed that it does not intend to recommend that any enforcement action
be instituted against Hawk. However, there can be no assurance that the Staff will not reverse its
decision and ultimately decide to recommend such an action, or that the SEC itself will not
institute such an action. |
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Hawk has no reason to believe that the SEC and DOJ investigations will result in any
restatement of Hawks financial statements for any period. |
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We cooperated fully with the inquiries by the SEC and the DOJ. Although Hawk believes that
insurance proceeds are available, Hawk may continue to incur additional expenses related to the
investigations that are not covered by insurance. The expenses may be substantial, including
indemnification costs for which Hawk may be responsible. Any adverse development in connection
with the SEC or DOJ investigations could adversely impact Hawks business and results of
operations. |
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As previously disclosed, on October 16, 2007, a lawsuit captioned Paul Mickle v. Wellman
Products Group, LLC, Case No. CJ 2007 06914 was filed in the District Court for Tulsa County,
Oklahoma. Mr. Mickle alleges violation of wage and hour laws by one of our subsidiaries, Wellman
Products Group, Inc. (Wellman). The case purports to be a class action on behalf of Mr. Mickle and
other allegedly similarly situated employees. Discovery as to the class certification is
finished. The plaintiffs have been granted their Motion for Class Certification, we disagree with
the class certification and filed an appeal on January 7, 2010. Briefing on the appeal of the
class certification is on-going as we continue to vigorously contest this lawsuit. |
In our opinion, the outcome of these lawsuits will not have a material adverse effect on our
financial condition, cash flows or results of operations, except as described above.
Part II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
Our Class A common stock has traded publicly under the symbol HWK since May 12, 1998. Prior
to October 1, 2008, our stock was traded on the American Stock Exchange (AMEX). NYSE Euronext
acquired the AMEX on October 1, 2008. Our common stock is now traded on the NYSE Amex. The
following table sets forth, for the fiscal periods indicated, the high and low closing prices of
our common stock.
16
Quarterly Stock Prices
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Quarter Ended |
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High |
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Low |
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2009 |
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December 31, 2009 |
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$ |
18.35 |
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$ |
13.68 |
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September 30, 2009 |
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$ |
15.38 |
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$ |
13.40 |
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June 30, 2009 |
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$ |
16.00 |
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$ |
11.61 |
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March 31, 2009 |
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$ |
18.15 |
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$ |
9.65 |
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2008 |
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December 31, 2008 |
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$ |
20.25 |
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$ |
11.40 |
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September 30, 2008 |
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$ |
24.70 |
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$ |
15.57 |
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June 30, 2008 |
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$ |
18.84 |
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$ |
15.28 |
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March 31, 2008 |
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$ |
20.20 |
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$ |
15.32 |
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The closing sale price for our common stock on December 31, 2009 was $17.61.
The following table provides information about purchases by Hawk of equity securities
registered under the Securities Exchange Act of 1934 during the three months ended December 31,
2009.
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|
Approximate Dollar |
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|
|
Total Number of |
|
|
Value of Shares That |
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|
Total |
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|
|
|
|
|
Shares Purchased |
|
|
may yet be |
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|
Number of |
|
|
Average |
|
|
as Part of Publicly |
|
|
Purchased Under the |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced Plans |
|
|
Plans or Programs(2) |
|
Period |
|
Purchased |
|
|
per Share |
|
|
or Programs(1) |
|
|
(in millions) |
|
|
10/1/09 to 10/31/09 |
|
|
|
|
|
|
|
|
|
|
988,822 |
|
|
1.7 million |
|
11/1/09 to 11/30/09 |
|
|
28,566 |
|
|
$ |
16.49 |
|
|
|
1,017,388 |
|
$ |
1.2 million |
|
12/1/09 to 12/31/09 |
|
|
55,523 |
|
|
$ |
16.49 |
|
|
|
1,072,911 |
|
$ |
0.3 million |
|
|
|
|
(1) |
|
On November 24, 2008, we announced a plan, approved by our Board of Directors, to
repurchase up to $15.0 million of our shares of Class A common stock in the open market,
through privately negotiated transactions or otherwise, in accordance with securities laws
and regulations (the Repurchase Plan). Under the terms of our indenture relating to the
senior notes as of December 31, 2009, we were permitted to repurchase up to $15.9 million of
our shares of Class A common stock based on our cumulative net income through December 31,
2009. |
|
(2) |
|
After December 31, 2009, the approximate value of additional shares that could be repurchased
pursuant to the Repurchase Plan was $0.3 million. The Plan expires when the aggregate
repurchase price limit is met, unless terminated earlier by our Board of Directors. |
Shareholders of record as of March 8, 2010 numbered 74. We estimate that an additional 1,100
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 on
Class A common stock for the foreseeable future. We intend to retain earnings for the future
operation and expansion of our business. If we were to pay dividends, we are limited to $5.0
million in dividend payments per annum under the terms of our bank facility. In addition, we may
pay dividends only as long as there is no event of default.
17
Performance Graph
The following graph compares the cumulative return on our Class A common stock with the
cumulative total return of the Russell 2000 Index and the S&P Industry Group Index Industrial
Machinery. Cumulative total return for each of the
periods shown in the Performance Graph is calculated from the last sale price of our Class A
common stock at the end of the period and assumes an initial investment of $100 on December 31,
2004 and the reinvestment of any dividends.
18
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ITEM 6. |
|
SELECTED FINANCIAL DATA |
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|
Years ended December 31 |
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2009 |
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|
2008 |
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|
2007 |
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|
2006(4) |
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2005 |
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|
|
(dollars in millions, except per share data) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
172.4 |
|
|
$ |
269.6 |
|
|
$ |
215.9 |
|
|
$ |
199.9 |
|
|
$ |
167.1 |
|
Gross profit |
|
$ |
47.5 |
|
|
$ |
77.1 |
|
|
$ |
51.4 |
|
|
$ |
44.9 |
|
|
$ |
33.7 |
|
Restructuring costs (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5.5 |
|
Income from operations |
|
$ |
16.7 |
|
|
$ |
39.2 |
|
|
$ |
19.5 |
|
|
$ |
15.4 |
|
|
$ |
2.3 |
|
Income (loss) from continuing
operations, after income taxes |
|
$ |
6.5 |
|
|
$ |
22.5 |
|
|
$ |
7.8 |
|
|
$ |
1.6 |
|
|
$ |
(5.7 |
) |
Discontinued operations, after income
taxes |
|
|
(0.1 |
) |
|
|
(1.7 |
) |
|
|
9.5 |
|
|
|
1.4 |
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|
|
4.4 |
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|
|
|
|
|
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|
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|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6.4 |
|
|
$ |
20.8 |
|
|
$ |
17.3 |
|
|
$ |
3.0 |
|
|
$ |
(1.3 |
) |
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|
Earnings (Loss) Per Share: |
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) from continuing
operations per share |
|
$ |
0.77 |
|
|
$ |
2.50 |
|
|
$ |
0.85 |
|
|
$ |
0.16 |
|
|
$ |
(0.66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) from continuing
operations per share |
|
$ |
0.75 |
|
|
$ |
2.40 |
|
|
$ |
0.82 |
|
|
$ |
0.15 |
|
|
$ |
(0.66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings (loss) per share |
|
$ |
0.76 |
|
|
$ |
2.31 |
|
|
$ |
1.91 |
|
|
$ |
0.31 |
|
|
$ |
(0.17 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings (loss) per share |
|
$ |
0.73 |
|
|
$ |
2.21 |
|
|
$ |
1.83 |
|
|
$ |
0.30 |
|
|
$ |
(0.17 |
) |
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|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
7.1 |
|
|
$ |
6.8 |
|
|
$ |
6.6 |
|
|
$ |
6.6 |
|
|
$ |
6.2 |
|
Amortization
(2) |
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.7 |
|
|
|
0.5 |
|
|
|
0.7 |
|
Capital expenditures (including capital
leases and financed capital
expenditures) |
|
|
7.5 |
|
|
|
15.2 |
|
|
|
7.6 |
|
|
|
7.9 |
|
|
|
7.5 |
|
|
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|
|
|
|
|
|
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|
December 31 |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(dollars in millions) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivelants |
|
$ |
47.2 |
|
|
$ |
62.5 |
|
|
$ |
22.0 |
|
|
$ |
6.2 |
|
|
$ |
6.8 |
|
Short-term investments |
|
|
35.9 |
|
|
|
30.8 |
|
|
|
59.0 |
|
|
|
|
|
|
|
|
|
Working capital (3) |
|
|
113.3 |
|
|
|
126.0 |
|
|
|
113.3 |
|
|
|
115.8 |
|
|
|
48.9 |
|
Property plant and equipment, net |
|
|
47.1 |
|
|
|
47.5 |
|
|
|
39.6 |
|
|
|
38.2 |
|
|
|
36.3 |
|
Assets of discontinued operations |
|
|
|
|
|
|
|
|
|
|
6.7 |
|
|
|
94.1 |
|
|
|
100.8 |
|
Total assets |
|
|
204.5 |
|
|
|
240.0 |
|
|
|
219.9 |
|
|
|
229.3 |
|
|
|
226.0 |
|
Liabilities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
1.7 |
|
|
|
14.2 |
|
|
|
16.9 |
|
Total indebtedness (including capital
leases) |
|
|
77.1 |
|
|
|
87.1 |
|
|
|
87.1 |
|
|
|
111.2 |
|
|
|
116.7 |
|
Shareholders equity |
|
|
77.5 |
|
|
|
77.4 |
|
|
|
67.3 |
|
|
|
46.7 |
|
|
|
40.7 |
|
19
|
|
|
(1) |
|
Reflects planning, travel, severance and moving costs associated with the closure of our
Brook Park, Ohio facility and the construction of our new facility in Tulsa, Oklahoma. |
|
(2) |
|
Amortization outlined in this table does not include deferred financing amortization of $0.4
million in each of the years 2009, 2008, 2007, 2006 and 2005, which is included in interest
expense on the respective Consolidated Statements of Operations. |
|
(3) |
|
Working capital is defined as total current assets less total current liabilities. |
|
(4) |
|
Effective January 1, 2006, we adopted new stock compensation guidance and elected to use the
modified prospective transition method, which required that prior period results not be
restated. No stock compensation expense was recognized in net income prior to the adoption of
the new guidance. |
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS |
Cautionary Note Regarding Forward-Looking Statements
Statements that are not historical facts, including statements about our confidence in our
prospects and strategies and our expectations about growth of existing markets and our 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 guarantees of performance. Although we believe that our plans, objectives, intentions
and expenditures reflected in our forward-looking statements are reasonable, we can give no
assurance that our plans, objectives, intentions and expenditures will be achieved. Our
forward-looking statements are made based on expectations and beliefs concerning future events
affecting us and are subject to uncertainties, risks and factors relating to our operations and
business environments, all of which are difficult to predict and many of which are beyond our
control, that could cause our actual results to differ materially from those matters expressed or
implied by our forward-looking statements. These risks and other factors include those listed under
Item 1A Risk Factors and elsewhere in this report.
When considering these risk factors, you should keep in mind the cautionary statements
elsewhere in this report and the documents incorporated by reference. New risks and uncertainties
arise from time to time, and we cannot predict those events or how they may affect us. We assume no
obligation to update any forward-looking statements or risk factor after the date of this report as
a result of new information, future events or developments, except as required by the federal
securities laws.
Results of Operations
Over recent years, we have been executing a strategy designed to focus on friction products.
Our results of operations are affected by a variety of factors, including but not limited to,
general customer demand for our products, competition, raw material pricing and availability, labor
relations with our personnel, political conditions in the countries in which we operate and general
economic conditions. We sell a wide range of products that have a corresponding range of gross
margins. Our consolidated gross profit 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.
We have made a decision to serve the original equipment manufacturers on a global basis by
offering superior technical solutions to their friction needs while providing exceptional
deliveries and quality capability. It is our view that if we can provide these attributes we will
be a formidable competitor on a worldwide basis. For the aftermarket we compete by broadening our
parts catalog to serve targeted new applications and offering prompt delivery. We have numerous
targeted initiatives for each of these areas.
Consolidated
net sales for 2009 decreased to $172.4 million, with net income per diluted share
of $0.73. Demand in most of our markets was lower in 2009 compared to 2008. This decrease was
most pronounced in our largest market, construction and mining. Throughout 2009, we took proactive
measures to reduce costs, including work force reductions,
discretionary spending reductions, and
freezing pay rates for all salaried employees and we continued to focus on lean manufacturing in order
to better position ourselves to take advantages of possible opportunities when the markets
improved. We focused on cash generation from continuing operations, including efforts to reduce
our overall working capital position and reduce capital expenditures, to ensure that we were
positioned to respond to the challenges of the current economic environment. In 2010, as market
conditions develop, we will continue to assess options to further manage our cost structure.
20
Recent Events
|
|
|
On February 8, 2010, we announced that we were soliciting consents from holders of $75.7
million of our senior notes to amend the indenture governing the senior notes. The
amendment will allow us to repurchase up to $20.0 million of our outstanding common stock.
The consent solicitation provided for the payment of a consent fee for valid consents
received by us by 5:00 p.m. on February 22, 2010. As of that date, $75.6 million of the
senior notes consented and a fee of $1.5 million was paid to the consenting senior note
holders. We have entered into a supplemental indenture to allow for the stock repurchase. |
|
|
|
On February 19, 2010, our Board of Directors approved a new plan to repurchase up to
$25.0 million of our common stock. Share repurchases are conditioned on our compliance
with covenants in our domestic bank facility and indenture. Under our domestic bank
facility, we can repurchase the full $25.0 million of our common stock. As of March 8,
2010, under the covenant formula applicable to stock repurchases in the indenture,
including the recent amendment to the indenture which allowed for a repurchase of up to
$20.0 million of stock, we can repurchase $20.9 million of our common stock. |
|
|
|
Under the program, our shares can be purchased from time to time in the open market, through
privately negotiated transactions, through a trading plan satisfying the safe harbor
provisions of Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, or
otherwise in accordance with securities laws and regulations. The timing and amount of any
repurchases will be determined by our management, based on its evaluation of market
conditions, share price and other factors. We have no obligation to repurchase shares under
the repurchase program and the timing, actual number of shares to be purchased and the
purchase prices to be paid by us will depend in part on market conditions. |
|
|
|
On March 2, 2010, we completed the acquisition of Sangte Plate Manufacturing Company,
Ltd., located near our existing Chinese facility in Suzhou, China, as part of our overall
strategy to capture more share of the Asian friction market. This acquisition was
determined to be insignificant for financial reporting purposes. |
Outlook for 2010
Coming off a challenging year in 2009 that resulted in a significant decline in volume from
2008 record levels, we expect 2010 to reflect a modest recovery in the general economy and the
markets we serve. As a result, we expect our revenues to be within a range of $190.0 million and
$200.0 million, which represents an increase of between 10.2% and 16.0% from 2009 revenues of
$172.4 million.
In 2009, we instituted cost reduction initiatives in response to the decline in volumes. Some
of the cost reductions involving employee compensation and benefit programs related to wages and
401(k) programs will be reinstated during the course of 2010 as we take steps to ensure that we
remain competitive in attracting and retaining the key employees necessary to execute our
long-term strategic plan. These incremental costs, general inflationary expectations, and mix of
product sales will provide pressure on our operating margins, that
are expected to be offset by increased
volume levels in 2010.
Based on these factors, we are guiding to 2010 income from operations between $18.0 million and
$19.0 million, which represents an increase of 7.8% and 13.8% over 2009 income from operations of $16.7
million.
As we continue to execute our long-term strategic plan, we are expecting to invest between
$8.0 million and $10.0 million in capital spending to increase our technical capabilities at all of
operational units, including China, to advance our information systems, to support our lean
manufacturing initiatives and theory of constraints supply chain initiatives, and to take the next
steps in establishing and broadening our presence in India.
We expect depreciation and amortization to be approximately $8.5 million. Our 2010 world-wide
effective tax rate will be approximately 40%.
Critical Accounting Policies
Some of our accounting policies require the application of significant judgment by us in the
preparation of our consolidated 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, we evaluate our
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.
21
We review our 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. Our critical accounting policies
include the following:
|
|
|
Accounts Receivable. We maintain an allowance for doubtful accounts for estimated
losses from the failure of our customers to make required payments for products delivered.
We estimate this allowance based on the age of the related receivable, knowledge of the
financial condition of our customers, review of historical receivable and reserve trends
and other pertinent information. In cases where we are aware of circumstances that may
impair a specific customers ability to meets its financial obligations subsequent to the
original sale, we record an allowance against amounts due, and thereby reduce the net
recognized receivable to the amount we reasonably believe will be collected. If the
financial condition of our customers deteriorates or we experience an unfavorable trend in
receivable collections in the future, additional allowances may be required. Historically,
our reserves have approximated actual experience. |
|
|
|
Revenue Recognition. Revenue from the sale of our products is recognized when all of
the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
shipment has occurred, (iii) the price to the customer is fixed or determinable, and (iv)
collection of the resulting receivable is reasonable assured. Revenue is generally
recognized at the point of shipment; however in certain instances as shipping terms
dictate, revenue is recognized when the product reaches the point of destination, and title
to our customer is transferred. Substantially all of our revenues are derived from fixed
price purchase orders. |
|
|
|
Inventory. Inventories are stated at the lower of cost or market. Cost includes
materials, labor and overhead and is determined by the first-in, first-out (FIFO) method.
Fixed manufacturing overhead costs are allocated to inventory based on normal production
capacity and abnormal manufacturing costs are recognized as period costs. We review the
net realizable value of inventory in detail on an on-going basis, with consideration given
to deterioration, obsolescence, and other factors. If actual market conditions differ from
those projected by management, and our estimates prove to be inaccurate, write-downs of
inventory values and adjustments to cost of sales may be required. Historically, our
reserves have approximated actual experience. |
|
|
|
Fair Value Disclosures. Our financial instruments include cash and cash equivalents,
short and long-term investments, accounts receivable, accounts payable, short and long-term
notes receivable and debt instruments, certain of which are recorded at fair value. We
have classified our financial assets as Level 1, 2 or 3 within the fair value hierarchy
based on the inputs used to determine their fair value. Fair values determined by Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that we have the ability to access. Fair values determined by Level 2 inputs
utilize data points that are observable such as quoted prices, interest rates and yield
curves. Fair values determined by Level 3 inputs utilize unobservable inputs supported by
little or no market activity and that are significant to the fair value of the assets or
liabilities. Excluding cash equivalents, the largest portion of our short-term investments
are comprised of investments that may be sensitive to changes in economic factors such as
interest rates or credit spreads. |
|
|
|
Investments. As of December 31, 2009 and December 31, 2008, we accounted for all of our
short-term investments as available-for-sale. We report our available-for-sale securities
at fair value in our Consolidated Balance Sheets with unrealized holding gains and losses,
net of tax, included in Accumulated other comprehensive (loss) income. Dividend and
interest income, including the amortization of any discount or premium, as well as realized
gains or losses, are included in Interest income in our Consolidated Statements of
Operations. We periodically evaluate our investments for other-than-temporary impairment.
We did not record any other-than-temporary impairment of our short-term investments in the years
ended December 31, 2009, 2008 or 2007. |
|
|
|
Long-Lived Assets (including Tangible and Finite-Lived Intangible Assets). To conduct
our global business operations and execute our business strategy, we acquire tangible and
intangible assets, including property, plant and equipment and finite-lived intangible
assets. At December 31, 2009, the net carrying amount of these long-lived assets totaled
$53.1 million. The determination of useful lives for depreciation and amortization
purposes and whether or not these assets are impaired involves the use of accounting
estimates and assumptions, changes in which could materially impact our financial condition
or results of operations if actual results differ from such estimates and assumptions. We
periodically evaluate the recovery of the carrying amount of our long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. The principal factors we consider in deciding when to perform an impairment
review include significant changes or planned changes in our use of the assets, significant
changes in the economic performance of the businesses that utilize the assets and other
factors. |
22
|
|
|
If we determine that an impairment review is necessary, recoverability of assets is measured
by comparing the carrying amount of the asset group to the estimated future undiscounted
cash flows. If the carrying amount exceeds the estimated future undiscounted cash flows,
the asset group is considered to be impaired. The impairment is then measured as the
difference between the carrying amount of the asset group and its fair value. Fair value is
measured based on quoted market prices in active markets, if available. If quoted market
prices are not available, the estimate of fair value is based on various valuation
techniques, including the discounted value of estimated future cash flows. We did not find
it necessary to perform an impairment review of our tangible or finite lived intangible
assets in the years ended December 31, 2009, 2008 or 2007. |
|
|
|
Pension Benefits. We maintain a number of defined benefit plans and one defined
contribution plan to provide retirement benefits for employees. These plans are maintained
and minimum contributions are made in accordance with the requirements of the Employee
Retirement Income Security Act of 1974 (ERISA) and the Ontario Pension Benefits Act and
Regulation. We consult with outside actuaries as to the appropriateness for many of the
assumptions used in determining the benefit obligations and the annual expense for our
pension plans. All significant assumptions are evaluated at least annually. |
|
|
|
For financial reporting purposes, net periodic pension expense is calculated based upon a
number of actuarial assumptions, including an expected long-term rate of return on plan
assets and a discount rate for plan obligations. At the end of each year, the expected
return on plan assets is determined based on the expected return of the various asset
classes in the plans portfolio and the targeted allocation of plan assets. We use the
target plan asset allocation because we rebalance our portfolio to target and we currently
have no plans to change our target plan asset allocation in the future. The asset return is
developed using historical asset return performance as well as current and anticipated
market conditions such as inflation, interest rates and market performance. We assumed that
the expected weighted average long-term rate of return on plan assets would be 8.25% for our
domestic plans at December 31, 2009 and 2008. 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 and produces the expected
return on plan assets that is included in net pension expense. The difference between this
expected return and the actual return on plan assets is recorded to Accumulated other
comprehensive (loss) income, and the amortization of the net deferral of past losses will
increase future pension expense. |
|
|
|
To develop the discount rate assumption to be used for our domestic pension plans, we match
projected pension payments to the yield derived from the Citigroup Pension Discount Curve (a
spot-rate yield curve) that contains a portfolio of available non-callable bonds rated AA or
higher with comparable maturities. At December 31, 2009, the result supported a discount
rate of 6.0% for our domestic pension plans. |
|
|
|
|
A similar approach to determining the long-term rate of return and discount rates in the
U.S. was utilized for our Canadian pension plan.
|
23
|
|
|
Changes in net periodic pension expense may occur in the future due to changes in our
expected long-term rate of return on plan assets and discount rate resulting from economic
events. The discount rate assumption is
selected each year based on market conditions in effect as of the disclosure date. The rate
selected is used to measure plan liabilities as of the disclosure date and for calculating
the following years pension expense. The expected long-term rate of return on plan assets
assumption, although reviewed annually, is changed less frequently due to the long-term
nature of the assumption. This assumption does not impact the measurement of assets or
liabilities as of the disclosure date; rather it is used only in the calculation of pension
expense. The following table highlights the sensitivity of our pension obligations and
expense to a 1% change in these assumptions, assuming all other assumptions remain constant: |
|
|
|
|
|
|
|
|
|
Impact on Pension |
|
|
Impact on 2010 Pension |
|
Benefit Obligation at |
Change in Assumption |
|
Expense |
|
December 31, 2009 |
|
|
|
|
|
1.0% decrease in discount rate |
|
Increase $0.4 million |
|
Increase $4.3 million |
|
|
|
|
|
1.0% increase in discount rate |
|
Decrease $0.3 million |
|
Decrease $3.5 million |
|
|
|
|
|
1.0% decrease in expected rate of return on
plan assets |
|
Increase $0.3 million |
|
n/a |
|
|
|
|
|
1.0% increase in expected rate of return on
plan assets |
|
Decrease $0.3 million |
|
n/a |
|
|
|
Net periodic pension expense is expected to be approximately $0.9 million in 2010, a $1.0
million decrease from 2009 due principally to higher plan asset balances increasing the
expected return on plan assets. In 2009, we made contributions of $0.8 million to satisfy
minimum statutory funding requirements. We also made voluntary contributions into our
domestic pension plans of $3.9 million in 2009, primarily to improve the funded status of
our plans which had deteriorated in 2008 due to the significant assets losses resulting from
the poor performance of the equity markets. During 2010, we anticipate contributing
approximately $1.8 million into our domestic and Canadian pension plans to satisfy minimum
funding requirements. Beyond 2010, the actual amounts expected to be contributed into our
pension plans may become significant, but such amounts are dependent upon, among other
things, interest rates, underlying asset returns and the impact of legislative or regulatory
changes related to pension funding obligations. |
|
|
|
Income Taxes. Our provision for income taxes, taxes payable and other tax assets and
liabilities are based on the current statutory income tax rates in the domestic and foreign
tax jurisdictions in which we operate. Our effective tax rate is substantially driven by
the impact of the mix of our foreign and domestic income and losses and the federal and
local tax rate differences on each. Deferred tax assets and liabilities are determined
based on the difference between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. |
|
|
|
The determination of the amount of valuation allowance to be provided on recorded deferred
tax assets involves certain estimates regarding the timing and amount of the reversal of
taxable temporary differences, expected future taxable income and the impact of tax planning
strategies. A valuation allowance is established to offset any deferred tax assets if,
based upon the available evidence it is more likely than not that some or all of the
deferred tax asset will not be realized. The projections of future taxable income include a
number of estimates and assumptions regarding our volume, pricing and costs. Additionally,
valuation allowances related to deferred tax assets can be impacted by changes to tax laws.
We recorded a valuation allowance for the years ended December 31, 2009 and 2008 for
deferred tax assets attributed to financial reserves in China. The valuation allowance was
recorded due to prior history of operating losses and the uncertainty of earnings in future
periods at our China facility. At December 31, 2009 and 2008, we have a valuation allowance
of $1.3 million and $1.5
million, respectively, against certain domestic state and local tax net operating losses due
to the uncertainty of future earnings in those locations and the potential for these net
operating losses to lapse. In 2008 we reversed the valuation allowance previously recorded
at our Canadian subsidiary. We have determined that no additional valuation allowances are
necessary as of December 31, 2009.
|
24
|
|
|
We believe that our tax positions meet the technical merits of existing tax laws. We establish additional
provisions for income taxes when there remain certain positions that do not meet the minimum
probability threshold, as defined by the authoritative guidance for uncertainty in income
taxes, which is a tax position that is more likely than not to be sustained upon examination by the
applicable taxing authority. The total amount of unrecognized tax benefits as of December
31, 2009, was $1.2 million. During 2009, we received notification of potential tax
deficiencies at our Italian subsidiary from Inland Revenue (Italy). We recorded
unrecognized tax benefits as tax expense related to this audit. We do not agree with the proposed
assessment and are contesting the preliminary audit report. |
|
|
|
We recognize interest and penalties related to unrecognized tax benefits as income tax
expense. The interest and penalties in continuing operations tax expense for the year ended
December 31, 2009 was $0.3 million. |
|
|
|
Foreign Currency Translation and Transactions. We have foreign manufacturing operations
in Italy, China and Canada, and revenue and expenses from these operations are denominated
in local currency, thereby creating exposures to changes in exchange rates. For the years
ended December 31, 2009, 2008 and 2007, revenue from non-U.S. countries represented 27.2%,
41.6% and 39.0% of our consolidated revenue, respectively. Fluctuations in these
operations respective currencies may have an impact on our business, results of operations
and financial position. We currently do not use financial instruments to hedge our exposure
to exchange rate fluctuations with respect to our foreign operations. As a result, we may
experience substantial foreign currency translation gains or losses due to the volatility
of other currencies compared to the U.S. dollar, which may positively or negatively affect
our results of operations attributed to these operations. Accumulated other comprehensive
(loss) income included translation gains (losses) of $1.2 million, ($2.6) million and $3.5
million for the years ended December 31, 2009, 2008 and 2007, respectively. |
|
|
|
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. Sales or
purchases in foreign currencies, other than the subsidiarys local currency, are exchanged
at the date of the transaction. The effect of transaction gains or losses is included in
Other income (expense), net in our Consolidated Statements of Operations. Foreign currency
transaction gains or losses were not material to the results of operations for the years
ended December 31, 2009, 2008 or 2007. |
Recent Accounting Pronouncements
The following new accounting updates and guidance became effective for us commencing with our
fourth fiscal quarter of 2009:
|
|
|
In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09,
Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09), which
addresses certain implementation issues related to an entitys requirement to perform and
disclose subsequent events procedures. The ASU (1) exempts entities that file their
financial statements with, or furnish them to, the SEC from disclosing the date through
which subsequent events procedures have been performed and (2) clarifies the circumstances
in which an entitys financial statements would be considered restated and in which the
entity would therefore be required to update its subsequent events evaluation since the
originally issued or available to be issued financial statements. ASU 2010-09 became
effective immediately upon issuance, and we have adopted its disclosure requirements within
our accompanying Form 10-K for the year ended December 31, 2009. |
|
|
|
The Financial Accounting Standards Board (FASB) issued a technical amendment to
employers disclosure requirements for plan assets for defined benefit pensions and other
postretirement plans, which is integrated into the Accounting Standards Codification (ASC)
at ASC 715-20-50, Compensation Retirement Benefits: Defined Benefit Plans General:
Disclosure. The objective is to provide users of financial statements with an
understanding of how investment allocation decisions are made, the major categories of
plan assets held by the plans, the inputs and valuation techniques used to measure the
fair value of plan assets, significant concentration of risk within the companys plan
assets, and for fair value measurements determined using significant unobservable inputs a
reconciliation of changes between the beginning and ending balances. The disclosures
contained within our Form 10-K for the year ended December 31, 2009 are in compliance with
the requirements of this ASC. |
|
|
|
The FASB issued ASU 2009-05, Measuring Liabilities at Fair Value (ASU 2009-05), which
provides additional guidance clarifying the measurement of liabilities at fair value and
addresses restrictions when estimating the fair value of a liability under ASC 820, Fair
Value Measurements and Disclosures (ASC 820). When a quoted price in an active market for
the identical liability is not available, ASU 2009-05 requires that the fair value should
be measured using one of the following approaches a) the quoted price of the identical
liability when traded as an asset, b) quoted prices for similar liabilities or similar
liabilities when traded as assets or c) another valuation technique that is consistent
with the principles of ASC 820. The disclosures contained within our accompanying Form
10-K for the year ended December 31, 2009 are in compliance with the requirements of this
ASC. |
25
In addition, the following accounting updates and guidance have been issued by the FASB which
will be adopted by us in future periods:
|
|
|
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures About Fair Value
Measurements (ASU 2010-06), which amends ASC 820 to add new requirements for disclosures
about transfers into and out of Levels 1 and 2 and separate disclosures about purchases,
sales, issuances and settlements relating to Level 3 measurements. ASU 2010-06 also
clarifies existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value. Further, ASU 2010-06 amends
guidance on employers disclosures about postretirement benefit plan assets under ASC 715
to require that disclosures be provided by classes of assets instead of by major
categories of assets. This ASU is effective for the first reporting period beginning
after December 15, 2009, except for the requirement to provide Level 3 activity of
purchases, sales, issuances and settlements on a gross basis, which will be effective for
fiscal years beginning on or after December 15, 2010, and for interim periods within those
fiscal years. We do not expect the adoption of this guidance will have a material impact
on our consolidated financial statements and disclosures. |
|
|
|
In December 2009, the FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities (ASU 2009-17), which codifies
former Statement of Financial Accounting Standards (SFAS) No. 167, Amendments to FASB
Interpretation No. 46R (SFAS 167) and revises the former guidance under FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest Entities to require an
analysis to determine whether a variable interest gives the entity a controlling financial
interest in a variable interest entity. SFAS 167 requires an ongoing reassessment and
eliminates the quantitative approach previously required for determining whether an entity
is the primary beneficiary. The ASU also requires additional disclosures about a reporting
entitys involvement with variable interest entities and about any significant changes in
risk exposure as a result of that involvement. This ASU is effective for fiscal years
beginning on or after November 15, 2009. We do not expect the adoption of this statement
will have an impact on our consolidated financial statements and disclosures. |
|
|
|
In December 2009, the FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets (ASU 2009-16), which codifies the former guidance in SFAS No. 166,
Accounting for Transfers of Financial Assets (SFAS 166) and revises the former guidance
under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities (SFAS 140). Among other things, ASU 2009-16 removes the
concept of a qualifying special-purpose entity, changes the requirements for derecognizing
assets, and enhances information reported to financial statement users by increasing the
transparency of disclosures about transfers of financial assets and an entitys continuing
involvement with transferred financial assets. This statement also clarifies the
requirements for isolation and limitations on portions of financial assets that are
eligible for sale accounting. This ASU is effective for fiscal years beginning on or
after November 15, 2009. We do not expect the adoption of this statement will have an
impact on our consolidated financial statements and disclosures. |
|
|
|
In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That
Include Software Elements a consensus of the FASB Emerging Issues Task Force (ASU
2009-14) which will become effective for all revenue arrangements entered into or
materially modified by us beginning July 1, 2010, with earlier adoption permitted. Under
the new guidance, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of the
software revenue recognition guidance, and software-enabled products will now be subject
to other relevant revenue recognition guidance. We do not expect the adoption of this
guidance will have an impact on our consolidated
financial statements and disclosures. |
|
|
|
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues Task Force (ASU 2009-13), which
will become effective for all revenue arrangements entered into or materially modified by
us beginning July 1, 2010, with earlier adoption permitted. Under the new guidance, when
vendor specific objective evidence or third party evidence for deliverables in an
arrangement cannot be determined, a best estimate of the selling price is required to
separate deliverables and allocate arrangement considerations using the relative selling
price method. The guidance includes new disclosure requirements on how the application of
the relative selling price method affects the timing and amount of revenue recognition.
We do not expect the adoption of this guidance will have an impact on our
consolidated financial statements and disclosures. |
26
|
|
|
In September 2009, the FASB issued a proposed ASU on the Emerging Issues Task Force
consensus-for-exposure on Issue 09-2 that addresses the inconsistencies between the
accounting for Research and Development (R&D) assets acquired in a business combination
and those acquired in an asset acquisition. The proposed ASU requires an entity to
capitalize R&D assets acquired in an asset acquisition as indefinite-lived intangible
assets until completion or abandonment of the related R&D activities. The ASU also
proposes that contingent consideration in an asset acquisition would be accounted for in
accordance with other sections of the ASC and includes a principle under which the entity
would analyze whether contingent consideration relates to the acquired asset or to future
services provided by the seller. The proposed ASU would be effective for fiscal years
beginning on or after December 15, 2009 and we do not expect the adoption of this guidance
will have a material impact on our consolidated financial statements and disclosures. |
Our management does not believe that any other recently issued, but not yet effective,
accounting standards, if currently adopted, will have a material effect on the accompanying
financial statements.
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
The following table summarizes our results of operations for the years ended December 31, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2009 |
|
|
Sales |
|
|
2008 |
|
|
Sales |
|
|
|
(dollars in millions) |
|
Net sales |
|
$ |
172.4 |
|
|
|
100.0 |
% |
|
$ |
269.6 |
|
|
|
100.0 |
% |
Cost of sales |
|
$ |
124.9 |
|
|
|
72.4 |
% |
|
$ |
192.5 |
|
|
|
71.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
47.5 |
|
|
|
27.6 |
% |
|
$ |
77.1 |
|
|
|
28.6 |
% |
|
Selling, technical and administrative expenses |
|
$ |
30.2 |
|
|
|
17.5 |
% |
|
$ |
37.3 |
|
|
|
13.8 |
% |
Income from operations |
|
$ |
16.7 |
|
|
|
9.7 |
% |
|
$ |
39.2 |
|
|
|
14.5 |
% |
Interest expense |
|
$ |
8.0 |
|
|
|
4.6 |
% |
|
$ |
8.1 |
|
|
|
3.0 |
% |
Interest income |
|
$ |
0.5 |
|
|
|
0.3 |
% |
|
$ |
2.1 |
|
|
|
0.8 |
% |
Other income (expense), net |
|
$ |
1.9 |
|
|
|
1.1 |
% |
|
$ |
1.5 |
|
|
|
0.6 |
% |
Income tax provision |
|
$ |
4.5 |
|
|
|
2.6 |
% |
|
$ |
12.1 |
|
|
|
4.5 |
% |
|
Income from continuing operations, after income taxes |
|
$ |
6.5 |
|
|
|
3.8 |
% |
|
$ |
22.6 |
|
|
|
8.4 |
% |
Discontinued operations, net of tax |
|
$ |
(0.1 |
) |
|
|
-0.1 |
% |
|
$ |
(1.7 |
) |
|
|
-0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6.4 |
|
|
|
3.7 |
% |
|
$ |
20.8 |
|
|
|
7.7 |
% |
27
Net Sales. Our net sales for 2009 were $172.4 million, a decrease of $97.2 million, or
36.1%, from the same period in 2008. Sales declines during the period resulted primarily from
volume decreases as customers in most of our end-markets
aggressively managed inventory while the global economy experienced a significant
downturn. Of our total sales decrease of 36.1% in 2009, volume represented approximately 36.2 of
the total percentage point decrease, unfavorable foreign currency exchange rates represented 0.9 of
the total percentage point decline and pricing accounted for a benefit of approximately 1.0 of the
total percentage point change.
Our sales to the construction and mining market, our largest, were down 50.6% in 2009 compared
to 2008. Sales to our agriculture market were down 39.4% in 2009 compared to 2008, primarily as a
result of weak market conditions, especially in the United States and Europe. Our aircraft and
defense markets were down 13.5% in 2009 compared to 2008 due to a decrease in demand in our
aircraft market offset by a modest increase in our defense market. Sales to our truck market
decreased 32.5% during 2009 compared to 2008, due to the decline in truck production during the
period and reduced freight volumes being shipped with existing vehicles. Sales in our friction
direct aftermarket that we service through the VelveTouch® and Hawk
Performance® brand names decreased 15.2% in 2009 compared to 2008. However, sales of
our performance automotive brake product, which are part of this market segment, were up 13.8% in
2009 compared to 2008, primarily as a result of new product introductions. Although still a small
percentage of our total net sales, sales to the alternative energy market were up 14.5% in 2009
compared to 2008 as unit volume shipments of this product line continued to
increase.
Net sales from our foreign facilities represented 27.2% of our total net sales in 2009
compared to 41.6% for the comparable period of 2008. The decline in our foreign facility revenues
as a percent of total revenues was due primarily to the downturn in the end markets that we serve
in the European and Asian markets. Sales at our Italian operation, on a local currency basis, were
down 57.2% in 2009 compared to 2008, and sales at our Chinese operation, on a local currency basis,
were down 52.5% during 2009, primarily due to declines in the construction and
agriculture markets served by those facilities.
Cost of Sales. Cost of sales was $124.9 million during 2009, a decrease of $67.6 million, or
35.1%, compared to cost of sales of $192.5 million in 2008. The impact of decreased sales and
production volumes through all of our manufacturing facilities, which represented approximately
36.1 percentage points of the total cost of sales decrease of 35.1%, was the primary driver of the
reduction in our cost of sales in 2009. Additionally, a slight shift in product mix represented
2.5 percentage points of the total decrease of 35.1% during 2009. The effect of foreign currency
exchange rates accounted for 1.0 percentage points of our total cost of sales decrease of 35.1%
during 2009. These decreases were offset by the impact that lower overall production levels had on
our manufacturing expenses, primarily overhead absorption, which in
total represented an
approximately 4.5 percentage points offset to the total cost of sales decrease. As a percent of
sales, our cost of sales represented 72.4% of our net sales in 2009
compared to 71.4% of net sales
in 2008. The increase in our cost of sales percentage was driven
primarily by the impact of lower production
volumes offset by the impact of our labor reduction programs in 2009.
Gross Profit. Gross profit was $47.5 million during 2009, a decrease of $29.6 million, or
38.4%, compared to gross profit of $77.1 million in 2008. Our gross profit margin was 27.6% of our
net sales in 2009 compared to 28.6% of our net sales in 2008. The factors impacting the change in
gross margin are detailed under Net Sales and Cost of Sales.
Selling, Technical and Administrative Expenses. Selling, technical and administrative (ST&A)
expenses decreased $7.1 million, or 19.0%, to $30.2 million in 2009 from $37.3 million during 2008.
As a percentage of net sales, ST&A was 17.5% in 2009 compared to 13.8% in 2008. The decrease in
ST&A expenses resulted primarily from a decrease in incentive compensation totaling approximately
10.2 percentage points of the 19.0% decrease in response to the lower levels of profitability
during 2009 compared to 2008. Wages and benefits decreased approximately 9.1%, or 7.2 percentage
points of the total ST&A decrease of 19.0%, primarily as a result of headcount reductions in 2009.
Decreases in legal and professional expenses represented approximately 1.7 percentage points of the
19.0% decrease primarily as a result of reduced expenditures related to the previously disclosed
SEC investigation. Additionally, sales and marketing expenses, which were down in
response to lower demand and reduced promotional activities, represented 2.7 percentage points of
the total decrease of 19.0%. We spent $4.7 million, or 2.7% of our net sales, on product research
and development in 2009, compared to $5.4 million or 2.0%, of our net sales for 2008.
Income from Operations. As a result of the factors discussed above, income from operations
was $16.7 million in 2009, a decrease of $22.5 million or 57.4%, compared to $39.2 million during
2008. Income from operations as a percentage of net sales decreased to 9.7% in 2009 from 14.5% in
the same period of 2008 for the reasons discussed above.
28
Interest Expense. Interest expense decreased slightly to $8.0 million in 2009 from $8.1
million in 2008 due to our purchase of $10.0 million of our senior notes on the open market in
November 2009. These repurchased notes are being held by us in treasury, which reduced our fixed
interest expense from the date of purchase through year-end. We
did not have any borrowings under our variable rate domestic or Italian bank facilities in the
years 2009 or 2008. Included as a component of Interest expense in our
Consolidated Statements of Operations is the amortization of deferred
financing costs.
Interest Income. We invested our excess cash in various short-term interest bearing
investments. Interest income was $0.5 million in 2009 compared to $2.1 million during 2008. The
decrease was the result of lower invested cash balances during the 2009 compared to 2008, and lower
effective interest rates on our investments in 2009 compared to rates available to us in 2008.
Other Income (Expense), Net. Other income was $1.9 million during 2009, an increase of $0.4
million compared to income of $1.5 million reported in 2008. In 2009, we reported income of $1.5
million from a cash payment received from a third-party for cancellation of its obligation to
develop a potential new product for us. In 2008 we reported income of $1.3 million as a result of
a similar cancellation. We also reported net realized and unrealized gains of $0.8 million on our
trading securities in 2009 compared to net losses of $0.3 million in 2008. We incurred foreign
currency transaction losses of $0.4 million in 2009 compared to foreign currency transaction gains
of $0.5 million in 2008.
Income Taxes. We recorded a tax provision from our continuing operations of $4.5 million for
the year ended December 31, 2009, compared to a tax provision of $12.1 million in 2008. Our
effective income tax rate of 40.9% in 2009 differs from the current federal U.S. statutory rate of
35.0%, primarily as a result of foreign withholding taxes on royalty income, a higher effective
rate at a foreign subsidiary, and the impact of non-deductible expenses on our worldwide taxes.
An analysis of changes in our income taxes and our effective tax rate
is contained in Note 13 Income Taxes in the accompanying audited Consolidated Financial Statements of this Form 10-K.
Net Income. As a result of the factors described above, we reported net income of $6.4
million in 2009, or $0.73 per diluted share, a decrease of $14.4 million compared to net income of
$20.8 million, or $2.21 per diluted share, in 2008.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Our continuing operation is organized into one strategic segment, friction products. In the
fourth quarter of 2008, we committed to selling our performance racing segment, and both operating
facilities were divested as of December 31, 2008. In the fourth quarter of 2006, we committed to
selling our precision components segment which was sold in February 2007. As a result, we have
classified the performance racing and precision components segments as discontinued operations in
our financial results.
29
The following table summarizes our results of operations for the year ended December 31, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2008 |
|
|
Sales |
|
|
2007 |
|
|
Sales |
|
|
|
(dollars in millions) |
|
Net sales |
|
$ |
269.6 |
|
|
|
100.0 |
% |
|
$ |
215.9 |
|
|
|
100.0 |
% |
Cost of sales |
|
$ |
192.5 |
|
|
|
71.4 |
% |
|
$ |
164.5 |
|
|
|
76.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
77.1 |
|
|
|
28.6 |
% |
|
$ |
51.4 |
|
|
|
23.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative expenses |
|
$ |
37.3 |
|
|
|
13.8 |
% |
|
$ |
31.2 |
|
|
|
14.5 |
% |
Income from operations |
|
$ |
39.2 |
|
|
|
14.5 |
% |
|
$ |
19.5 |
|
|
|
9.0 |
% |
Interest expense |
|
$ |
8.1 |
|
|
|
3.0 |
% |
|
$ |
9.4 |
|
|
|
4.4 |
% |
Interest income |
|
$ |
2.1 |
|
|
|
0.8 |
% |
|
$ |
3.8 |
|
|
|
1.8 |
% |
Other income (expense), net |
|
$ |
1.5 |
|
|
|
0.6 |
% |
|
$ |
(0.3 |
) |
|
|
-0.1 |
% |
Income taxes |
|
$ |
12.1 |
|
|
|
4.5 |
% |
|
$ |
5.8 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, after income taxes |
|
$ |
22.6 |
|
|
|
8.4 |
% |
|
$ |
7.8 |
|
|
|
3.6 |
% |
Discontinued operations, net of tax |
|
$ |
(1.7 |
) |
|
|
-0.6 |
% |
|
$ |
9.5 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
20.8 |
|
|
|
7.7 |
% |
|
$ |
17.3 |
|
|
|
8.0 |
% |
Net Sales. Our net sales for 2008 were $269.6 million, an increase of $53.7 million, or
24.9% from 2007 despite the economic slowdown which began to affect us in the last quarter of 2008.
Sales increases during the year resulted primarily from increased shipment volumes as a result of
strong demand in all of our end markets through the first 10 months of 2008, new product
introductions, pricing actions pursuant to the terms of long-term supply agreements as well as to
offset the increase in our raw material input costs, and favorable foreign currency exchange rates
primarily in the first half of 2008. Of our total sales increase of 24.9% in the year ended
December 31, 2008, volume represented approximately 10.0 percentage points, pricing accounted for
approximately 10.7 percentage points, and favorable foreign currency exchange rates represented 4.1
percentage points.
We experienced sales increases in all of our major markets, primarily led by construction and
mining, aircraft and defense and agriculture. Our sales to the construction and mining market, our
largest, were up 28.3% in 2008, compared to 2007, as a result of strong global market conditions
through the first 10 months of 2008. Sales in the agriculture sector were up 38.0% in 2008,
compared to 2007, as a result of strong market conditions in North and South America during the
first half of 2008. Our rate of increase in this market slowed significantly during the fourth
quarter of 2008, especially in our European market. Our aircraft and defense markets were up 26.4%
in 2008 compared to 2007, due to strong demand, especially in our defense market. We experienced
aircraft volume declines during the last quarter of 2008 as airlines reduced schedules to reflect
reduced global passenger traffic. Sales to our heavy market increased 6.8% during the year ended
December 31, 2008 compared to the year ended December 31, 2007, as the impact of the 2007 emission
standards change negatively impacted our 2007 sales. We also experienced reduced volumes in this
market in the last half of 2008. During 2008, we continued to focus our efforts on the friction
direct aftermarket that we service through the VelveTouch® and Hawk Performance® brand names.
Sales in this product category were $28.9 million in 2008 compared to $26.1 million in 2007, an
increase of 10.7%.
30
Net sales from our foreign facilities represented 41.6% of our total net sales in 2008
compared to 39.0% for 2007. Sales at our Italian operation, on a local currency basis, increased
23.3% in 2008, compared to 2007, and sales at our Chinese operation, on a local currency basis,
increased 33.3% during the same period despite the economic downturn in the last quarter of 2008.
Cost of Sales. Cost of sales was $192.5 million during 2008, an increase of $28.0 million, or
17.0%, compared to cost of sales of $164.5 million in 2007. The primary driver of the increase in
our cost of sales in 2008 was increased production volumes through our manufacturing facilities.
Production volume increases represented approximately 9.0 percentage points of the total cost of
sales increase of 17.0%. Increased manufacturing costs, including commodity costs, represented 4.8
percentage points and the effect of foreign currency exchange rates accounted for 3.3 percentage
points. As a percent of sales, our cost of sales represented 71.4% of our net sales in 2008
compared to 76.2% of net sales in 2007. The improvement in our cost of sales percentage was driven
by increased volumes and product mix partially offset by the effect of foreign currency exchange
rates on our cost of sales and the impact of higher costs of a number of our raw material inputs.
Gross Profit. Gross profit was $77.1 million, an increase of $25.7 million, or 50.0%, during
2008, compared to gross profit of $51.4 million for 2007. Our gross profit margin improved to
28.6% of our net sales in 2008 compared to 23.8% of our net sales in 2007. The factors impacting
the change in gross margin are detailed under Net Sales and Cost of Sales.
Selling, Technical and Administrative Expenses.
ST&A
expenses increased $6.1 million, or 19.6%, to $37.3 million in 2008 from $31.2 million during 2007.
As a percentage of net sales, ST&A was 13.8% in 2008 compared to 14.5% in 2007. The increase in
ST&A expenses in 2008 compared to 2007 resulted primarily from an increase in incentive
compensation of approximately 8.8 percentage points and increased salary and benefit costs of
approximately 3.6 percentage points of the total ST&A increase of 19.6% to support the higher
levels of business activity and increased profitability during the year. Increased legal expense,
excluding expenses associated with the previously disclosed SEC and DOJ investigations represented
approximately 2.0 percentage points of the total 19.6% increase. During 2008, we incurred $0.6
million in legal expenses net of insurance reimbursement, related to the SEC and DOJ
investigations, compared to $1.1 million in 2007. Sales and marketing expense increases, including
advertising and catalog expense, represent approximately 2.0 percentage points of the total 19.6%
increase. Additionally, we spent $5.4 million, or 2.0%, of our net sales on product research and
development in 2008, compared to $4.6 million, or 2.1%, of our net sales for 2007.
Income from Operations. As a result of the factors discussed above, income from operations
was $39.2 million in 2008, an increase of $19.7 million, or 101.0%, compared to $19.5 million
during 2007. Income from operations as a percentage of net sales increased to 14.5% in 2008 from
9.0% in 2007. The effect of foreign currency exchange rates accounted for 14.5 percentage points
of our total operating income increase of 101.0% during 2008.
Interest Expense. Interest expense decreased $1.3 million during 2008 to $8.1 million from
$9.4 million in 2007, as a result of the redemption of $22.9 million our senior notes in August
2007 resulting in lower average debt levels outstanding during 2008 compared to 2007. Included as
a component of Interest expense in our Consolidated Statements of Operations is the amortization of
deferred financing costs. Amortization of deferred financing costs was $0.4 million in both 2008
and 2007.
Interest Income. We invested our excess cash in various short-term interest bearing
investments. Interest income was $2.1 million in 2008 compared to $3.8 million during 2007.
Effective interest rates on our investments decreased significantly in 2008, compared to rates
available to us in 2007.
Other Income (Expense), Net. Other income was $1.5 million during 2008, an increase of $1.8
million compared to expense of $0.3 million reported in 2007. During 2008, we reported income of
$1.3 million from a cancellation fee derived from discontinuing a specific portion of a joint
development project. In 2007, as a result of partial senior note redemption, we recorded an
expense of $0.6 million related to the write-off of deferred financing costs. There was no
comparable expense in 2008. We reported foreign currency exchange transaction gains of $0.5
million during 2008 compared to foreign currency exchange transaction gains of $0.3 million in
2007.
Income Taxes. We recorded a tax provision for our continuing operations of $12.1 million in
2008, compared to $5.8 million in 2007. Our effective rate decreased to 35.0% in 2008 compared to
42.8% in 2007, primarily as a result of higher domestic earnings and lower statutory tax rates in
our Italian and Canadian jurisdictions. This decrease was partially offset by the impact of
non-deductible expenses on our U.S. based taxes. Our worldwide provision for income taxes is based
on annual tax rates for the year applied to all of our sources of income. An analysis of changes
in our income taxes and our effective tax rate is contained in Note 13 Income Taxes in the
accompanying audited Consolidated Financial Statements of this Form 10-K.
31
Income from continuing operations, After income taxes. We reported income from continuing
operations, after income taxes of $22.6 million in 2008, or $2.40 per diluted share, an increase of
$14.8 million, or 189.7% compared to income from continuing operations, after income taxes of $7.8
million, or $0.82 per diluted share, during 2007.
Discontinued Operations, Net of Tax. During the first quarter of 2008, we committed to a plan
to divest our performance racing segment which operated two facilities in the United States. In
May 2008, we sold our North Carolina facility and in December 2008, we sold our Illinois facility.
In February 2007, we sold our precision components segment. As of December 31, 2008, there were no
remaining assets or liabilities classified as discontinued operations in our Consolidated Balance
Sheet. The operating activity of the performance racing segment and precision components segment
is reflected in the following summary of results of our discontinued operations for the years ended
December 31, 2008 and 2007. An analysis of discontinued operations is contained in Note 3
Discontinued Operations in the accompanying Consolidated Financial Statements of this Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in millions) |
|
Net sales |
|
$ |
7.4 |
|
|
$ |
20.1 |
|
|
|
|
|
|
|
|
Loss from discontinued operations, before income taxes |
|
$ |
(1.8 |
) |
|
$ |
(3.1 |
) |
(Loss) gain on sale of discontinued operations, before income taxes |
|
|
(1.9 |
) |
|
|
15.0 |
|
Income tax (benefit) expense |
|
|
(2.0 |
) |
|
|
2.4 |
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, after income taxes |
|
$ |
(1.7 |
) |
|
$ |
9.5 |
|
|
|
|
|
|
|
|
Net Income. We reported net income of $20.8 million in 2008, or $2.21 per diluted share, an
increase of $3.5 million, or 20.2% compared to net income of $17.3 million, or $1.83 per diluted
share, during 2007.
Liquidity, Capital Resources and Cash Flows
Current economic and market conditions have placed significant constraints on the ability of
many companies to access capital in the debt and equity markets. However, our access to capital
resources that provide liquidity generally has not been materially affected by the current credit
environment. We are not aware of any material trend, event or capital commitment which would
potentially adversely affect our liquidity. In the event such a trend develops, we believe that
our net cash and short-term investment position, coupled with our availability under our bank
facilities, will continue to be sufficient to support our operations and internal growth needs, to
pay interest on our indebtedness and to fund anticipated capital expenditures for the next twelve
months.
Current market conditions also raise increased concerns that our customers, suppliers and
subcontractors may find it difficult to access credit to support their operations. Customer or
supplier bankruptcies, delays in their ability to obtain financing, or the inability to obtain
financing could adversely affect our cash flow or results of operations. To date, we have not been
materially adversely affected by customer, supplier or subcontractor credit problems or
bankruptcies. We continue to monitor and take measures to limit our credit exposure.
32
The following selected measures of liquidity, capital resources and cash flows outline various
metrics that are reviewed by our management and are provided to our shareholders to enhance the
understanding of our business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in millions) |
|
LIQUIDITY |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
47.2 |
|
|
$ |
62.5 |
|
|
$ |
22.0 |
|
Short-term investments |
|
$ |
35.9 |
|
|
$ |
30.8 |
|
|
$ |
59.0 |
|
Working capital (1) |
|
$ |
113.3 |
|
|
$ |
126.0 |
|
|
$ |
113.3 |
|
Current ratio (2) |
|
|
4.6 to 1.0 |
|
|
|
3.4 to 1.0 |
|
|
|
3.1 to 1.0 |
|
Net debt as a % of capitalization (3) (4) |
|
|
N/A |
|
|
|
N/A |
|
|
|
8.4 |
% |
Average number of days sales in accounts receivable |
|
|
58 days |
|
|
|
52 days |
|
|
|
63 days |
|
Average number of days sales in inventory |
|
|
80 days |
|
|
|
78 days |
|
|
|
81 days |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in millions) |
|
CASH FLOWS |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities of continuing operations |
|
$ |
19.2 |
|
|
$ |
23.6 |
|
|
$ |
20.4 |
|
Cash (used in) provided by investing activities of continuing operations |
|
|
(12.3 |
) |
|
|
16.7 |
|
|
|
29.7 |
|
Cash (used in) provided by financing activities of continuing operations |
|
|
(22.3 |
) |
|
|
(0.7 |
) |
|
|
(26.6 |
) |
Effect of exchange rates on cash |
|
|
0.2 |
|
|
|
(0.9 |
) |
|
|
0.7 |
|
Cash (used in) provided by discontinued operations |
|
|
(0.1 |
) |
|
|
1.8 |
|
|
|
(8.4 |
) |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(15.3 |
) |
|
$ |
40.5 |
|
|
$ |
15.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Working capital is defined as total current assets minus total current liabilities. |
|
(2) |
|
Current ratio is defined as total current assets divided by total current
liabilities. |
|
(3) |
|
Net debt is defined as long-term debt, including current portion, and
short-term borrowings, less cash and short-term investments. Capitalization is defined
as net debt plus shareholders equity. |
|
(4) |
|
We have zero net debt at December 31, 2009 and 2008 because our cash, cash
equivalents and short-term investments were $6.0 million and $6.2 million greater than
total debt, respectively. |
Cash and cash equivalents decreased $15.3 million to $47.2 million as of December 31, 2009,
from $62.5 million at December 31, 2008. Short-term investments increased $5.1 million at December
31, 2009 from the December 31, 2008 balance. The net decrease in cash and cash equivalents and
short-term investments of $10.2 million in 2009 was driven primarily by our supplemental pension
plan contributions, repurchase of our stock and the purchase of our senior notes. We made a
voluntary supplemental contribution into our domestic pension plans of $3.9 million in March 2009.
We also repurchased $12.6 million of our common stock pursuant to our stock repurchase program
during 2009. Lastly, we purchased $10.0 million of our senior notes in the open market during the
fourth quarter of 2009. These uses of cash were partially offset by our positive cash generated from
operating activities in 2009.
In assessing liquidity, we review certain working capital measurements. At December 31, 2009,
our working capital was $113.3 million, a decrease of $12.7 million from December 31, 2008. The decrease in
working capital in 2009 was primarily due to decreases in accounts receivable and inventory. Our
accounts receivable and inventory levels are reviewed through the computation of days sales
outstanding and inventory turnover. Days sales in accounts receivable was 58 days at December 31,
2009, compared to 52 days at December 31, 2008 and 63 days at December 31, 2007. We have not
experienced any significant change in accounts receivable collectability, and continue to monitor
the financial situation of our major customers. Days sales in inventory was 80 days at December
31, 2009, compared to 78 days at December 31, 2008 and 81 days at December 31, 2007. We continue
to focus on controlling inventory to reduce overall inventory levels while maintaining levels
sufficient to meet current customer demands.
At December 31, 2009, our current ratio was 4.6, an increase from the current ratio of 3.4 at
December 31, 2008 and 3.1 at December 31, 2007. The improvement in the current ratio in 2009 was
due primarily to the decrease in accounts payable resulting from our efforts to reduce spending
levels for inventory and expense items to levels commensurate with lowered current business
demands. The improvement in the current ratio in 2008 was due primarily to increases in current
assets that more than offset increases in current liabilities.
33
Net debt as a percentage of capitalization was zero at December 31, 2009 and 2008 because our
cash, cash equivalents and short-term investments were $6.0 million and $6.2 million greater than
total debt, respectively. This compares to total net debt of $6.2 million at December 31, 2007.
Our overall cash, cash equivalents and short-term investments position at December 31, 2009 and
2008 has improved from 2007 levels primarily due to the positive cash generated from continuing
operations in 2009 and 2008. In addition, we decreased our debt level in 2009 through the
repurchase of $10.0 million of our outstanding senior notes through a purchase in the open market.
Operating Activities
Our ability to generate cash from internal operations may be affected by general economic,
financial, competitive, legislative and regulatory factors beyond our control. Generally, our cash
flow from operations fluctuates due to various factors, including customer order patterns,
fluctuations in working capital requirements, the amounts of payments of incentive compensation and
profit sharing payments, changes in customer and supplier credit policies, and changes in customer
payment patterns.
Cash provided by our operating activities from continuing operations in 2009 was $19.2
million, $4.4 million and $1.2 million lower than our cash provided by operating activities in 2008
and 2007, respectively. We experienced lower levels of sales in 2009 compared to the 2008 and 2007
periods due to the impact of the economic slow-down, causing accounts receivable and inventory
levels to decrease in the period which is a source of operating cash flow. We also made a
voluntary supplemental contribution into our domestic pension plans of $3.9 million in 2009, which
resulted in a decrease in an operating accrual and a use of operating cash. In addition, the
reduced levels of inventories and service supplies required to be purchased, and our focus on
reducing working capital, has resulted in lower accounts payable at December 31, 2009, using cash
of $12.8 million in the period.
Investing Activities
Our investing activities from continuing operations used $12.3 million in the year ended
December 31, 2009 compared to cash provided by investing activities of $16.7 million and $29.7
million in the years ended December 31, 2008 and 2007, respectively. During 2008, we received
total cash proceeds of $2.7 million from the sale of our performance racing facilities in North
Carolina and Illinois. During 2007, we received cash proceeds from the sale of our precision
components segment of $93.4 million.
Net short-term investment purchases and sales in 2009 used cash of $4.8 million compared to
$29.2 million of cash generated in the 2008 period and $56.1 million of cash used in the 2007
period.
We used $7.5 million, $15.2 million and $7.6 million for the purchase of property, plant and
equipment in the periods ended December 31, 2009, 2008 and 2007, respectively. The principal
sources of financing for these capital expenditures were existing cash and internally generated
funds. We anticipate capital expenditures in 2010 in the range of $8.0 million to $10.0 million.
Our management critically evaluates all proposed capital expenditures and requires that each
project maximizes shareholders value, and in doing so supports our business needs and long-term
strategic plans.
Financing Activities
Cash used in financing activities was $22.3 million in 2009, compared to cash used of $0.7
million and $26.6 million in the years 2008 and 2007, respectively. We used $12.6 million, $2.3
million and $3.7 million to repurchase shares of our common stock pursuant to our stock repurchase
programs in the periods ended December 31, 2009, 2008 and 2007, respectively. At December 31,
2009, the approximate dollar value of shares that may yet be purchased under our stock repurchase
program was $0.3 million.
During 2009, we purchased $10.0 million of senior notes in open market purchases. In 2007, we
repaid $35.0 million of outstanding debt, including the repayment of $1.0 million of local debt in
China and $22.9 million of our senior notes. We had no outstanding borrowings under our domestic
or Italian bank facilities at December 31, 2009, 2008 or 2007.
We received $0.3 million and $0.7 million in government grants during the years ended December
31, 2009 and 2008, respectively. In addition, we paid $0.3 million of costs and expenses associated
with the June 2009 refinancing of our bank facility, which expires in June 2012.
34
Contractual Obligations and Other Commercial Commitments
The following table presents our total contractual obligations and other commercial
commitments as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
Total |
|
|
2010 |
|
|
2011-2013 |
|
|
2014-2016 |
|
|
Thereafter |
|
Contractual obligations (1) (2) (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank facilities (4) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes (5) |
|
|
77,090 |
|
|
|
|
|
|
|
|
|
|
|
77,090 |
|
|
|
|
|
Operating leases |
|
|
23,759 |
|
|
|
3,214 |
|
|
|
8,643 |
|
|
|
6,384 |
|
|
|
5,518 |
|
Deferred compensation plan distributions (6) |
|
|
3,018 |
|
|
|
|
|
|
|
261 |
|
|
|
136 |
|
|
|
2,621 |
|
Purchase obligations (7) |
|
|
18,361 |
|
|
|
18,271 |
|
|
|
82 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
122,228 |
|
|
$ |
21,485 |
|
|
$ |
8,986 |
|
|
$ |
83,618 |
|
|
$ |
8,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commercial commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stand-by letters of credit |
|
$ |
855 |
|
|
$ |
855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This contractual obligations table does not include our defined benefit pension
obligations. An analysis of our obligations under our defined benefit pension plans is
contained in Note 11 Employee Benefits in the accompanying audited Consolidated Financial
Statements of this Form 10-K. |
|
(2) |
|
This contractual obligations table does not include liabilities related to deferred
taxes because it is not certain when these liabilities will become due. |
|
(3) |
|
The above table does not include approximately $1.2 million of unrecognized tax benefits
recorded in other long-term accrued expenses. These liabilities have not been included in
the contractual obligations table because we cannot reasonably predict whether any specific
taxing jurisdiction will select our tax returns to review, so it is impractical to
determine the amounts that may impact future cash flows. See Note 13 Income Taxes in the
accompanying audited Consolidated Financial Statements of this Form 10-K for further
analysis of our unrecognized tax benefit liabilities. |
|
(4) |
|
The Company currently has no borrowings under its $30 million domestic bank facility or
its $3.3 million (2.3 million Euro) Italian bank facility, both of which are variable rate
obligations. |
|
(5) |
|
The senior notes accrue interest at a fixed rate of 83/4% per annum, or $6.7 million per
year, which is paid semi-annually on January 1 and July 1. |
|
(6) |
|
Deferred compensation plan distributions are based on known in-service distributions
with remaining payments made upon termination. For purpose of this table, all participants
are assumed to be actively employed through December 31, 2016. |
|
(7) |
|
Purchase obligations primarily represent commitments for inventory purchases, services
and capital expenditures under purchase order. |
Debt
The following table summarizes the components of our indebtedness:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
(dollars in millions) |
|
Senior notes |
|
$ |
77.1 |
|
|
$ |
87.1 |
|
Bank facilities (domestic and foreign) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
77.1 |
|
|
$ |
87.1 |
|
|
|
|
|
|
|
|
35
As of December 31, 2009 and December 31, 2008, we were in compliance with the provisions
of all of our debt instruments. We are not aware of any business or economic trends affecting our
business that would cause us to become non-compliant with the provisions of our debt instruments
during the next twelve months.
Senior Notes
On November 1, 2004, we completed a public offering of $110.0 million aggregate principal
amount of our senior notes. In August 2007, under provisions of the indenture, a total of $22.9
million in aggregate principal amount was tendered and subsequently redeemed by us. In November
2009, we purchased $10.0 million of our senior notes in the open market. The senior notes have not
been formally retired by us, but have been treated as an extinguishment of debt for accounting
purposes because we have been released from being the primary obligor under the liability. As
noted in the above table, after taking into account the above transactions, the remaining balance
of our senior notes outstanding as of December 31, 2009 was $77.1 million.
Interest is payable on the senior notes each January 1 and July 1.
The senior notes are senior unsecured obligations, rank senior in right of payment to all of
our existing and future subordinated debt and rank equally in right of payment with all of our
existing and future senior debt, including the Credit and Security Agreement, dated June 12, 2009,
with KeyBank National Association, as Lender (the bank facility), which is described in more detail
below.
The senior notes are unconditionally guaranteed on a senior unsecured basis by all of our
existing and future domestic restricted subsidiaries (the Guarantors). The guarantees rank senior
in right of payment to all of the existing and future subordinated debt of the Guarantors and
equally in right of payment with all existing and future senior debt of the Guarantors, including
the bank facility. The senior notes and the guarantees are effectively subordinated to all of
Hawks and our Guarantors secured debt, including the bank facility, to the extent of the value of
the assets securing that debt.
On or after November 1, 2009, we may, at our option, redeem some or all of the senior notes at
the following redemption prices, plus accrued and unpaid interest and additional interest, if any,
to the date of redemption:
|
|
|
|
|
For the period below |
|
Percentage |
|
On or after November 1, 2009 |
|
|
104.375 |
% |
On or after November 1, 2010 |
|
|
103.281 |
% |
On or after November 1, 2011 |
|
|
102.188 |
% |
On or after November 1, 2012 |
|
|
101.094 |
% |
On or after November 1, 2013 |
|
|
100.000 |
% |
Upon a change of control as defined in the indenture, dated November 1, 2004, among Hawk, the
Guarantors and HSBC Bank USA, National Association, as trustee, each holder of the senior notes
will have the right to require us to repurchase all or any part of such holders senior notes at a
purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest and additional interest, if any, to the date of purchase.
The senior notes are governed by the indenture. The indenture also contains certain covenants,
subject to a number of important limitations and exceptions that limit our ability to:
|
|
|
incur or guarantee additional debt or issue disqualified capital stock, |
|
|
|
|
pay dividends, redeem subordinated debt or make other restricted payments, |
|
|
|
|
issue preferred stock of our subsidiaries, |
|
|
|
|
transfer or sell assets, including capital stock of our subsidiaries, |
|
|
|
|
incur dividend or other payment restrictions affecting certain of our subsidiaries, |
|
|
|
|
make certain investments or acquisitions, |
|
|
|
|
grant liens on our assets, |
|
|
|
|
enter into certain transactions with affiliates, and |
|
|
|
|
merge, consolidate or transfer substantially all of our assets. |
36
The indenture considers non-compliance with the limitations set forth above to be events of
default. The indenture also considers non-payment of interest and principal amounts on the senior
notes and certain payment defaults with respect to other debt in excess of $5.0 million to be
events of default. In the event of a default, the principal and interest could be accelerated upon
written notice by more than 25% or more of the holders of the senior notes.
The indenture permits us to incur additional debt without limitation, provided that we
continue to meet a cash flow ratio greater than 2.0 to 1.0 for the most recently ended four
quarters. We may pay cash dividends on our Class A common stock under the indenture provided:
|
|
|
there is no default or event of default, |
|
|
|
|
we meet the cash flow ratio, and |
|
|
|
|
the amount of the dividend payment plus certain other payments is
not in excess of a formula based on the sum of our consolidated
net income after November 1, 2004, the cash proceeds of certain
equity offerings by us after November 1, 2004, and the return on
certain investments made by us. |
As of December 31, 2009, we were in compliance with the provisions of our indenture and have
met the cash flow ratio requirement that would permit us to incur additional debt.
Bank Facility
On June 12, 2009, we entered into a new three year bank facility with KeyBank National
Association. The bank facility replaced our old credit facility which was due to mature on November
1, 2009.
The bank facility has a maximum revolving credit commitment of $30.0 million, including a $2.0
million letter of credit subfacility. The bank facility matures on June 11, 2012. Loans made
under the bank facility will be at interest rates derived either from federal funds rates (Base
Rate Loans) or Eurodollar rates (Eurodollar Loans). The interest rate for Base Rate Loans will be
175 basis points over the higher of (a) the Lenders prime rate and (b) 0.5% in excess of the
Federal Funds Rate. The interest rate for Eurodollar Loans will be 350 basis points over the
Eurodollar Rate. The commitment fee is 50 basis points on the unused portion of the bank facility.
The facility is collateralized by a security interest in the cash, accounts receivable,
inventory and certain intangible assets of Hawk and our domestic subsidiaries. We pledged the
stock of substantially all of our domestic subsidiaries and 65% of the stock of certain of our
foreign subsidiaries as collateral.
The bank facility requires maintenance of a fixed charge coverage ratio of at least 1.0 to 1.0
measured quarterly on a trailing four quarter basis, although this ratio applies only if we have
borrowings under the bank facility and our availability falls below $15.0 million.
Under the bank facility, we may:
|
|
|
pay cash dividends on our Class A common stock in an amount up to $5.0 million per
year; |
|
|
|
repurchase our Class A common stock in an amount not to exceed $30.0 million during
the commitment period; |
|
|
|
repurchase our 83/4% Senior Notes due 2014 (senior notes) in an amount not to exceed
$30.0 million during the commitment period; and |
|
|
|
effect acquisitions subject to certain restrictions in an unlimited amount; |
37
provided that, in all cases there is no event of default, and with respect to acquisitions, our
availability is not less than $15.0 million.
The bank facility also requires compliance with other customary loan covenants and contains
customary default provisions that, if triggered, would cause the acceleration of repayment of the
debt incurred under the bank facility. We agreed to maintain average compensating balances of $15.0 million ($10.0 million beginning
January 1, 2010). The balances are not legally restricted to withdrawal and serve as normal
operating cash.
We had no borrowings under our bank facility or old credit facility at December 31, 2009 and
2008, respectively. At December 31, 2009 and December 31, 2008, we had $13.1 million and $18.3
million, respectively, available to borrow, based on our eligible collateral less letters of credit
outstanding. On December 31, 2009 and December 31, 2008, we had issued stand-by letters of credit
totaling $0.9 million under our letter of credit sub-facility.
Other Debt
We have entered into a short-term, variable-rate, debt agreement of up to $3.3 million (2.3
million Euro) as of December 31, 2009, with a local Italian financial institution at our Italian
facility. There were no borrowings under this credit facility at December 31, 2009 or 2008.
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The following discussion involves forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements.
Market Risk Disclosures. We are exposed to market risk related to changes in interest rates
and foreign currency exchange rates. In seeking to minimize the risks and costs associated with
market risk, we manage our exposures to interest rates and foreign currency exchange rates through
our regular operating and financial activities and through foreign currency hedge contracts. From
time to time we may use foreign currency hedge contracts to reduce the effects of fluctuations in
exchange rates, however we had no foreign currency hedge contracts outstanding as of December 31,
2009. The majority of assets held by our non-qualified deferred compensation plan are invested in
mutual funds. We do not use financial instruments for speculative or trading purposes.
Interest Rate Risk. We are subject to market risk from exposure to changes in interest rates
due to our financing, investing and cash management activities. We have domestic and Italian
variable rate credit facilities, fixed rate senior notes, cash and equivalents and short and
long-term investments. At December 31, 2009, our total debt outstanding consisted of fixed rate
senior notes. Our cash is primarily invested in bank deposits, money market funds and other
marketable debt securities, including commercial paper. Due to their short maturities, the carrying
value of our investments approximates fair value on the reporting dates.
The primary objective of our investment strategy is to achieve maximum yield consistent with
security of principal and maintenance of liquidity. In undertaking this strategy, we are exposed
to financial market risks including default risk, cash balances included in bank deposits exceeding
insurance limits set by the Federal Deposit Insurance Corporation, changes in marketable debt
prices, equity security prices and interest rates. We do not expect any of our counterparties to
fail to meet their obligations. At December 31, 2009, a 1% change in market interest rates on our
cash and equivalents and short-term investments would have an impact of approximately $0.8 million
on an annual basis.
Inflation/Deflation Risk. We manage our inflation/deflation risks by ongoing review of
product selling prices and production costs. Our overall strategy is to remain commodity neutral
with respect to increases or decreases in our raw material prices. However, the ability to pass on
price increases to our customers or retain the benefit of price decreases is dependent on market
conditions. The current economic crisis has resulted in increasing downward pressure from
customers. It is difficult to predict the impact that possible future raw material cost changes
might have on our profitability. The effect of deflation in raw material costs would depend on the
extent to which we had to lower selling prices of our products to respond to sales price
competition in the market. We have not entered into any hedging programs to mitigate the risk of
adverse price fluctuations, nor do we intend to hedge our exposure to such risks in the future.
38
Foreign Currency Exchange Risk. We have foreign manufacturing operations in Italy, China
and Canada. Revenue and expenses from these operations are denominated in local currency, thereby
creating exposures to changes in exchange rates. As such, fluctuations in these operations
respective currencies may have an impact on our business, results of operations and financial
position. We currently do not use financial instruments to hedge our exposure to exchange rate
fluctuations with respect to our foreign operations. As a result, we may experience substantial
foreign currency translation gains or losses due to the volatility of other currencies compared to
the U.S. dollar, which may positively or negatively affect our results of operations attributed to
these operations. As currency exchange rates fluctuate, translation of the income statements of
our international businesses into U.S. dollars will affect comparability of revenues and expenses
between years.
Future business operations and opportunities outside of the United States may further increase
the risk that cash flows resulting from these activities may be adversely affected by changes in
currency exchange rates. If and when appropriate, we intend to manage these risks through our
regular operating and financial activities and by utilizing various types of foreign exchange
contracts.
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Hawk Corporation
December 31, 2009, 2008 and 2007
|
|
|
|
|
Audited Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
47 |
|
39
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Hawk Corporation
We have audited the accompanying consolidated balance sheets of Hawk Corporation as of December 31,
2009 and 2008, and the related consolidated statements of operations, shareholders equity, and
cash flows for each of the three years in the period ended December 31, 2009. Our audits also
included the financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hawk Corporation at December 31, 2009 and
2008, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Hawk Corporations internal control over financial reporting as of December
31, 2009, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10,
2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 10, 2010
40
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Hawk Corporation
We have audited Hawk Corporations internal control over financial reporting as of December 31,
2009, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Hawk
Corporations management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Managements Report on Internal Control over Financial Reporting (Item
9A). Our responsibility is to express an opinion on the companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Hawk Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 31, 2009 and 2008, and the
related consolidated statements of operations, shareholders equity, and cash flows for each of the
three years in the period ended December 31, 2009 of Hawk Corporation and our report dated March
10, 2010 expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
Cleveland, Ohio
March 10, 2010
41
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
47,206 |
|
|
$ |
62,520 |
|
Short-term investments |
|
|
35,930 |
|
|
|
30,774 |
|
Accounts receivable, less allowance of $985 in
2009 and $1,328 in 2008 |
|
|
27,578 |
|
|
|
38,569 |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
|
5,503 |
|
|
|
10,607 |
|
Work-in-process |
|
|
10,886 |
|
|
|
16,967 |
|
Finished products |
|
|
11,106 |
|
|
|
13,803 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
27,495 |
|
|
|
41,377 |
|
Deferred income taxes |
|
|
1,305 |
|
|
|
414 |
|
Other current assets |
|
|
5,686 |
|
|
|
5,521 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
145,200 |
|
|
|
179,175 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Land and improvements |
|
|
1,166 |
|
|
|
1,154 |
|
Buildings and improvements |
|
|
19,264 |
|
|
|
16,227 |
|
Machinery and equipment |
|
|
102,365 |
|
|
|
94,388 |
|
Furniture and fixtures |
|
|
8,327 |
|
|
|
8,225 |
|
Construction in progress |
|
|
2,186 |
|
|
|
6,638 |
|
|
|
|
|
|
|
|
|
|
|
133,308 |
|
|
|
126,632 |
|
Less accumulated depreciation |
|
|
86,212 |
|
|
|
79,134 |
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
47,096 |
|
|
|
47,498 |
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Finite-lived intangible assets |
|
|
6,015 |
|
|
|
6,568 |
|
Deferred income taxes |
|
|
289 |
|
|
|
2,381 |
|
Other |
|
|
5,892 |
|
|
|
4,370 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
12,196 |
|
|
|
13,319 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
204,492 |
|
|
$ |
239,992 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
42
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
16,861 |
|
|
$ |
30,207 |
|
Accrued compensation |
|
|
7,324 |
|
|
|
9,910 |
|
Accrued interest |
|
|
3,385 |
|
|
|
3,816 |
|
Accrued taxes |
|
|
345 |
|
|
|
2,253 |
|
Other accrued expenses |
|
|
3,979 |
|
|
|
7,031 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
31,894 |
|
|
|
53,217 |
|
|
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
77,090 |
|
|
|
87,090 |
|
Deferred income taxes |
|
|
2,873 |
|
|
|
338 |
|
Pension liabilities |
|
|
2,509 |
|
|
|
11,300 |
|
Other accrued expenses |
|
|
12,656 |
|
|
|
10,656 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
95,128 |
|
|
|
109,384 |
|
|
|
|
|
|
|
|
|
|
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 |
|
Series 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; 7,979,740 and 8,836,424 outstanding in 2009 and
2008, respectively |
|
|
92 |
|
|
|
92 |
|
Class B common stock, $.01 par value; 10,000,000 shares authorized;
none issued or outstanding |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
55,323 |
|
|
|
54,738 |
|
Retained earnings |
|
|
42,011 |
|
|
|
35,784 |
|
Accumulated other comprehensive loss |
|
|
(3,281 |
) |
|
|
(8,232 |
) |
Treasury stock, at cost, 1,208,010 and 351,326 shares in 2009 and
2008, respectively |
|
|
(16,676 |
) |
|
|
(4,992 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
77,470 |
|
|
|
77,391 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
204,492 |
|
|
$ |
239,992 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
43
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
$ |
172,402 |
|
|
$ |
269,648 |
|
|
$ |
215,879 |
|
Cost of sales |
|
|
124,927 |
|
|
|
192,552 |
|
|
|
164,509 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
47,475 |
|
|
|
77,096 |
|
|
|
51,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative expenses |
|
|
30,238 |
|
|
|
37,325 |
|
|
|
31,172 |
|
Amortization of finite-lived intangible assets |
|
|
553 |
|
|
|
589 |
|
|
|
727 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
30,791 |
|
|
|
37,914 |
|
|
|
31,899 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
16,684 |
|
|
|
39,182 |
|
|
|
19,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(8,036 |
) |
|
|
(8,055 |
) |
|
|
(9,394 |
) |
Interest income |
|
|
491 |
|
|
|
2,089 |
|
|
|
3,835 |
|
Other income (expense), net |
|
|
1,879 |
|
|
|
1,503 |
|
|
|
(297 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before income taxes |
|
|
11,018 |
|
|
|
34,719 |
|
|
|
13,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
4,505 |
|
|
|
12,139 |
|
|
|
5,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, after income taxes |
|
|
6,513 |
|
|
|
22,580 |
|
|
|
7,786 |
|
(Loss) income from discontinued operations, after income tax
(benefit)
expense of ($70) in 2009, ($1,957) in 2008, and $2,414 in 2007 |
|
|
(136 |
) |
|
|
(1,738 |
) |
|
|
9,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,377 |
|
|
$ |
20,842 |
|
|
$ |
17,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, after income taxes |
|
$ |
0.77 |
|
|
$ |
2.50 |
|
|
$ |
0.85 |
|
Discontinued operations, after income taxes |
|
|
(0.01 |
) |
|
|
(0.19 |
) |
|
|
1.06 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per basic share |
|
$ |
0.76 |
|
|
$ |
2.31 |
|
|
$ |
1.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, after income taxes |
|
$ |
0.75 |
|
|
$ |
2.40 |
|
|
$ |
0.82 |
|
Discontinued operations, after income taxes |
|
|
(0.02 |
) |
|
|
(0.19 |
) |
|
|
1.01 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per diluted share |
|
$ |
0.73 |
|
|
$ |
2.21 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding basic |
|
|
8,242 |
|
|
|
8,964 |
|
|
|
8,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares and equivalents outstanding diluted |
|
|
8,507 |
|
|
|
9,356 |
|
|
|
9,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
6,227 |
|
|
$ |
20,692 |
|
|
$ |
17,118 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
44
HAWK CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Retained |
|
|
Foreign |
|
|
Change in |
|
|
/ Loss on |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
Paid-in |
|
|
Earnings |
|
|
Currency |
|
|
Pension |
|
|
Marketable |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
(Deficit) |
|
|
Translation |
|
|
Liability |
|
|
Securities |
|
|
Stock |
|
|
Total |
|
Balance at January 1, 2007 |
|
$ |
1 |
|
|
$ |
92 |
|
|
$ |
53,492 |
|
|
$ |
(2,026 |
) |
|
$ |
2,142 |
|
|
$ |
(5,609 |
) |
|
$ |
|
|
|
$ |
(1,363 |
) |
|
$ |
46,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,268 |
|
Other comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
funded status
of pensions,
net of tax of $1,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,980 |
|
|
|
|
|
|
|
|
|
|
|
1,980 |
|
Unrealized gain
on marketable
securities,
net of tax
of $37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
65 |
|
Foreign
currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,545 |
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
3,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,508 |
|
Preferred stock
dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
Share based
compensation |
|
|
|
|
|
|
|
|
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390 |
|
Stock repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,694 |
) |
|
|
(3,694 |
) |
Issuance of common
stock from treasury as
compensation and
exercise of stock
options |
|
|
|
|
|
|
|
|
|
|
(814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,087 |
|
|
|
1,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
1 |
|
|
$ |
92 |
|
|
$ |
53,068 |
|
|
$ |
15,092 |
|
|
$ |
5,687 |
|
|
$ |
(3,711 |
) |
|
$ |
65 |
|
|
$ |
(2,970 |
) |
|
$ |
67,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,842 |
|
Other comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
funded status
of pensions,
net of tax of $4,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,596 |
) |
|
|
|
|
|
|
|
|
|
|
(7,596 |
) |
Unrealized loss
on marketable
securities,
net of tax
of $25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
(44 |
) |
Foreign
currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,744 |
) |
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
(2,633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,273 |
) |
Preferred stock
dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
Share based compensation |
|
|
|
|
|
|
|
|
|
|
808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
808 |
|
Stock repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,335 |
) |
|
|
(2,335 |
) |
Tax benefit from
exercise of incentive
stock
options |
|
|
|
|
|
|
|
|
|
|
908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
908 |
|
Issuance of common
stock from treasury as
compensation and
exercise of stock
options |
|
|
|
|
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313 |
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
1 |
|
|
$ |
92 |
|
|
$ |
54,738 |
|
|
$ |
35,784 |
|
|
$ |
2,943 |
|
|
$ |
(11,196 |
) |
|
$ |
21 |
|
|
$ |
(4,992 |
) |
|
$ |
77,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,377 |
|
Other comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
funded status
of pensions,
net of tax of $2,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,800 |
|
|
|
|
|
|
|
|
|
|
|
3,800 |
|
Unrealized loss
on marketable
securities,
net of tax
of $16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
(28 |
) |
Foreign
currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,253 |
|
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
1,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,951 |
|
Preferred stock
dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
Share based
compensation |
|
|
|
|
|
|
|
|
|
|
931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
931 |
|
Stock repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,632 |
) |
|
|
(12,632 |
) |
Tax benefit from
exercise of incentive
stock
options |
|
|
|
|
|
|
|
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116 |
|
Issuance of common
stock from treasury as
compensation and
exercise of stock
options |
|
|
|
|
|
|
|
|
|
|
(462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
948 |
|
|
|
486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
1 |
|
|
$ |
92 |
|
|
$ |
55,323 |
|
|
$ |
42,011 |
|
|
$ |
4,196 |
|
|
$ |
(7,470 |
) |
|
$ |
(7 |
) |
|
$ |
(16,676 |
) |
|
$ |
77,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,377 |
|
|
$ |
20,842 |
|
|
$ |
17,268 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
|
136 |
|
|
|
482 |
|
|
|
2,461 |
|
Loss (gain) on sale of discontinued operations, net of tax |
|
|
|
|
|
|
1,256 |
|
|
|
(11,943 |
) |
Depreciation and amortization |
|
|
8,070 |
|
|
|
7,767 |
|
|
|
7,682 |
|
Deferred income taxes |
|
|
1,600 |
|
|
|
1,631 |
|
|
|
1,999 |
|
Amortization of discount on investments |
|
|
(225 |
) |
|
|
(1,260 |
) |
|
|
(2,753 |
) |
Loss on sale or disposal of fixed assets |
|
|
70 |
|
|
|
202 |
|
|
|
114 |
|
Write-off of deferred financing fees |
|
|
177 |
|
|
|
|
|
|
|
583 |
|
Stock option expense |
|
|
931 |
|
|
|
808 |
|
|
|
390 |
|
Changes in operating assets and liabilites: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
11,126 |
|
|
|
(2,277 |
) |
|
|
(1,351 |
) |
Inventories |
|
|
13,957 |
|
|
|
(5,255 |
) |
|
|
(1,253 |
) |
Other assets |
|
|
(1,907 |
) |
|
|
(1,082 |
) |
|
|
(898 |
) |
Accounts payable |
|
|
(12,834 |
) |
|
|
(473 |
) |
|
|
7,308 |
|
Accrued expenses |
|
|
(8,011 |
) |
|
|
2,445 |
|
|
|
1,610 |
|
Pension accounts, net |
|
|
(2,906 |
) |
|
|
(1,617 |
) |
|
|
(1,621 |
) |
Other |
|
|
2,611 |
|
|
|
99 |
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing operations |
|
|
19,172 |
|
|
|
23,568 |
|
|
|
20,415 |
|
Net cash (used in) provided by operating activities of discontinued operations |
|
|
(136 |
) |
|
|
1,939 |
|
|
|
(6,954 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations |
|
|
|
|
|
|
2,650 |
|
|
|
93,355 |
|
Purchase of held to maturity securities |
|
|
|
|
|
|
|
|
|
|
(78,969 |
) |
Proceeds from held to maturity securities |
|
|
|
|
|
|
|
|
|
|
80,475 |
|
Purchases of available for sale securities |
|
|
(173,837 |
) |
|
|
(311,355 |
) |
|
|
(263,869 |
) |
Proceeds from available for sale securities |
|
|
168,997 |
|
|
|
340,571 |
|
|
|
206,306 |
|
Purchases of property, plant and equipment |
|
|
(7,518 |
) |
|
|
(15,204 |
) |
|
|
(7,648 |
) |
Proceeds from sale of property, plant and equipment |
|
|
11 |
|
|
|
18 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities of continuing operations |
|
|
(12,347 |
) |
|
|
16,680 |
|
|
|
29,667 |
|
Net cash used in investing activities of discontinued operations |
|
|
|
|
|
|
(51 |
) |
|
|
(1,423 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on short-term debt |
|
|
|
|
|
|
|
|
|
|
(980 |
) |
Proceeds from long-term debt |
|
|
|
|
|
|
|
|
|
|
10,964 |
|
Payments on long-term debt |
|
|
(10,000 |
) |
|
|
(59 |
) |
|
|
(34,006 |
) |
Proceeds from stock options |
|
|
436 |
|
|
|
221 |
|
|
|
1,233 |
|
Stock repurchase |
|
|
(12,632 |
) |
|
|
(2,335 |
) |
|
|
(3,694 |
) |
Receipts from government grants |
|
|
325 |
|
|
|
675 |
|
|
|
|
|
Payments of deferred financing fees |
|
|
(340 |
) |
|
|
|
|
|
|
|
|
Tax benefit from exercise of incentive stock options |
|
|
116 |
|
|
|
908 |
|
|
|
|
|
Payments of preferred stock dividends |
|
|
(150 |
) |
|
|
(150 |
) |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities of continuing operations |
|
|
(22,245 |
) |
|
|
(740 |
) |
|
|
(26,633 |
) |
Net cash used in financing activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
Effect of exchange rate changes on cash |
|
|
242 |
|
|
|
(868 |
) |
|
|
771 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by continuing operations |
|
|
(15,178 |
) |
|
|
38,640 |
|
|
|
24,220 |
|
Net cash (used in) provided by discontinued operations |
|
|
(136 |
) |
|
|
1,888 |
|
|
|
(8,391 |
) |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(15,314 |
) |
|
|
40,528 |
|
|
|
15,829 |
|
Cash and cash equivalents at beginning of year |
|
|
62,520 |
|
|
|
21,992 |
|
|
|
6,163 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
47,206 |
|
|
$ |
62,520 |
|
|
$ |
21,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
8,082 |
|
|
$ |
7,697 |
|
|
$ |
10,032 |
|
|
|
|
|
|
|
|
|
|
|
Cash payments for taxes |
|
$ |
6,606 |
|
|
$ |
5,797 |
|
|
$ |
5,602 |
|
|
|
|
|
|
|
|
|
|
|
Cash refunds for taxes |
|
$ |
(216 |
) |
|
$ |
(580 |
) |
|
$ |
(544 |
) |
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of incentive
stock options |
|
$ |
116 |
|
|
$ |
908 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
46
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
(In Thousands, except share data)
1. Basis of Presentation
Hawk Corporation, through its friction products segment, designs, engineers, manufactures and
markets specialized components used in a variety of off-highway, on-highway, industrial, aircraft,
agricultural and performance applications.
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in the
accompanying financial statements.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates, judgments and assumptions that affect the amounts
reported in the accompanying financial statements and notes. Actual results could differ from those
amounts.
Cash Equivalents
The Company considers all highly liquid investments that are readily convertible to cash with
a maturity of three months or less when purchased to be cash equivalents. Cash equivalents at
December 31, 2009 consist of various money market funds. The carrying amount of cash and cash
equivalents approximates its fair value due to their short maturities.
Short-term Investments
The Company defines short-term investments as income yielding securities that can be readily
converted into cash. Short-term investments at December 31, 2009 consist primarily of U.S.
Treasury and agency obligations and various issues of A1+/P1 rated corporate commercial paper. The
Companys short-term investments are classified as available for sale and contractual maturities
for all such securities at December 31, 2009 were within one year. Available-for-sale securities
are reported at fair value with unrealized holding gains and losses, net of tax, included in
Accumulated other comprehensive (loss) income.
Fair Value of Financial Instruments
The Companys financial instruments include cash and cash equivalents, short and long-term
investments, short-term trade receivables, short and long-term notes receivable, accounts payable,
deferred compensation plan liabilities and debt instruments. Because of their short maturity, the
historical carrying value of short-term financial instruments approximates fair value. Fair values
for long-term financial instruments that are not readily determinable are estimated based upon the
discounted future cash flows at prevailing market interest rates. Fair value of long-term debt is
based on quoted market prices.
Trade Receivables
The Company maintains an allowance for doubtful accounts for estimated losses from the failure
of our customers to make required payments for products delivered. The Company estimates this
allowance based on the age of the related receivable, knowledge of the financial condition of its
customers, review of historical receivable and reserve trends and other pertinent information. If
the financial condition of the Companys customers deteriorates or it experiences an unfavorable
trend in receivable collections in the future, additional allowances may be required.
Historically, the Companys reserves have approximated actual experience.
47
Inventories
Inventories are stated at the lower of cost or market. Cost includes materials, labor and
overhead and is determined by the first-in, first-out (FIFO) method. The Company reviews the net
realizable value of inventory in detail on an on-going basis, with consideration given to
deterioration, obsolescence, and other factors. If actual market conditions differ from those
projected by management, and the Companys estimates prove to be inaccurate, write-downs of
inventory values and adjustments to cost of sales may be required. Historically, the Companys
reserves have approximated actual experience.
Long-Lived Assets
Property, plant and equipment is stated at cost and includes expenditures for additions and major
improvements. Expenditures for repairs and maintenance are charged to operations as incurred. The
Company uses the straight-line method of depreciation for financial reporting purposes. Buildings
and improvements are depreciated over periods ranging from 7 to 34 years. Machinery and equipment
are depreciated over periods ranging from 4 to 12 years. Furniture and fixtures are depreciated
over periods ranging from 3 to 10 years. Accelerated methods of depreciation are used for federal
income tax purposes. When assets are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in the consolidated
statement of operations. The Companys depreciation expense was $7,132 in 2009, $6,822 in 2008 and
$6,550 in 2007.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate the
carrying amount may not be recoverable. Events or circumstances that would result in an impairment
review primarily include operations reporting losses, a significant change in the use of an asset,
or the planned disposal or sale of the asset. The asset would be considered impaired when the
future net undiscounted cash flows generated by the asset are less than its carrying value. An
impairment loss would be recognized based on the amount by which the carrying value of the asset
exceeds its fair value, as determined by quoted market price (if available) or the present value of
expected future cash flows.
Pension Benefits
The Company recognizes the overfunded or underfunded status of a plan as an asset or liability
in the statement of financial position and the recognition of changes in the funded status in the
year in which the changes occur through Accumulated other comprehensive (loss) income. Pension
expense continues to be recognized in the financial statements on an actuarial basis.
To develop the discount rate assumption to be used for its pension plans, the Company matches
projected pension payments to the yield derived from a spot-rate yield curve that contains a
portfolio of available non-callable bonds rated AA or higher with comparable maturities. The
expected long-term rate of return assumption is based on the expected return of the various asset
classes in the plans portfolio and the targeted allocation of plan assets. The asset return is
developed using historical asset return performance as well as current and anticipated market
conditions such as inflation, interest rates and market performance. The assumed long-term rate of
return on assets is applied to a calculated value of plan assets and produces the expected return
on plan assets that is included in net pension expense. The difference between this expected
return and the actual return on plan assets is recorded to Accumulated other comprehensive (loss)
income.
Revenue Recognition
Revenue from the sale of the Companys products is recognized when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii) shipment has occurred,
(iii) the price to the customer is fixed or determinable, and (iv) collection of the resulting
receivable is reasonable assured. Revenue is generally recognized at the point of shipment;
however in certain instances as shipping terms dictate, revenue is recognized when the product
reaches the point of destination, and title to the customer is transferred. Substantially all of
the Companys revenues are derived from fixed price purchase orders.
Costs and related expenses to manufacture the products are recorded as costs of sales when the
related revenue is recognized. Shipping and handling costs are included in cost of products sold
and are included in net sales when billed to customers.
48
Certain of the Companys foreign locations collect various taxes from customers that have been
assessed by a governmental authority and imposed on revenue-producing transactions. The Company
records all such taxes on a net basis in its Consolidated Statements of Operations.
Grant Income
Grant income is recognized when there is reasonable assurance that the Company has complied
with the conditions attached to the respective grant and the grant income will be received. Grant
income is recognized in the Companys Consolidated Statements of Operations on a systematic basis
over the periods necessary to match the grant income with related costs. Specifically, grants
related to capital assets are deducted from the carrying amount of the related asset and recognized
in the Companys Consolidated Statements of Operations as a reduction of depreciation expense over
the useful life of the asset. Grant income received for expenses is recorded as a reduction to the
related expense in the Consolidated Statements of Operations, recognized as the related costs are
incurred.
During the years 2009 and 2008, the Company received a grant totaling $1,000 which has been
recognized as a reduction to the carrying value of Property, plant and equipment with a
corresponding reduction to depreciation expense of $82 and $19, respectively. The government grant
contains obligations to provide periodic progress reporting, maintenance of records and various
other terms and conditions, and provides for repayment in the event of default by the Company. The
Company has complied and expects to continue to comply with all conditions attached to the grant as
of December 31, 2009.
Insurance
The Company uses 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 liabilities for these self-insured liabilities at December 31, 2009 and 2008 of
$1,071 and $1,625, respectively, could be significantly affected if future actual occurrences and
claims differ from these assumptions and historical trends.
Contingencies
The Companys treatment of contingent liabilities in the financial statements is based on the
expected outcome of the applicable contingency. In the ordinary course of business, the Company
consults with legal counsel on matters related to litigation and other experts both within and
outside of the Company. The Company will accrue a liability if the likelihood of an adverse outcome
is probable of occurrence and the amount is estimable. The Company will disclose contingent
liabilities if either the likelihood of an adverse outcome is only reasonably possible or an amount
is not estimable.
Foreign Currency
The Companys primary functional currency is the U.S. dollar. However, revenue and expenses
from the Companys foreign manufacturing operations in Italy, China and Canada are denominated in
local currency, thereby creating exposures to changes in exchange rates. Gains and losses from
foreign currency translation of assets and liabilities are included in Accumulated other
comprehensive (loss) income, a separate component of shareholders equity. Accumulated other
comprehensive (loss) income included translation gains (losses) of $1,179, ($2,633) and $3,463 for
the years ended December 31, 2009, 2008 and 2007, respectively. 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. Sales or purchases in foreign currencies, other than the
subsidiarys local currency, are exchanged at the date of the transaction. The effect of
transaction gains or losses is included in Other income (expense), net in our Consolidated
Statements of Operations. Foreign currency transaction (losses) gains were ($398), $507, and $263
in 2009, 2008 and 2007, respectively.
Significant Concentrations
The Company provides credit, in the normal course of its business, to original equipment and
aftermarket manufacturers. For the year ended December 31, 2009, approximately 44.5% of the
Companys revenue was derived from its top five customers. The Companys largest customer,
Caterpillar, accounted for approximately 17.3% of its total net sales in 2009. For the year ended
December 31, 2008, the Companys top five customers accounted for 43.9% of its revenues. The
Company expects this customer concentration will continue to account for a large portion of our
revenue in the future. The Company generally does not require collateral and performs ongoing
credit evaluations of its customers
and maintains allowances for potential credit losses which, when realized, have been within
the range of managements expectations.
49
Personnel
At December 31, 2009, the Company had 619 domestic employees and 334 international employees.
Approximately 25 employees at the Akron, Ohio facility are covered under a collective bargaining
agreement with the United Automobile Workers expiring in July 2012. Approximately 210 employees at
the Companys Orzinuovi, Italy facility are represented by a national mechanics union agreement
that expires in December 2012. Additionally, 205 of its Italian employees are also covered by an
internal facility agreement that expires in December 2012. Labor relations are generally
satisfactory, and there have been no major work stoppages in recent years.
Product Research and Development
Product research and development costs are expensed as incurred. The Companys expenditures for
product research and development and engineering were approximately $4,704 in 2009, $5,358 in 2008
and $4,627 in 2007.
Advertising
All advertising costs are expensed as incurred. The Companys expenditures for advertising
were approximately $247 in 2009, $596 in 2008 and $447 in 2007.
Income Taxes
The Company uses the liability method in measuring the provision for income taxes and
recognizing deferred tax assets and liabilities in the balance sheet. The liability method requires
that deferred income taxes reflect the tax consequences of currently enacted tax laws and rates for
differences between the tax and financial reporting basis of assets and liabilities.
Recent Accounting Developments
The following new accounting updates and guidance became effective for the Company commencing
with its fourth quarter of 2009:
|
|
|
In February 2010, the FASB issued ASU 2010-09, which addresses certain implementation
issues related to an entitys requirement to perform and disclose subsequent events
procedures. The ASU (1) exempts entities that file their financial statements with, or
furnish them to, the SEC from disclosing the date through which subsequent events
procedures have been performed and (2) clarifies the circumstances in which an entitys
financial statements would be considered restated and in which the entity would therefore
be required to update its subsequent events evaluation since the originally issued or
available to be issued financial statements. ASU 2010-09 became effective immediately upon
issuance, and the Company has adopted its disclosure requirements within this Form 10-K for
the year ended December 31, 2009. |
|
|
|
The FASB issued a technical amendment to employers disclosure requirements for plan
assets for defined benefit pensions and other postretirement plans, which is integrated
into the ASC at ASC 715-20-50, Compensation Retirement Benefits: Defined Benefit Plans
General: Disclosure. The objective is to provide users of financial statements with an
understanding of how investment allocation decisions are made, the major categories of
plan assets held by the plans, the inputs and valuation techniques used to measure the
fair value of plan assets, significant concentration of risk within the companys plan
assets, and for fair value measurements determined using significant unobservable inputs a
reconciliation of changes between the beginning and ending balances. The disclosures
contained within the Companys Form 10-K for the year ended December 31, 2009 are in
compliance with the requirements of this ASC. |
|
|
|
The FASB issued ASU 2009-05, which provides additional guidance clarifying the
measurement of liabilities at fair value and addresses restrictions when estimating the
fair value of a liability under ASC 820. When a quoted price in an active market for the
identical liability is not available, ASU 2009-05 requires that the fair value should be
measured using one of the following approaches a) the quoted price of the identical
liability when traded as an asset, b) quoted prices for similar liabilities or similar
liabilities when traded as assets or c) another valuation technique that is consistent
with the principles of ASC 820. For the Company, ASU 2009-05 is
effective for the quarter ended December 31, 2009. The disclosures contained within the
Companys Form 10-K for the year ended December 31, 2009 are in compliance with the
requirements of this ASC. |
50
In addition, the following accounting updates and guidance have been issued by the FASB which
will be adopted by the Company in future periods:
|
|
|
In January 2010, the FASB issued ASU 2010-06, which amends ASC 820 to add new
requirements for disclosures about transfers into and out of Levels 1 and 2 and separate
disclosures about purchases, sales, issuances and settlements relating to Level 3
measurements. ASU 2010-06 also clarifies existing fair value disclosures about the level
of disaggregation and about inputs and valuation techniques used to measure fair value.
Further, ASU 2010-06 amends guidance on employers disclosures about postretirement
benefit plan assets under ASC 715 to require that disclosures be provided by classes of
assets instead of by major categories of assets. This ASU is effective for the first
reporting period beginning after December 15, 2009, except for the requirement to provide
Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which
will be effective for fiscal years beginning on or after December 15, 2010, and for
interim periods within those fiscal years. The Company does not expect the adoption of
this guidance will have a material impact on its consolidated financial statements and
disclosures. |
|
|
|
In December 2009, the FASB issued ASU 2009-17, which codifies SFAS 167 and revises the
former guidance under FIN 46R to require an analysis to determine whether a variable
interest gives the entity a controlling financial interest in a variable interest entity.
SFAS 167 requires an ongoing reassessment and eliminates the quantitative approach
previously required for determining whether an entity is the primary beneficiary. The ASU
also requires additional disclosures about a reporting entitys involvement with variable
interest entities and about any significant changes in risk exposure as a result of that
involvement. This ASU is effective for fiscal years beginning on or after November 15,
2009. The Company does not expect the adoption of this statement will have an impact on
its consolidated financial statements and disclosures. |
|
|
|
In December 2009, the FASB issued ASU 2009-16, which codifies SFAS 166 and revises the
former guidance under SFAS 140. Among other things, ASU 2009-16 removes the concept of a
qualifying special-purpose entity, changes the requirements for derecognizing assets, and
enhances information reported to financial statement users by increasing the transparency
of disclosures about transfers of financial assets and an entitys continuing involvement
with transferred financial assets. This statement also clarifies the requirements for
isolation and limitations on portions of financial assets that are eligible for sale
accounting. This ASU is effective for fiscal years beginning on or after November 15,
2009. The Company does not expect the adoption of this statement will have an impact on
its consolidated financial statements and disclosures. |
|
|
|
In October 2009, the FASB issued ASU 2009-14, which will become effective for all
revenue arrangements entered into or materially modified by the Company beginning July 1,
2010, with earlier adoption permitted. Under the new guidance, tangible products that
have software components that are essential to the functionality of the tangible product
will no longer be within the scope of the software revenue recognition guidance, and
software-enabled products will now be subject to other relevant revenue recognition
guidance. The Company does not expect the adoption of this guidance will have an
impact on its consolidated financial statements and disclosures. |
|
|
|
In October 2009, the FASB issued ASU 2009-13, which will become effective for all
revenue arrangements entered into or materially modified by the Company beginning July 1,
2010, with earlier adoption permitted. Under the new guidance, when vendor specific
objective evidence or third party evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to separate deliverables and
allocate arrangement considerations using the relative selling price method. The guidance
includes new disclosure requirements on how the application of the relative selling price
method affects the timing and amount of revenue recognition. The Company does not expect
the adoption of this guidance will have an impact on its consolidated financial
statements and disclosures. |
|
|
|
In September 2009, the FASB issued a proposed ASU on the Emerging Issues Task Force
consensus-for-exposure on Issue 09-2 that addresses the inconsistencies between the
accounting for Research and Development (R&D) assets acquired in a business combination
and those acquired in an asset acquisition. The proposed ASU requires an entity to
capitalize R&D assets acquired in an asset acquisition as indefinite-lived intangible
assets until completion or abandonment of the related R&D activities. The ASU also
proposes that contingent
consideration in an asset acquisition would be accounted for in accordance with other
sections of the ASC and includes a principle under which the entity would analyze whether
contingent consideration relates to the acquired asset or to future services provided by the
seller. The proposed ASU would be effective for fiscal years beginning on or after December
15, 2009 and the Company does not expect the adoption of this guidance will have a material
impact on its consolidated financial statements and disclosures. |
51
The Companys management does not believe that any other recently issued, but not yet
effective, accounting standards, if currently adopted, will have a material effect on the
accompanying financial statements.
3. Discontinued Operations
The Company began reporting the performance racing segment as a discontinued operation for
financial reporting purposes as of March 31, 2008, at which point this segment had met the held for
sale criteria. The sale of the Companys performance racing facility in North Carolina closed on
May 30, 2008, and the Company reported a loss on sale of $1,896 ($1,256, net of tax). This loss is
reported in (Loss) income from discontinued operations, after income taxes in the Consolidated
Statement of Operations for the year ended December 31, 2008. The sale of the Companys performance
racing facility in Illinois closed on December 22, 2008 and, because sales proceeds equaled net
book value, no gain or loss was recognized in the Consolidated Statement of Operations for the year
ended December 31, 2008.
The sale of the Companys precision components segment closed in the first quarter of 2007,
and the Company reported a gain on sale of the precision components segment of $15,023 ($11,943,
net of tax). This gain is reported in (Loss) income from discontinued operations, after income
taxes in the Consolidated Statement of Operations for the year ended December 31, 2007.
In connection with the finalization of the sale of the Companys Monterrey, Mexico facility in
2006, the Company received a note receivable of $1,200. During 2008, the note holder defaulted on
its repayment obligation and the Company recorded a reserve of $1,000 due to its uncertainty of
collecting this remaining outstanding balance of the note receivable. During the fourth quarter of
2009, the Company was able to successfully negotiate a settlement arrangement with the note holder
and realized $125 of income in (Loss) income from discontinued operations, after income taxes for
the year ended December 31, 2009. During 2007, the Company received an audit assessment from the
Mexican tax authority related to certain tax matters associated with its Mexican discontinued
operation and recorded after tax discontinued operations expense of approximately $1,000 related to
this assessment in the year ended December 31, 2007. In 2008, the Company received a favorable
ruling from the Mexican tax authority and (Loss) income from discontinued operations, after income
taxes was favorably impacted by approximately $800 in the year ended December 2008 as a result of
this favorable ruling.
There are no remaining assets or liabilities classified as discontinued operations recorded in
the Consolidated Balance Sheets at December 31, 2009 or 2008. Through December 31, 2009, the
Company continues to make adjustments to amounts previously reported as discontinued operations and
incur legal and professional expenses associated with the finalization of legal matters and closure
of its legal presence in Mexico. This residual activity is included in the following summary of
our results of discontinued operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
$ |
|
|
|
$ |
7,373 |
|
|
$ |
20,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from discontinued operations, before income taxes |
|
$ |
(206 |
) |
|
$ |
(1,799 |
) |
|
$ |
(3,127 |
) |
(Loss) gain on sale of discontinued operations, before income
taxes |
|
|
|
|
|
|
(1,896 |
) |
|
|
15,023 |
|
Income tax (benefit) expense |
|
|
(70 |
) |
|
|
(1,957 |
) |
|
|
2,414 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, after income taxes |
|
$ |
(136 |
) |
|
$ |
(1,738 |
) |
|
$ |
9,482 |
|
|
|
|
|
|
|
|
|
|
|
52
The following table presents the composition of basic and diluted earnings per share from
discontinued operations, after income taxes for the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Basic (loss) earnings per share from discontinued operations, after
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from discontinued operations, after income taxes |
|
|
(0.01 |
) |
|
|
(0.05 |
) |
|
$ |
(0.27 |
) |
(Loss) gain on sale of discontinued operations, after income taxes |
|
|
|
|
|
|
(0.14 |
) |
|
|
1.33 |
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share from discontinued operations, after
income taxes |
|
$ |
(0.01 |
) |
|
$ |
(0.19 |
) |
|
$ |
1.06 |
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share from discontinued operations,
after income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from discontinued operations, after income taxes |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.27 |
) |
(Loss) gain on sale of discontinued operations, after income taxes |
|
|
|
|
|
|
(0.14 |
) |
|
|
1.28 |
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share from discontinued operations,
after income taxes |
|
$ |
(0.02 |
) |
|
$ |
(0.19 |
) |
|
$ |
1.01 |
|
|
|
|
|
|
|
|
|
|
|
4. Fair Value Measurements
The Company follows the fair value accounting guidance which refined the definition of fair
value, established a framework for measuring fair value, and permitted the election of fair value
measurement with unrealized gains and losses on designated items recognized in earnings at each
subsequent period for certain financial assets and liabilities. The Companys financial
instruments include cash and cash equivalents, short and long-term investments, short-term trade
receivables, short and long-term notes receivable, accounts payable and debt instruments. For
short-term instruments, other than those required to be reported at fair value on a recurring basis
and for which additional disclosures are included below, management concluded the historical
carrying value is a reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization.
The Companys financial instruments are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement. The three levels that may be used to
measure fair value are as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such
as quoted prices for similar assets or liabilities; quoted prices that are not active; or other
inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities. The fair values of available for sale obligations issued by
U.S. government agencies and U.S. corporations held by the Company were determined by obtaining
quoted prices from nationally recognized securities broker-dealers.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
53
The following tables set forth our financial assets and liabilities that were recorded at fair
value on a recurring basis as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
11,172 |
|
|
$ |
11,172 |
|
|
$ |
|
|
|
$ |
|
|
Commercial paper |
|
|
34,977 |
|
|
|
|
|
|
|
34,977 |
|
|
|
|
|
Other trading(1) |
|
|
3,018 |
|
|
|
2,538 |
|
|
|
|
|
|
|
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
49,167 |
|
|
$ |
13,710 |
|
|
$ |
34,977 |
|
|
$ |
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
liability
(1) |
|
$ |
3,018 |
|
|
$ |
2,538 |
|
|
$ |
|
|
|
$ |
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
3,018 |
|
|
$ |
2,538 |
|
|
$ |
|
|
|
$ |
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
22,031 |
|
|
$ |
22,031 |
|
|
$ |
|
|
|
$ |
|
|
Mutual funds |
|
|
25,028 |
|
|
|
25,028 |
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
19,956 |
|
|
|
|
|
|
|
19,956 |
|
|
|
|
|
U.S. govt. agencies |
|
|
10,000 |
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
Other trading(1) |
|
|
1,062 |
|
|
|
1,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
78,077 |
|
|
$ |
48,121 |
|
|
$ |
29,956 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability
(1) |
|
$ |
1,062 |
|
|
$ |
1,062 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
1,062 |
|
|
$ |
1,062 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other trading assets represent assets held in a rabbi trust to fund deferred compensation
plan liabilities and are included as a component of Other long-term assets in the Consolidated
Balance Sheets as of December 31, 2009 and December 31, 2008. The deferred compensation plan
liability is the Companys liability under its deferred compensation plan and is included in
Other long-term accrued expenses in the Consolidated Balance Sheets as of December 31, 2009
and 2008. |
At December 31, 2009, a majority of the Companys financial assets have been classified as
Level 2. These assets are initially valued at the transaction price and subsequently valued
typically utilizing third party pricing services. The pricing services use many inputs to
determine value, including reportable trades, broker/dealer quotes, bids, offers, and other
industry and economic events. The Company validates the prices provided by its third party pricing
services by reviewing their pricing methods and matrices, obtaining market values from other
pricing sources, and analyzing pricing data in certain instances. Considerable judgment is
required in interpreting market data to develop estimates of fair value. Accordingly, the fair
value estimates provided herein are not necessarily indicative of the amount that the Company or
its debtholders could realize in a current market exchange. The use of different assumptions
and/or estimation methodologies may have a material effect on the estimated fair value. After
completing its validation procedures, the Company did not adjust or override any fair value
measurements provided by our pricing services at either December 31, 2009 or 2008.
The fair values of the Companys money market funds and the majority of certain other trading
securities are determined based on quoted prices in active markets and have been classified as
Level 1. The trading securities are maintained for the future payments under the Companys
deferred compensation plan, which is structured as a rabbi trust. The investments are all managed
by a third party and valued based on the underlying fair value of each mutual fund held by the
trust, for which there are active quoted markets. The related deferred compensation liabilities
are valued based on the underlying investment selections held in each participants shadow account.
Investment funds held by the rabbi trust, for which there is an active quoted market, mirror the
investment options selected by participants in the deferred compensation plan. The majority of the
deferred compensation liability is classified as Level 1. The total net realized and unrealized
gains (losses) including the gain measured using Level 3 inputs totaled $778 in 2009, ($326) in
2008 and $0 in 2007 are included in Other income (expense), net in the Companys Consolidated
Statements of Operations, respectively. Offsetting entries to the deferred compensation liability
and compensation expense within Selling, technical and administrative expenses, for the same
amounts were also recorded during the years ended December 31, 2009, 2008 and 2007, respectively.
The fair value of a guaranteed income fund maintained in the rabbi trust and reported in Other
trading assets in the table above, and the related deferred compensation liability have been
classified as Level 3.
54
Level 3 Gains and Losses
The table below sets forth a summary of changes in the fair value of the deferred compensation
plans Level 3 assets for the year ended December 31, 2009:
|
|
|
|
|
|
|
Guaranteed |
|
|
|
Income Fund |
|
Balance January 1, 2009 |
|
$ |
|
|
Realized gains |
|
|
|
|
Unrealized gains / (losses) relating to instruments
still held at reporting date |
|
|
8 |
|
Purchases, sales, issuances and settlements (net) |
|
|
472 |
|
|
|
|
|
Balance December 31, 2009 |
|
$ |
480 |
|
|
|
|
|
The deferred compensation plan has entered into an investment contract, the Guaranteed
Income Fund (fund), with Prudential Retirement Services, Inc. (Prudential). Prudential maintains
the contributions to this fund in a general account, which is credited with earnings on the
underlying investments and charged for participant withdrawals and administrative expenses.
The Consolidated Balance Sheet as of December 31, 2009 presents the fund at contract value,
which approximates fair value. However, contract value is the relevant measurement attribute for
that portion of the net assets available for benefits attributable to fully benefit-responsive
investment contract because contract value is the amount deferred compensation plan participants
would receive if they were to initiate permitted transactions under the terms of the plan.
Contract value represents contributions made under the contract, plus earnings and transfers in,
less participant withdrawals, administrative expenses and transfers out. Prudential is
contractually obligated to repay the principal and a specified interest rate that is guaranteed to
the plan. Participants may ordinarily direct the withdrawal or transfer of all or a portion of
their investment at contract value. However, Prudential has the right to defer certain
disbursements (excluding retirement, termination, and death or disability disbursements) or
transfers from the fund when total amounts disbursed from the pool in a given calendar year exceed
10% of the total assets in that pool on January 1 of that year. The Company does not believe that
any events that would limit the deferred compensation plans ability to transact at contract value
with participants are probable of occurring.
There are no reserves against contract value for credit risk of the contract issuer or
otherwise. The average yield and crediting interest rate was approximately 2.87% for the year
ended December 31, 2009. The crediting interest rate is based on a formula agreed upon with the
Prudential, based on the yields of the underlying investments and considering factors such as
projected investment earnings, the current interest environment, investment expenses, and a profit
and risk component. The rate may never be less than 1.50% nor may it be reduced by more than 2.10%
during any calendar year. Interest rates are declared in advance and guaranteed for six month
periods.
55
The carrying value and the fair value of non-current financial liabilities that qualify as
financial instruments are reported in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
Long-term financial
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
77,090 |
|
|
$ |
76,994 |
|
|
$ |
87,090 |
|
|
$ |
88,396 |
|
5. Investments
The Company determines the appropriate classification of its investments at the time of
purchase and reevaluates such designation as of each balance sheet date. At both December 31, 2009
and December 31, 2008, the Company accounted for all of its short-term investments as
available-for-sale. Available-for-sale securities are reported at fair value with unrealized
holding gains and losses, net of tax, included in Accumulated other comprehensive loss in the
Consolidated Balance Sheets. The amortized cost of debt securities in this category is adjusted
for the amortization of any discount or premium to maturity computed under the effective interest
method. Dividend and interest income, including the amortization of any discount or premium, as
well as realized gains or losses, are included in Interest income in the Consolidated Statements of
Operations. Both the cost of any security sold and the amount reclassified out of Accumulated
other comprehensive (loss) income into earnings is based on the specific identification method.
The following is a summary of the Companys available-for-sale securities as of December 31,
2009 and December 31, 2008, by contractual maturity dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
|
|
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Estimated Fair Value |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
(Net Carrying Amount) |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt
securities due in
one year or less |
|
$ |
35,941 |
|
|
$ |
|
|
|
$ |
(11 |
) |
|
$ |
35,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt
securities due in
one year or less |
|
$ |
30,791 |
|
|
$ |
60 |
|
|
$ |
(26 |
) |
|
$ |
30,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, unrealized losses on available-for-sale securities of $11 ($7
net of tax) compared to net unrealized gains, net on available-for-sale securities of $34 ($21 net
of tax) at December 31, 2008 are included in Accumulated other comprehensive loss in the
accompanying Consolidated Balance Sheets. Unrealized losses of $32 ($21 net of tax) and unrealized
gains $102 ($65 net of tax) were reclassified out of Accumulated other comprehensive (loss) income
and into earnings during the years ended December 31, 2009 and 2008, respectively. No unrealized
gains (losses) were reclassified out of Accumulated other comprehensive (loss) income during the
year ended December 31, 2007.
At December 31, 2009, the Company had three investments with an amortized cost totaling
$34,988 that were in an unrealized loss position totaling $11 and the Company determined that the
gross unrealized loss on these investments is temporary in nature. The gross unrealized loss on
these investments was due to changes in interest rates and, at December 31, 2009, the Company had
both the intent and ability to hold these investments through their maturity dates in the first
quarter of 2010, at which time it expects to receive the full maturity value of $35,000.
At December 31, 2008, the Company had one investment in commercial paper with an estimated
fair value of $9,968 that was in an unrealized loss position, and the Company had determined that
the gross unrealized loss on this investment was temporary in nature. The gross unrealized loss on
this investment was due to changes in interest rates, and at December 31, 2008, the Company had
both the intent and ability to hold this investment through its maturity date in the first quarter
of 2009, at which time it received the full maturity value of $10,000.
56
6. Intangible Assets
The components of finite-lived intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Product
certifications |
|
$ |
20,820 |
|
|
$ |
14,805 |
|
|
$ |
6,015 |
|
|
$ |
20,820 |
|
|
$ |
14,252 |
|
|
$ |
6,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product certifications were acquired and valued based on the acquired companys position
as a certified supplier of friction materials to the major manufacturers of commercial aircraft
brakes. The benefit the Company receives from its product certifications is anticipated to
continue as long as the friction technology underlying them is utilized by the manufacturers of
commercial aircraft brakes. At December 31, 2009, the Companys technology continues to be
utilized on both current and replacement models of aircraft, and the Company currently anticipates
that its technology will continue to be used over the remaining useful life of its product
certifications. Therefore, the Company does not believe that our future cash flows will be
materially impacted by our intent or ability to renew or extend our product certification
arrangements.
The Company estimates that the straight-line amortization expense for finite-lived intangible
assets will be $553 in each of the next four fiscal years 2010 through 2013 and $437 in 2014.
The Company expenses any costs incurred to renew or extend the terms of its finite-lived
intangible assets. In 2009, 2008, and 2007, the company did not incur any costs to renew or extend
the terms of its product certifications.
7. Financing Arrangements
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
Senior notes |
|
$ |
77,090 |
|
|
$ |
87,090 |
|
Bank facilities (domestic and foreign) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
77,090 |
|
|
$ |
87,090 |
|
|
|
|
|
|
|
|
As of December 31, 2009 and December 31, 2008, the Company was in compliance with the
provisions of all of its debt instruments.
Aggregate principal payments due on long-term debt as of December 31, 2009 are as follows:
2010 $0; 2011 $0; 2012 $0; 2013 $0; 2014 $77,090.
Senior Notes
On November 1, 2004, the Company completed a public offering of $110,000 aggregate principal
amount of 83/4% Senior Notes due November 1, 2014 (the senior notes). In August 2007, under
provisions of the indenture, a total of $22,910 in aggregate principal amount was tendered and
subsequently redeemed by the Company. The Company reported a loss on extinguishment of debt,
comprised solely of the write-off of the unamortized portion of the debt issuance costs of $582,
which was recorded in Other income (expense), net in the Consolidated Statement of Operations for
the year ended December 31, 2007. In November 2009, the Company purchased $10,000 of its senior
notes in the open market. The senior notes have not been formally retired by the Company, but have
been treated as an extinguishment of debt for accounting purposes, as the Company has been released
from being the primary obligor under the liability. The Company reported a $126 loss on
extinguishment of debt associated with this purchase, comprised of a gain on the repurchase of the
bonds and the write-off of the unamortized portion of the debt issuance costs which was included in
Other income (expense), net in the Consolidated Statement of Operations for 2009, and
a commission expense of $25, which was included in Selling, technical and administrative expense in the Consolidated
Statement of Operations for 2009.
As noted in the above table, after taking into account the above transactions, the
remaining balance of senior notes outstanding as of December 31, 2009 is $77,090.
57
Interest is payable on the senior notes each January 1 and July 1.
The senior notes are senior unsecured obligations, rank senior in right of payment to all of
the Companys existing and future subordinated debt and rank equally in right of payment with all
of the Companys existing and future senior debt, including the Credit and Security Agreement,
dated June 12, 2009, with KeyBank National Association, as Lender (the bank facility), which is
described in more detail below.
The senior notes are unconditionally guaranteed on a senior unsecured basis by all of the
Companys existing and future domestic restricted subsidiaries (the Guarantors). The guarantees
rank senior in right of payment to all of the existing and future subordinated debt of the
Guarantors and equally in right of payment with all existing and future senior debt of the
Guarantors, including the bank facility. The senior notes and the guarantees will be effectively
subordinated to all of Hawks and the Companys Guarantors secured debt, including the bank
facility, to the extent of the value of the assets securing that debt.
On or after November 1, 2009, the Company may, at its option, redeem some or all of the senior
notes at the following redemption prices, plus accrued and unpaid interest and additional interest,
if any, to the date of redemption:
|
|
|
|
|
For the period below |
|
Percentage |
|
On or after November 1, 2009 |
|
|
104.375 |
% |
On or after November 1, 2010 |
|
|
103.281 |
% |
On or after November 1, 2011 |
|
|
102.188 |
% |
On or after November 1, 2012 |
|
|
101.094 |
% |
On or after November 1, 2013 |
|
|
100.000 |
% |
Upon a change of control as defined in the indenture, dated November 1, 2004, among Hawk, the
Guarantors and HSBC Bank USA, National Association, as trustee, each holder of the senior notes
will have the right to require the Company to repurchase all or any part of such holders Senior
Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest and additional interest, if any, to the date of purchase.
The senior notes are governed by the indenture. The indenture also contains certain covenants,
subject to a number of important limitations and exceptions that limit the Companys ability to:
|
|
|
incur or guarantee additional debt or issue disqualified capital stock, |
|
|
|
pay dividends, redeem subordinated debt or make other restricted payments, |
|
|
|
issue preferred stock of its subsidiaries, |
|
|
|
transfer or sell assets, including capital stock of its subsidiaries, |
|
|
|
incur dividend or other payment restrictions affecting certain of its subsidiaries, |
|
|
|
make certain investments or acquisitions, |
|
|
|
enter into certain transactions with affiliates, and |
|
|
|
merge, consolidate or transfer substantially all of its assets. |
The indenture considers non-compliance with the limitations set forth above to be events of
default. The indenture also considers non-payment of interest and principal amounts on the senior
notes and certain payment defaults with respect to other debt in excess of $5,000 to be events of
default. In the event of a default, the principal and interest could be accelerated upon written
notice by more than 25% or more of the holders of the senior notes.
58
The indenture permits the Company to incur additional debt without limitation, provided that
the Company continues to meet a cash flow ratio greater than 2.0 to 1.0 for the most recently ended
four quarters. Hawk may pay cash dividends on its Class A common stock under the indenture
provided:
|
|
|
there is no default or event of default, |
|
|
|
the Company meets the cash flow ratio, and |
|
|
|
the amount of the dividend payment plus certain other payments is not in excess of a
formula based on the sum of the Companys consolidated net income after November 1,
2004, the cash proceeds of certain equity offerings by the Company after November 1,
2004, and the return on certain investments made by the Company. |
Subsequent Event:
On February 8, 2010, the Company announced that it was soliciting consents from holders of
$75,740 of its senior notes to effect an amendment to the indenture governing the senior notes.
The amendment allows the Company to repurchase up to $20,000 of its outstanding common stock. The
consent solicitation provided for the payment of a consent fee for valid consents received by the
Company by 5:00 p.m. on February 22, 2010. As of that date $75,585 of the senior notes consented
and a fee of $1,513 was paid to the consenting senior note holders. On February 23, 2010, the
Company entered into a supplemental indenture to allow for the stock repurchase.
Bank Facility
On June 12, 2009, the Company entered into a new three year bank facility with KeyBank
National Association. The new bank facility replaced the Companys old credit facility which was
due to mature on November 1, 2009.
The bank facility has a maximum revolving credit commitment of $30,000, including a $2,000
letter of credit subfacility. The bank facility matures on June 11, 2012. Loans made under the
bank facility will be at interest rates derived either from federal funds rates (Base Rate Loans)
or Eurodollar rates (Eurodollar Loans). The interest rate for Base Rate Loans will be 175 basis
points over the higher of (a) the Lenders prime rate and (b) 0.5% in excess of the Federal Funds
Rate. The interest rate for Eurodollar Loans will be 350 basis points over the Eurodollar Rate. The
commitment fee is 50 basis points on the unused portion of the bank facility.
The bank facility is collateralized by a security interest in the cash, accounts receivable,
inventory and certain intangible assets of the Company and its domestic subsidiaries. The Company
pledged the stock of substantially all of its domestic subsidiaries and 65% of the stock of certain
of its foreign subsidiaries as collateral.
The bank facility requires maintenance of a fixed charge coverage ratio of at least 1.0 to 1.0
measured quarterly on a trailing four quarter basis, although this minimum coverage ratio applies
only if the Companys availability falls below $15,000, and the Company has borrowings under the
bank facility.
Under the bank facility, the Company may:
|
|
|
pay cash dividends on its Class A common stock in an amount up to $5,000 per year; |
|
|
|
repurchase its Class A common stock in an amount not to exceed $30,000 during the
commitment period; |
|
|
|
repurchase its senior notes in an amount not to exceed
$30,000 during the commitment period; and |
|
|
|
effect acquisitions subject to certain restrictions in an unlimited amount; |
provided that, in all cases there is no event of default, and with respect to acquisitions, the
Companys availability is not less than $15,000.
The bank facility also requires compliance with other customary loan covenants and contains
customary default provisions that, if triggered, would cause the acceleration of repayment of the
debt incurred under the bank facility. The Company has agreed to maintain average compensating
balances of $15,000 ($10,000 beginning January 1, 2010). The balances are not legally restricted to
withdrawal and serve as normal operating cash.
59
Approximately $356 of costs and expenses related to the issuance of the bank
facility are being deferred and amortized over the three year term of the bank facility.
The Company maintains its bank facility to finance its ongoing working capital requirements,
capital expenditure requirements and for general corporate purposes.
The Company had no borrowings under its bank facility or old credit facility at December 31,
2009 and December 31, 2008, respectively. The Company had $13,089 at December 31, 2009 compared to
$18,335 as of December 31, 2008 available to borrow based on its eligible collateral. On December
31, 2009, the Company had issued stand-by letters of credit totaling $855 compared to $893 of
issued stand-by letters of credit as of December 31, 2008.
Other
The Company has entered into a short-term, variable rate, debt agreement of up to $3,297
(2,300 Euro) with a local Italian financial institution at its facility in Italy. There were no
borrowings under this facility as of December 31, 2009 or December 31, 2008.
8. Accounts Receivables Factoring Agreement
The Companys Italian subsidiary had a factoring agreement to sell, without recourse, certain
of their European-based accounts receivables to an unrelated third party financial institution
during 2009 and 2008. Under the terms of the factoring agreement, the maximum available amount of
the factoring facility outstanding at any one time was $6,751 (4,710 Euro) during 2009 and $5,991
(4,250 Euro) during 2008, which limitation was subject to change based on the level of eligible
receivables. During the course of the year in 2009 and 2008, $7,412 and $4,060, respectively, of
receivables had been sold under the terms of the factoring agreement. The sale of these
receivables reduced the credit exposure of the Company. The Company has the option to receive a
cash advance from the factoring company upon the sale of the receivable. As of December 31, 2009
and 2008, the Company had no cash advances from the factoring company under the programs. Sales
of account receivable to the factoring company are reflected as a reduction of trade accounts
receivable and an expense is reflected in the Consolidated Statement of Operations on such sale.
The amounts due from the factoring company as of December 31, 2009 and 2008, net of advances
received, were $3,278 and $3,980, respectively, and are included in Accounts receivable in the
Consolidated Balance Sheets. The Company paid fees associated with the sale of receivables based
on the monetary value of the receivables sold. Administrative costs related to this program for
the years ended December 31, 2009 and 2008 were $48 and $22, respectively, and are included in
Selling, technical and administrative expenses in the Consolidated Statements of Operations.
9. Shareholders Equity
Dividends on the Series D preferred stock are payable, when declared, at the rate of 9.8% per
annum. The Company paid dividends of $150 in each year of 2009 and 2008 to its preferred
stockholders. Each share of Series D preferred stock is (1) entitled to a liquidation preference
equal to $1,000 per share plus any accrued or unpaid dividends, (2) not entitled to vote, except in
certain circumstances, and (3) redeemable in whole, at the option of the Company, for $1,000 per
share plus all accrued dividends to the date of redemption. The Company also has 100,000 authorized
shares of $0.01 par value, Series E preferred stock, of which no shares are issued or outstanding.
Each share of Series E preferred stock is (1) not redeemable and is entitled to dividends in the
amount of 1,000 times the per share dividend received by the holders of common stock, (2) entitled
to 1,000 votes per share, and (3) entitled to a liquidation right of 1,000 times the aggregate
amount distributed per share to the holder of common stock.
The holders of the Series D preferred are entitled to elect a majority of the members of the
Board of Directors. Accordingly, if any two of the Series D preferred shareholders vote their
shares of Series D preferred stock in the same manner, they will have sufficient voting power to
elect a majority of the Board of Directors and to thereby control and direct the policies of the
Board of Directors and, in general, to determine the outcome of various matters submitted to the
stockholders for approval, including fundamental corporate transactions.
60
In 1997, the Board of Directors declared a dividend of one Series E preferred share purchase
right (a Right) for each outstanding share of common stock. The dividend was payable to the
shareholders of record as of January 16, 1998, and with respect to common stock, issued thereafter
until the Distribution Date, as defined in the Rights Agreement, and in certain circumstances, with
respect to common stock issued after the Distribution Date. As of December 31, 2009 7,979,740
Rights were outstanding. Except as set forth in the Amended and Restated Rights Agreement, dated
January 4, 2008, each Right, when it becomes exercisable, entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series E preferred stock at a price of
$70 per one one-thousandth share of a Series E preferred stock, subject to adjustment. A Right
will generally become exercisable upon any person becoming the beneficial owner of 15% or more of
the then outstanding Class A common stock of the Company.
On March 5, 2007, the Company announced a plan, approved by the Board of Directors, to
repurchase up to $4,000 of its shares of Class A common stock in the open market, through privately
negotiated transactions or otherwise in accordance with securities laws and regulations. The
aggregate purchase price limit of $4,000 of this plan was met as of June 30, 2008 and the plan
expired. Under this plan the Company purchased 310,113 shares of its Class A common stock at
market prices.
On November 24, 2008, the Company announced a plan, approved by the Board of Directors, to
repurchase up to $15,000 of its shares of Class A common stock in the open market, through
privately negotiated transactions or otherwise in accordance with securities laws and regulations.
Under the terms of the indenture, as of December 31, 2009, the Company wsa limited to repurchase up
to $15,868 of its shares of Class A common stock based on the Companys cumulative net income
through December 31, 2009. As of December 31, 2009, $14,661 has been spent by the Company to
repurchase 1,072,911 shares of common stock at market prices.
On
February 19, 2010, the Companys Board of Directors approved a plan to repurchase up to $25,000 of its shares
of Class A common stock in the open market, through privately
negotiated transactions or otherwise
in accordance with securities laws and regulations. Under the terms of the indenture and
supplemental indenture, as of March 8, 2010, the Company is
limited to purchase $20,867 of its
common stock based on a covenant formula applicable to stock repurchases, including the recent
amendment which allows for a repurchase of up to $20,000 of the Companys common stock.
10. Stock Compensation Plan
The Companys Amended and Restated 2000 Long Term Incentive Plan (Plan), provides for the
granting of up to 1,315,000 shares of common stock of the Company. The Plan had 509,483 shares
available for grants as of December 31, 2009. Options generally vest over a five year period after
the grant date and expire no more than ten years after the grant date.
There were no options granted in 2009. The fair value of stock options granted in 2008 and
2007 were estimated using the Black-Scholes option pricing model. A summary of the assumptions used
in determining the fair value of options follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Expected volatility |
|
|
n/a |
|
|
|
86.2 |
% |
|
|
87.2 |
% |
Expected option life in years |
|
|
n/a |
|
|
|
5.5 |
|
|
|
5.5 |
|
Expected dividend yield |
|
|
n/a |
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Risk-free interest rate |
|
|
n/a |
|
|
|
3.2 |
% |
|
|
5.0 |
% |
Weighted average fair value per option at
grant date |
|
|
n/a |
|
|
$ |
5.19 |
|
|
$ |
8.68 |
|
Application of the Black-Scholes option pricing model involves assumptions that are
judgmental and affect compensation expense. Historical information is the primary basis for the
selection of expected volatility, expected option life and expected dividend yield. Expected
volatility is based on the most recent historical period equal to the expected life of the option.
The risk-free interest rate is based on yields of U.S. Treasury zero-coupon issues with a term
equal to the expected life of the option on the date the stock options were granted.
61
The Company recognized $931, $808 and $390 of compensation expense for the years ended
December 31, 2009, 2008 and 2007, respectively. The Company classifies its stock option expense
principally in Selling, technical & administrative expenses in its Consolidated Statements of
Operations.
Stock-based option activity during the year ended December 31, 2009, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted Average |
|
|
Remaining |
|
|
Intrinsic Value |
|
|
|
Options |
|
|
Exercise Price |
|
|
Contract Term |
|
|
(in thousands) |
|
Options outstanding at January 1, 2009 |
|
|
798,828 |
|
|
$ |
8.50 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(69,649 |
) |
|
|
6.27 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31,
2009 |
|
|
729,179 |
|
|
$ |
8.72 |
|
|
4.7 yrs. |
|
$ |
6,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009 |
|
|
527,778 |
|
|
$ |
6.05 |
|
|
3.5 yrs. |
|
$ |
6,112 |
|
The aggregate intrinsic value in the table above represents the total pre-tax difference
between the $17.61 closing price of shares of common stock of the Company on December 31, 2009,
over the exercise price of the stock option, multiplied by the number of options outstanding and
exercisable. The aggregate intrinsic value is not recorded for financial accounting purposes and
the value changes based on the daily changes in the fair market value of the Companys shares of
common stock.
The weighted-average fair value of stock options granted per option was $0 in 2009, $5.19
in 2008 and $8.28 in 2007.
The following table summarizes information about stock options exercised and vested (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Total intrinsic value of options
exercised |
|
$ |
344 |
|
|
$ |
305 |
|
|
$ |
1,863 |
|
Total fair value of shares vested |
|
$ |
652 |
|
|
$ |
213 |
|
|
$ |
114 |
|
The following table summarizes the non-vested status of the Companys stock-based option
awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
Beginning nonvested shares
outstanding |
|
|
283,200 |
|
|
$ |
10 |
|
|
|
150,200 |
|
|
$ |
6 |
|
|
|
219,480 |
|
|
$ |
3 |
|
Issuances |
|
|
|
|
|
|
|
|
|
|
179,000 |
|
|
$ |
12 |
|
|
|
59,875 |
|
|
$ |
8 |
|
Cancellations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84,280 |
) |
|
|
|
|
Vestings |
|
|
(81,799 |
) |
|
$ |
8 |
|
|
|
(46,000 |
) |
|
$ |
5 |
|
|
|
(44,875 |
) |
|
$ |
3 |
|
Ending nonvested shares outstanding |
|
|
201,401 |
|
|
$ |
11 |
|
|
|
283,200 |
|
|
$ |
10 |
|
|
|
150,200 |
|
|
$ |
6 |
|
Net cash proceeds from the exercise of stock options were $436 in 2009, $221 in 2008 and
$1,233 in 2007. Shares used to satisfy the exercise of stock-based awards are normally issued out
of treasury stock. The Company does not currently have a policy of repurchasing a specified number
of shares issued under employee benefit programs during any particular time period. The intrinsic
value of stock options exercised was $344 in 2009, $305 in 2008 and $1,863 in 2007.
62
As of December 31, 2009, there was $1,030 of total unrecognized compensation cost related to
the non-vested share-based compensation arrangements under the Companys stock compensation plans.
The remaining cost is expected to be recognized over the next 2.3 years.
11. Employee Benefits
The Company sponsors several defined benefit pension plans covering certain domestic and
Canadian employees. Domestic defined benefit pension plans comprise 96% of our projected benefit
obligation. The Company recognizes the net amount by which pension and other postretirement
benefit plan liabilities are over funded or underfunded, which is the difference between plan
assets at fair value and the projected benefit obligation, on its Consolidated Balance Sheets.
Benefits payable are based primarily on compensation and years of service or a fixed annual benefit
for each year of service. The Company funds the plans in amounts sufficient to satisfy the
minimum amounts required under the Employee Retirement Income Security Act of 1974 and the Ontario
Pension Benefits Act and Regulation.
The following table summarizes the balance sheet impact, including the benefit obligations,
assets and funded status associated with our pension plans at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
Accumulated benefit obligation |
|
$ |
31,327 |
|
|
$ |
30,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
31,013 |
|
|
$ |
28,405 |
|
Service cost |
|
|
309 |
|
|
|
190 |
|
Interest cost |
|
|
1,819 |
|
|
|
1,746 |
|
Actuarial losses |
|
|
324 |
|
|
|
2,651 |
|
Foreign currency exchange rate impact (1) |
|
|
154 |
|
|
|
(207 |
) |
Benefits paid |
|
|
(2,021 |
) |
|
|
(1,772 |
) |
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
31,598 |
|
|
$ |
31,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
19,713 |
|
|
$ |
27,923 |
|
Actual return on plan assets |
|
|
6,525 |
|
|
|
(7,530 |
) |
Foreign currency exchange rate impact (1) |
|
|
104 |
|
|
|
(166 |
) |
Company contributions |
|
|
4,768 |
|
|
|
1,258 |
|
Benefits paid |
|
|
(2,021 |
) |
|
|
(1,772 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
29,089 |
|
|
$ |
19,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plans |
|
$ |
(2,509 |
) |
|
$ |
(11,300 |
) |
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance
Sheets consist of the
following: |
|
|
|
|
|
|
|
|
Pension liabilities non current |
|
$ |
(2,509 |
) |
|
$ |
(11,300 |
) |
|
|
|
(1) |
|
Resulting from the impact of the Companys defined benefit pension plan in
Canada. |
The amount of the net actuarial gain included in Accumulated other comprehensive (loss) income
for 2009 is $4,498. The reclassification adjustment out of Accumulated other comprehensive (loss)
income for 2009 for those amounts that have been recognized as a component of net periodic pension
expense is $1,473.
The amount of unrecognized net actuarial loss and prior service credits, net of tax, included
in Accumulated other comprehensive (loss) income at December 31, 2009 is $801 and $6,669,
respectively.
63
The estimated amounts of unrecognized net actuarial loss and prior service cost expected to be
amortized from Accumulated other comprehensive (loss) income and recognized as components of net
periodic benefit cost in 2010 are $299 and $693, respectively.
Amounts applicable to the Companys under-funded pension plans at December 31, 2009 and 2008
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
Projected benefit obligation |
|
$ |
31,598 |
|
|
$ |
31,013 |
|
A ccumulated benefit obligation |
|
$ |
31,327 |
|
|
$ |
30,845 |
|
Fair value of plan assets |
|
$ |
29,089 |
|
|
$ |
19,713 |
|
A mounts recognized as accrued benefit
liabilities |
|
$ |
2,509 |
|
|
$ |
11,300 |
|
A summary of the components of net periodic benefit cost of the Companys defined benefit
pension plans for the periods presented in the Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Components of net periodic pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
340 |
|
|
$ |
223 |
|
|
$ |
186 |
|
Interest cost |
|
|
1,819 |
|
|
|
1,746 |
|
|
|
1,703 |
|
Expected return on plan assets |
|
|
(1,759 |
) |
|
|
(2,274 |
) |
|
|
(2,091 |
) |
Amortization of prior service cost |
|
|
240 |
|
|
|
240 |
|
|
|
240 |
|
Recognized net actuarial loss |
|
|
1,233 |
|
|
|
251 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost of defined
benefit plans |
|
$ |
1,873 |
|
|
$ |
186 |
|
|
$ |
438 |
|
|
|
|
|
|
|
|
|
|
|
The plans assets are primarily invested in equity and fixed income securities. In
addition, one of the Companys defined benefit plans also contains investments in the Companys
Class A common stock, which is included as part of U.S. Companies value in the
asset allocation table. As of December 31, 2009, 60,000 shares of the Companys Class A
common stock were held by a defined benefit plan at a cost of $717 and with a market value of
$1,057. The Company has not and does not contemplate paying dividends on its Class A common stock.
The following assumptions were used in accounting for the defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Weighted average rates used to compute the projected
benefit obligation as of December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
Rate of compensation increase (1) |
|
|
3.5 |
% |
|
|
3.5 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average rates used to determine the net
periodic benefit cost for the years ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.1 |
% |
|
|
6.0 |
% |
|
|
5.6 |
% |
Rate of compensation increase (1) |
|
|
3.5 |
% |
|
|
3.5 |
% |
|
|
3.5 |
% |
Expected long-term rate of return on plan assets |
|
|
8.2 |
% |
|
|
8.2 |
% |
|
|
8.2 |
% |
|
|
|
(1) |
|
Only the Companys Canadian pension plan is impacted by a rate of compensation
increase. |
The measurement date used to determine the pension benefit measurements for all plans in all
periods presented is December 31. The Company has reviewed historical rates of return specific to
its respective plans to determine the expected long-term rate of return on assets.
64
The Company expects to contribute $1,789 in cash in 2010 to fund its defined benefit pension
plans for both the 2009 and 2010 plan years based on the contribution expectation provided by its
third party actuary.
Estimated benefit payments for the next five years and in the aggregate for the five years
thereafter are:
|
|
|
|
|
|
|
Benefit |
|
Year |
|
Payments |
|
2010 |
|
$ |
1,739 |
|
2011 |
|
$ |
1,782 |
|
2012 |
|
$ |
1,837 |
|
2013 |
|
$ |
1,853 |
|
2014 |
|
$ |
1,917 |
|
2015 - 2019 |
|
$ |
10,060 |
|
Investment Strategy and Asset Allocation
The objectives of the Companys investment strategies are the preservation of capital and
long-term growth without exposing principal to undue risk utilizing an investment strategy of
investing in equities, fixed income, cash equivalents and alternative investments in a mix which
participates in a rising market and provides protection in a falling market. Target asset
allocations are a range of 55% to 65% in equity securities, a range of 25% to 35% in fixed income
and cash securities and a maximum of 10% in alternative investments. These target asset
allocations have been determined after giving consideration to the expected returns of each asset
class, the expected variability or volatility of the asset class returns over time, and the
complementary nature or correlation of the asset classes within the portfolio. Assets are rebalanced periodically to conform to policy tolerances.
The Company also employs an active management approach for the portfolio. Each asset class is managed by one or
more external money managers with the objective of generating returns, net of management fees,
which exceed market-based benchmarks.
The fair values of the major categories of defined benefit plan assets are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
Asset Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
664 |
|
|
|
2.3 |
% |
|
$ |
522 |
|
|
|
2.6 |
% |
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. companies growth |
|
|
5,383 |
|
|
|
18.5 |
% |
|
|
3,621 |
|
|
|
18.4 |
% |
Foreign companies growth |
|
|
4,272 |
|
|
|
14.7 |
% |
|
|
2,922 |
|
|
|
14.8 |
% |
U.S. companies value |
|
|
6,592 |
|
|
|
22.7 |
% |
|
|
4,614 |
|
|
|
23.4 |
% |
Foreign companies value |
|
|
3,469 |
|
|
|
11.9 |
% |
|
|
2,285 |
|
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
19,716 |
|
|
|
67.8 |
% |
|
|
13,442 |
|
|
|
68.2 |
% |
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
264 |
|
|
|
0.9 |
% |
|
|
355 |
|
|
|
1.8 |
% |
Fixed income funds |
|
|
6,649 |
|
|
|
22.9 |
% |
|
|
5,394 |
|
|
|
27.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
|
6,913 |
|
|
|
23.8 |
% |
|
|
5,749 |
|
|
|
29.2 |
% |
Other |
|
|
1,796 |
|
|
|
6.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,089 |
|
|
|
100 |
% |
|
$ |
19,713 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
65
Pension Plan Assets Measured at Fair Value
The Company classifies and discloses pension plan assets in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market
data.
Level 3: Unobservable inputs that are not corroborated by market data.
The following table summarizes the fair values, and levels within the fair value hierarchy in which
the fair value measurements fall for pension plan assets at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Cash and equivalents |
|
$ |
664 |
|
|
$ |
664 |
|
|
$ |
|
|
|
$ |
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. companies growth |
|
|
5,383 |
|
|
|
3,383 |
|
|
|
2,000 |
|
|
|
|
|
Foreign companies growth |
|
|
4,272 |
|
|
|
2,365 |
|
|
|
1,907 |
|
|
|
|
|
U.S. companies value |
|
|
6,592 |
|
|
|
4,680 |
|
|
|
1,912 |
|
|
|
|
|
Foreign companies value |
|
|
3,469 |
|
|
|
2,448 |
|
|
|
1,021 |
|
|
|
|
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
264 |
|
|
|
|
|
|
|
264 |
|
|
|
|
|
Fixed income funds |
|
|
6,649 |
|
|
|
4,649 |
|
|
|
2,000 |
|
|
|
|
|
Other |
|
|
1,796 |
|
|
|
|
|
|
|
1,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,089 |
|
|
$ |
18,189 |
|
|
$ |
10,900 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Contribution Plan
The Company also sponsors a defined contribution plan which provides for voluntary employee
contributions and matching and discretionary employer contributions. Aggregate employer
contributions were approximately $420 in 2009, $1,560 in 2008, which included $614 in discretionary
employer contributions and $1,187 in 2007, which included $595 in discretionary employer
contributions. The Company elected to not make any discretionary employer contribution for 2009.
In addition, effective at the beginning of the third quarter of 2009, the Company suspended its
matching employer contribution as part of the Companys cost savings plan. On March 1, 2010,
matching contributions were reinstated at 50% of the participants tax deferred contributions up to
6% of eligible compensation.
12. Lease Obligations
The Company leases certain office and warehouse facilities, equipment and vehicles under
operating leases. Certain of these operating leases contain escalation clauses, rent holidays,
and/or provide the Company with a renewal option after the initial lease term. At December 31,
2009 and 2008, Other accrued expenses on the Companys Consolidated Balance Sheets included a
deferred rent liability of $1,945 and $2,012, respectively, resulting from the difference between
rental expense recognized on a straight-line basis and cash payments for rent. Leasehold
improvements are amortized over the shorter of the economic useful life of the improvements or the
remaining balance of the lease term.
The Company has one material operating lease commitment for its Tulsa facility. The initial
term of this lease arrangement is 15 years beginning January 1, 2005, with an original minimum
lease commitment of $20,942. The Company has the option to renew the lease for two additional five
year terms. The first 18 months of the lease was a rent holiday.
66
For all operating lease arrangements, rental expense is recognized on a straight-line basis
over the lease term. Rental expense was approximately $3,649 in 2009, $3,774 in 2008 and $3,443 in
2007. Future non-cancelable minimum lease commitments under agreements that have an original or
existing term in excess of one year as of December 31, 2009 are as follows: 2010 $3,214; 2011
$3,052; 2012 $2,831; 2013 $2,760; 2014 $2,478; and thereafter $9,424.
13. Income Taxes
The effective income tax rate from continuing operations for the year ended December 31, 2009,
was 40.9%, compared to 35.0% for the year ended December 31, 2008. The Companys effective rate
differs from the U.S. statutory rate of 35.0% primarily as a result of foreign withholding taxes on
royalty income, a higher effective rate at a foreign subsidiary and the impact of non-deductible
expenses on the Companys worldwide taxes.
In December 2007, the Italian Parliament approved the Budget Law for 2008, effective January
1, 2008, which resulted in a decrease in the corporate income tax rate in Italy from 33.0% to 27.5%
and an additional reduction in the regional rate from 4.25% to 3.90%. The rate reduction was
offset in part by changes which broadened the tax base. The Company has evaluated the impact of
the law change and has implemented these favorable changes for its Italian operations, which
reduced its worldwide continuing operations effective rate in 2008. Additionally, the law change
provided for an election under which the Company would reverse the accelerated depreciation taken
in prior years at a substantially lower rate. The Company made this election in the quarter ended
June 30, 2008. The impact of this election was a discrete decrease of $391 to the 2008 tax provision.
The Company was granted a five year tax holiday upon its entry into China by the Chinese
taxing authority/government which would have commenced in the year the Company first became subject
to tax. Effective January 1, 2009, a change in the Chinese tax law required that all tax holidays
not yet active take effect on January 1, 2009, and remain in effect for the stated period for which
they were originally issued. Under this arrangement, the tax holidays available to the Companys
China subsidiary will expire after December 31, 2012.
The total amount of unrecognized tax benefits as of December 31, 2009, was $1,164 (including
$318 of accrued interest and penalties), the recognition of which would have had an effect of
$1,127 on the continuing operations effective tax rate. The Company believes it is reasonably
possible that the unrecognized tax benefit may be reduced by $206 in the next twelve months.
The changes in the liability for unrecognized tax benefits not including interest and
penalties during the year ended December 31, 2009, for both continuing and discontinuing
operations, were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
586 |
|
|
$ |
1,113 |
|
Additions based on tax positions related to the current year |
|
|
116 |
|
|
|
110 |
|
Additions for tax positions of prior years |
|
|
273 |
|
|
|
|
|
Reduction for tax positions of prior years |
|
|
(23 |
) |
|
|
|
|
Settlement |
|
|
|
|
|
|
(517 |
) |
Lapses in applicable statutes |
|
|
(106 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
846 |
|
|
$ |
586 |
|
|
|
|
|
|
|
|
The Company recognizes interest and penalties related to unrecognized tax benefits as
income tax expense. The amount included in income tax expense from continuing operations for the
year ended 2009 for interest and penalties was $318 for the years ended 2008 and 2007, the amounts
were not material.
During 2009, the Company received notification of potential tax deficiencies at its Italian
subsidiary from Inland Revenue (Italy). The Company recorded unrecognized tax benefits of $554
(including $239 of interest and penalties) as tax expense related to this audit. The Company does
not agree with the proposed adjustment and is contesting the preliminary audit report. In 2008,
the Company received a favorable ruling with respect to the Mexican income tax audit which enabled
the Company to reverse the liability of $1,146 for unrealized tax benefits recorded in prior years.
67
The Company files income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. The Company is no longer subject to U.S. federal, state and local, or
non-U.S. income tax examinations by tax authorities for years before 2002. The Company is
currently under examination for the tax years 2007 and 2008 by U.S. federal income tax authorities
and for tax year 2006 by Italian income tax authorities. The years 2003 2009 are open years
available for examination by various state, local and foreign tax authorities.
The provision (benefit) for income taxes from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2,096 |
|
|
$ |
3,138 |
|
|
$ |
8 |
|
State and local |
|
|
64 |
|
|
|
307 |
|
|
|
(97 |
) |
Foreign |
|
|
745 |
|
|
|
7,063 |
|
|
|
3,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,905 |
|
|
|
10,508 |
|
|
|
3,830 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
2,043 |
|
|
|
2,708 |
|
|
|
1,318 |
|
State and local |
|
|
9 |
|
|
|
21 |
|
|
|
38 |
|
Foreign |
|
|
(452 |
) |
|
|
(1,098 |
) |
|
|
643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600 |
|
|
|
1,631 |
|
|
|
1,999 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision |
|
$ |
4,505 |
|
|
$ |
12,139 |
|
|
$ |
5,829 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income tax purposes.
Significant components of the Companys deferred tax assets and liabilities as of December 31 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
NOL carryforward |
|
$ |
1,532 |
|
|
$ |
1,540 |
|
|
AMT carryforward |
|
|
|
|
|
|
490 |
|
Accrued vacation |
|
|
532 |
|
|
|
494 |
|
Employee benefits |
|
|
1,702 |
|
|
|
3,599 |
|
Other accruals |
|
|
2,139 |
|
|
|
2,734 |
|
Book over tax amortization |
|
|
|
|
|
|
|
|
Inventory |
|
|
2,251 |
|
|
|
1,134 |
|
|
|
|
|
|
|
|
Subtotal deferred tax assets |
|
|
8,156 |
|
|
|
9,991 |
|
Valuation allowances |
|
|
(1,358 |
) |
|
|
(1,594 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
6,798 |
|
|
|
8,397 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Tax over book depreciation |
|
|
5,920 |
|
|
|
4,158 |
|
Tax over book amortization |
|
|
1,792 |
|
|
|
1,436 |
|
Foreign leased property |
|
|
310 |
|
|
|
334 |
|
Other |
|
|
55 |
|
|
|
12 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
8,077 |
|
|
|
5,940 |
|
|
|
|
|
|
|
|
Net deferred tax (liabilities) assets |
|
$ |
(1,279 |
) |
|
$ |
2,457 |
|
|
|
|
|
|
|
|
68
As of December 31, 2009 and 2008, the Company had net operating losses (NOLs) associated
with state and local taxes of $50,048 and $51,561, respectively, and alternative minimum tax (AMT)
credit carry forwards of $0 and $490, respectively.
The Company records a valuation allowance to offset any deferred tax asset if, based upon the
available evidence it is more likely than not that some or all of the deferred tax asset will not
be realized. The Company has a valuation allowance at December 31, 2009 and 2008 for deferred taxes
attributed to financial reserves in China. The valuation allowance was recorded due to prior
history of operating losses and the uncertainty of earnings in future periods at its China
facility. At December 31, 2009 and 2008, the Company has a valuation allowance of $1,276 and
$1,540, respectively, against certain domestic state and local tax NOLs because of uncertainty of
future earnings in these locations and the potential for these NOLs to lapse. In 2008, the Company
reversed a valuation allowance previously recorded at its Canadian subsidiary. The
Company has determined that no additional valuation allowance is necessary as of December 31, 2009.
The provision for income taxes from continuing operations differs from the amounts computed by
applying the federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Income tax expense at federal statutory rate |
|
$ |
3,856 |
|
|
$ |
12,152 |
|
|
$ |
4,764 |
|
State and local tax, net of federal tax benefit |
|
|
47 |
|
|
|
213 |
|
|
|
(38 |
) |
Taxes on foreign income which differ from
United States
statutory rate |
|
|
389 |
|
|
|
(909 |
) |
|
|
668 |
|
Foreign tax withholding |
|
|
160 |
|
|
|
329 |
|
|
|
232 |
|
Unrecognized tax benefits |
|
|
533 |
|
|
|
|
|
|
|
|
|
Tax credit utilization |
|
|
(699 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
219 |
|
|
|
354 |
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
4,505 |
|
|
$ |
12,139 |
|
|
$ |
5,829 |
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the domestic and foreign components of the Companys
income (loss) from continuing operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Income (loss) from continuing operations before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
12,263 |
|
|
$ |
14,473 |
|
|
$ |
2,953 |
|
Foreign |
|
|
(1,245 |
) |
|
|
20,246 |
|
|
|
10,662 |
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
11,018 |
|
|
$ |
34,719 |
|
|
$ |
13,615 |
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings of the Companys foreign subsidiaries amounted to approximately
$40,541 and $41,407 at December 31, 2009 and 2008, respectively. These earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes
has been provided. The Company cannot determine in any practical
manner the amount of income tax liability that would result if such earnings would be repatriated.
Upon distribution of these earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes, which may be offset by foreign tax credits, and withholding
taxes payable to various foreign countries.
69
14. Earnings Per Share
Basic and diluted earnings per share are computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Income from continuing operations, after income taxes |
|
$ |
6,513 |
|
|
$ |
22,580 |
|
|
$ |
7,786 |
|
Less: Preferred stock dividends |
|
|
150 |
|
|
|
150 |
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, after income taxes
available to common shareholders |
|
$ |
6,363 |
|
|
$ |
22,430 |
|
|
$ |
7,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,377 |
|
|
$ |
20,842 |
|
|
$ |
17,268 |
|
Less: Preferred stock dividends |
|
|
150 |
|
|
|
150 |
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
6,227 |
|
|
$ |
20,692 |
|
|
$ |
17,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
8,242 |
|
|
|
8,964 |
|
|
|
8,967 |
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
8,242 |
|
|
|
8,964 |
|
|
|
8,967 |
|
Dilutive effect of stock options |
|
|
265 |
|
|
|
392 |
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
8,507 |
|
|
|
9,356 |
|
|
|
9,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings from continuing operations, after
income taxes |
|
$ |
0.77 |
|
|
$ |
2.50 |
|
|
$ |
0.85 |
|
Discontinued operations, after income taxes |
|
|
(0.01 |
) |
|
|
(0.19 |
) |
|
|
1.06 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per basic share |
|
$ |
0.76 |
|
|
$ |
2.31 |
|
|
$ |
1.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings from continuing operations, after
income taxes |
|
$ |
0.75 |
|
|
$ |
2.40 |
|
|
$ |
0.82 |
|
Discontinued operations, after income taxes |
|
|
(0.02 |
) |
|
|
(0.19 |
) |
|
|
1.01 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per diluted share |
|
$ |
0.73 |
|
|
$ |
2.21 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
|
|
A weighted average of 228,044, 85,672 and 110,762 options were not included in the
calculation of diluted weighted shares outstanding because they were anti-dilutive for the years
ended December 31, 2009, 2008 and 2007 respectively.
15. Related Parties
The Company reported as legal expense, included in Selling, technical and administrative
expenses in the Consolidated Statements of Operations, approximately $1,337, $1,449 and $791 during
2009, 2008 and 2007, respectively, to Kohrman Jackson and Krantz (KJK), our lead counsel, for legal
services performed in the ordinary course of business for a variety of legal matters, including the
current investigation by the SEC, which began in November 2006, the sale of the Companys
performance racing segment businesses in 2008, and the sale of the Companys precision components
segment in 2007. Additionally, in June 2009, the Company paid $70 to KJK for legal services in
connection with the Companys new bank facility. This payment is being ratably amortized, as a
part of deferred financing costs, in Interest expense in the Consolidated Statements of Operations
through June 2012. Approximately $22 and $97 of related party payables are included in Accounts
payable, and $138 and $226 of related party accrued expenses are included in Accrued other, in the
Companys Consolidated Balance Sheets as of December 31, 2009 and 2008, respectively.
Byron Krantz, a director of the Company and a partner of KJK, beneficially owns 3.4% of the
Class A common stock and 10% of the Series D preferred stock of the Company as of December 31,
2009. Mr. Krantz is also a party to a stockholders agreement governing the voting and disposition
of all shares of the Companys voting stock owned by the parties to the agreement.
70
On January 26, 2010 the Friction Products Co. Employees Pension Plan, a related party,
purchased $1,000 of senior notes for its investment portfolio.
16. Principal Markets and Geographic Disclosures
Since its divestitures of the performance racing segment in 2008 and the precision components
segment in 2007, the Company operates within one segment called friction products. Friction
products are the replacement components used in brakes, clutches and transmissions to absorb
vehicular energy and dissipate it through heat and normal mechanical wear.
The Company custom-designs, manufactures and markets these components. Below are the
principal end markets from which the Company derives its sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands) |
|
Net Sales by Market: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Mining |
|
$ |
62,947 |
|
|
$ |
127,371 |
|
|
$ |
99,247 |
|
Aircraft and Defense |
|
|
47,373 |
|
|
|
54,739 |
|
|
|
43,292 |
|
Agriculture |
|
|
24,466 |
|
|
|
40,406 |
|
|
|
29,276 |
|
Truck |
|
|
16,725 |
|
|
|
24,795 |
|
|
|
23,220 |
|
Performance Friction |
|
|
11,856 |
|
|
|
10,414 |
|
|
|
10,063 |
|
Specialty Friction |
|
|
6,541 |
|
|
|
9,744 |
|
|
|
10,344 |
|
Alternative Energy |
|
|
2,494 |
|
|
|
2,179 |
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
172,402 |
|
|
$ |
269,648 |
|
|
$ |
215,879 |
|
|
|
|
|
|
|
|
|
|
|
The Companys capital expenditures and depreciation expense are below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands) |
|
Capital Expenditures |
|
$ |
7,518 |
|
|
$ |
15,204 |
|
|
$ |
7,648 |
|
Depreciation Expense |
|
|
7,132 |
|
|
|
6,822 |
|
|
|
6,550 |
|
The geographic split of the Companys net sales and property, plant and equipment, based
on country of origin, is as follows:
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands) |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
125,489 |
|
|
$ |
157,437 |
|
|
$ |
131,644 |
|
Italy |
|
|
39,554 |
|
|
|
98,023 |
|
|
|
73,457 |
|
All Other Foreign |
|
|
7,359 |
|
|
|
14,188 |
|
|
|
10,778 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
172,402 |
|
|
$ |
269,648 |
|
|
$ |
215,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
34,728 |
|
|
$ |
33,610 |
|
|
$ |
27,272 |
|
Italy |
|
|
10,150 |
|
|
|
11,198 |
|
|
|
9,729 |
|
All Other Foreign |
|
|
2,218 |
|
|
|
2,690 |
|
|
|
2,574 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
47,096 |
|
|
$ |
47,498 |
|
|
$ |
39,575 |
|
|
|
|
|
|
|
|
|
|
|
The Companys other foreign operations are located in China and Canada.
The Companys largest customer, Caterpillar, represented approximately 17.3%, 19.1% and 17.7%
of consolidated net sales in 2009, 2008 and 2007, respectively.
17. Supplemental Guarantor Information
Each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and
several basis, to pay principal, premium, and interest with respect to the Companys senior notes.
The Guarantor Subsidiaries are direct or indirect wholly-owned subsidiaries of the Company.
The following supplemental consolidating condensed financial statements present:
|
|
|
Consolidating condensed Balance Sheets as of December 31, 2009 and December 31, 2008,
consolidating condensed Statements of Operations for the years ended December 31, 2009,
2008 and 2007 and consolidating condensed Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007. |
|
|
|
|
Hawk Corporation (Parent), combined Guarantor Subsidiaries and combined Non-Guarantor
Subsidiaries consisting of the Companys subsidiaries in Italy, Canada and China with their
investments in subsidiaries accounted for using the equity method. |
|
|
|
|
Elimination entries necessary to consolidate the financial statements of the Parent and
all of its subsidiaries. |
The Company does not believe that separate financial statements of the Guarantor Subsidiaries
provide material additional information to investors. Therefore, separate financial statements and
other disclosures concerning the Guarantor Subsidiaries are not presented. The Companys bank
facility contains covenants with respect to the Company and its subsidiaries that, among other
things, would prohibit the payment of dividends to the Company by the subsidiaries (including
Guarantor Subsidiaries) in the event of a default under the terms of the bank facility. The
indenture governing the senior notes permits the payment of dividends to the Company by the
subsidiaries (including Guarantor Subsidiaries) provided that no event of default has occurred
under the terms of the indenture of the senior notes.
72
Supplemental Consolidating Condensed
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(dollars in thousands) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
24,182 |
|
|
$ |
11 |
|
|
$ |
23,013 |
|
|
$ |
|
|
|
$ |
47,206 |
|
Short-term investments |
|
|
34,977 |
|
|
|
|
|
|
|
953 |
|
|
|
|
|
|
|
35,930 |
|
Accounts receivable, net |
|
|
|
|
|
|
12,520 |
|
|
|
15,058 |
|
|
|
|
|
|
|
27,578 |
|
Inventories, net |
|
|
|
|
|
|
16,714 |
|
|
|
11,025 |
|
|
|
(244 |
) |
|
|
27,495 |
|
Deferred income taxes |
|
|
511 |
|
|
|
|
|
|
|
794 |
|
|
|
|
|
|
|
1,305 |
|
Other current assets |
|
|
3,704 |
|
|
|
723 |
|
|
|
1,259 |
|
|
|
|
|
|
|
5,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
63,374 |
|
|
|
29,968 |
|
|
|
52,102 |
|
|
|
(244 |
) |
|
|
145,200 |
|
Investment in subsidiaries |
|
|
49,927 |
|
|
|
|
|
|
|
|
|
|
|
(49,927 |
) |
|
|
|
|
Inter-company advances, net |
|
|
|
|
|
|
2,738 |
|
|
|
(2,738 |
) |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
34,728 |
|
|
|
12,368 |
|
|
|
|
|
|
|
47,096 |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets |
|
|
|
|
|
|
6,015 |
|
|
|
|
|
|
|
|
|
|
|
6,015 |
|
Other |
|
|
5,892 |
|
|
|
|
|
|
|
289 |
|
|
|
|
|
|
|
6,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
5,892 |
|
|
|
6,015 |
|
|
|
289 |
|
|
|
|
|
|
|
12,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
119,193 |
|
|
$ |
73,449 |
|
|
$ |
62,021 |
|
|
$ |
(50,171 |
) |
|
$ |
204,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
46 |
|
|
$ |
9,696 |
|
|
$ |
7,119 |
|
|
$ |
|
|
|
$ |
16,861 |
|
Accrued compensation |
|
|
2,455 |
|
|
|
2,599 |
|
|
|
2,270 |
|
|
|
|
|
|
|
7,324 |
|
Accrued interest |
|
|
3,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,385 |
|
Accrued taxes |
|
|
|
|
|
|
56 |
|
|
|
345 |
|
|
|
(56 |
) |
|
|
345 |
|
Other accrued expenses |
|
|
1,804 |
|
|
|
1,870 |
|
|
|
292 |
|
|
|
13 |
|
|
|
3,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
7,690 |
|
|
|
14,221 |
|
|
|
10,026 |
|
|
|
(43 |
) |
|
|
31,894 |
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
77,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,090 |
|
Deferred income taxes |
|
|
2,508 |
|
|
|
|
|
|
|
365 |
|
|
|
|
|
|
|
2,873 |
|
Other |
|
|
4,499 |
|
|
|
6,534 |
|
|
|
4,132 |
|
|
|
|
|
|
|
15,165 |
|
Inter-company advances, net |
|
|
(50,064 |
) |
|
|
42,346 |
|
|
|
7,919 |
|
|
|
(201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
34,033 |
|
|
|
48,880 |
|
|
|
12,416 |
|
|
|
(201 |
) |
|
|
95,128 |
|
Shareholders equity |
|
|
77,470 |
|
|
|
10,348 |
|
|
|
39,579 |
|
|
|
(49,927 |
) |
|
|
77,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
119,193 |
|
|
$ |
73,449 |
|
|
$ |
62,021 |
|
|
$ |
(50,171 |
) |
|
$ |
204,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
Supplemental Consolidating Condensed
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(dollars in thousands) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
45,241 |
|
|
$ |
32 |
|
|
$ |
17,247 |
|
|
$ |
|
|
|
$ |
62,520 |
|
Short-term investments |
|
|
29,956 |
|
|
|
|
|
|
|
818 |
|
|
|
|
|
|
|
30,774 |
|
Accounts receivable, net |
|
|
|
|
|
|
13,900 |
|
|
|
24,669 |
|
|
|
|
|
|
|
38,569 |
|
Inventories, net |
|
|
|
|
|
|
23,779 |
|
|
|
17,858 |
|
|
|
(260 |
) |
|
|
41,377 |
|
Deferred income taxes |
|
|
116 |
|
|
|
|
|
|
|
298 |
|
|
|
|
|
|
|
414 |
|
Other current assets |
|
|
1,545 |
|
|
|
1,650 |
|
|
|
2,326 |
|
|
|
|
|
|
|
5,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
76,858 |
|
|
|
39,361 |
|
|
|
63,216 |
|
|
|
(260 |
) |
|
|
179,175 |
|
Investment in subsidiaries |
|
|
38,498 |
|
|
|
|
|
|
|
|
|
|
|
(38,498 |
) |
|
|
|
|
Inter-company advances, net |
|
|
|
|
|
|
14,122 |
|
|
|
(14,115 |
) |
|
|
(7 |
) |
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
33,610 |
|
|
|
13,888 |
|
|
|
|
|
|
|
47,498 |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets |
|
|
|
|
|
|
6,568 |
|
|
|
|
|
|
|
|
|
|
|
6,568 |
|
Other |
|
|
5,956 |
|
|
|
606 |
|
|
|
189 |
|
|
|
|
|
|
|
6,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
5,956 |
|
|
|
7,174 |
|
|
|
189 |
|
|
|
|
|
|
|
13,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
121,312 |
|
|
$ |
94,267 |
|
|
$ |
63,178 |
|
|
$ |
(38,765 |
) |
|
$ |
239,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
114 |
|
|
$ |
14,865 |
|
|
$ |
15,228 |
|
|
$ |
|
|
|
$ |
30,207 |
|
Accrued compensation |
|
|
3,013 |
|
|
|
4,393 |
|
|
|
2,504 |
|
|
|
|
|
|
|
9,910 |
|
Accrued interest |
|
|
3,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,816 |
|
Accrued taxes |
|
|
195 |
|
|
|
45 |
|
|
|
2,058 |
|
|
|
(45 |
) |
|
|
2,253 |
|
Other accrued expenses |
|
|
1,796 |
|
|
|
2,956 |
|
|
|
2,273 |
|
|
|
6 |
|
|
|
7,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
8,934 |
|
|
|
22,259 |
|
|
|
22,063 |
|
|
|
(39 |
) |
|
|
53,217 |
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
87,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,090 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
338 |
|
|
|
|
|
|
|
338 |
|
Other |
|
|
2,327 |
|
|
|
15,785 |
|
|
|
3,844 |
|
|
|
|
|
|
|
21,956 |
|
Inter-company advances, net |
|
|
(54,430 |
) |
|
|
46,591 |
|
|
|
7,696 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
34,987 |
|
|
|
62,376 |
|
|
|
11,878 |
|
|
|
143 |
|
|
|
109,384 |
|
Shareholders equity |
|
|
77,391 |
|
|
|
9,632 |
|
|
|
29,237 |
|
|
|
(38,869 |
) |
|
|
77,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
121,312 |
|
|
$ |
94,267 |
|
|
$ |
63,178 |
|
|
$ |
(38,765 |
) |
|
$ |
239,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Supplemental Consolidating Condensed
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
|
|
|
$ |
124,433 |
|
|
$ |
51,327 |
|
|
$ |
(3,358 |
) |
|
$ |
172,402 |
|
Cost of sales |
|
|
|
|
|
|
81,316 |
|
|
|
46,969 |
|
|
|
(3,358 |
) |
|
|
124,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
43,117 |
|
|
|
4,358 |
|
|
|
|
|
|
|
47,475 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative expenses |
|
|
21 |
|
|
|
25,225 |
|
|
|
4,992 |
|
|
|
|
|
|
|
30,238 |
|
Amortization of intangibles |
|
|
|
|
|
|
553 |
|
|
|
|
|
|
|
|
|
|
|
553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
21 |
|
|
|
25,778 |
|
|
|
4,992 |
|
|
|
|
|
|
|
30,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(21 |
) |
|
|
17,339 |
|
|
|
(634 |
) |
|
|
|
|
|
|
16,684 |
|
Interest (expense) income, net |
|
|
|
|
|
|
(7,782 |
) |
|
|
237 |
|
|
|
|
|
|
|
(7,545 |
) |
Income (loss) from equity investee |
|
|
5,593 |
|
|
|
(1,356 |
) |
|
|
|
|
|
|
(4,237 |
) |
|
|
|
|
Other income (expense), net |
|
|
674 |
|
|
|
2,032 |
|
|
|
(827 |
) |
|
|
|
|
|
|
1,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before
income taxes |
|
|
6,246 |
|
|
|
10,233 |
|
|
|
(1,224 |
) |
|
|
(4,237 |
) |
|
|
11,018 |
|
Income tax provision (benefit) |
|
|
(151 |
) |
|
|
4,524 |
|
|
|
132 |
|
|
|
|
|
|
|
4,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, after income |
|
|
6,397 |
|
|
|
5,709 |
|
|
|
(1,356 |
) |
|
|
(4,237 |
) |
|
|
6,513 |
|
Discontinued operations, after income taxes |
|
|
(20 |
) |
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6,377 |
|
|
$ |
5,593 |
|
|
$ |
(1,356 |
) |
|
$ |
(4,237 |
) |
|
$ |
6,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
Supplemental Consolidating Condensed
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
|
|
|
$ |
155,745 |
|
|
$ |
123,925 |
|
|
$ |
(10,022 |
) |
|
$ |
269,648 |
|
Cost of sales |
|
|
|
|
|
|
106,725 |
|
|
|
95,849 |
|
|
|
(10,022 |
) |
|
|
192,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
49,020 |
|
|
|
28,076 |
|
|
|
|
|
|
|
77,096 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative expenses |
|
|
70 |
|
|
|
29,331 |
|
|
|
7,924 |
|
|
|
|
|
|
|
37,325 |
|
Amortization of intangibles |
|
|
|
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
70 |
|
|
|
29,920 |
|
|
|
7,924 |
|
|
|
|
|
|
|
37,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(70 |
) |
|
|
19,100 |
|
|
|
20,152 |
|
|
|
|
|
|
|
39,182 |
|
Interest (expense) income, net |
|
|
(220 |
) |
|
|
(6,278 |
) |
|
|
532 |
|
|
|
|
|
|
|
(5,966 |
) |
Income from equity investee |
|
|
23,521 |
|
|
|
14,817 |
|
|
|
|
|
|
|
(38,338 |
) |
|
|
|
|
Other income (expense), net |
|
|
(303 |
) |
|
|
2,073 |
|
|
|
(267 |
) |
|
|
|
|
|
|
1,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before
income taxes |
|
|
22,928 |
|
|
|
29,712 |
|
|
|
20,417 |
|
|
|
(38,338 |
) |
|
|
34,719 |
|
Income tax provision |
|
|
50 |
|
|
|
6,445 |
|
|
|
5,644 |
|
|
|
|
|
|
|
12,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, after income taxes |
|
|
22,878 |
|
|
|
23,267 |
|
|
|
14,773 |
|
|
|
(38,338 |
) |
|
|
22,580 |
|
Discontinued operations, after income taxes |
|
|
(2,036 |
) |
|
|
254 |
|
|
|
44 |
|
|
|
|
|
|
|
(1,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
20,842 |
|
|
$ |
23,521 |
|
|
$ |
14,817 |
|
|
$ |
(38,338 |
) |
|
$ |
20,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
Supplemental Consolidating Condensed
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
|
|
|
$ |
133,535 |
|
|
$ |
93,013 |
|
|
$ |
(10,669 |
) |
|
$ |
215,879 |
|
Cost of sales |
|
|
|
|
|
|
99,870 |
|
|
|
75,308 |
|
|
|
(10,669 |
) |
|
|
164,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
33,665 |
|
|
|
17,705 |
|
|
|
|
|
|
|
51,370 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative expenses |
|
|
327 |
|
|
|
24,083 |
|
|
|
6,762 |
|
|
|
|
|
|
|
31,172 |
|
Amortization of intangibles |
|
|
|
|
|
|
727 |
|
|
|
|
|
|
|
|
|
|
|
727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
327 |
|
|
|
24,810 |
|
|
|
6,762 |
|
|
|
|
|
|
|
31,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(327 |
) |
|
|
8,855 |
|
|
|
10,943 |
|
|
|
|
|
|
|
19,471 |
|
Interest (expense) income, net |
|
|
(234 |
) |
|
|
(5,646 |
) |
|
|
321 |
|
|
|
|
|
|
|
(5,559 |
) |
Income from equity investee |
|
|
7,538 |
|
|
|
5,153 |
|
|
|
|
|
|
|
(12,691 |
) |
|
|
|
|
Other income (expense), net |
|
|
(530 |
) |
|
|
694 |
|
|
|
(461 |
) |
|
|
|
|
|
|
(297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before
income taxes |
|
|
6,447 |
|
|
|
9,056 |
|
|
|
10,803 |
|
|
|
(12,691 |
) |
|
|
13,615 |
|
Income tax provision |
|
|
16 |
|
|
|
1,482 |
|
|
|
4,331 |
|
|
|
|
|
|
|
5,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, after income taxes |
|
|
6,431 |
|
|
|
7,574 |
|
|
|
6,472 |
|
|
|
(12,691 |
) |
|
|
7,786 |
|
Discontinued operations, after income taxes |
|
|
10,837 |
|
|
|
(36 |
) |
|
|
(1,319 |
) |
|
|
|
|
|
|
9,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,268 |
|
|
$ |
7,538 |
|
|
$ |
5,153 |
|
|
$ |
(12,691 |
) |
|
$ |
17,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Supplemental Consolidating Condensed
Cash Flows Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(dollars in thousands) |
|
Net cash provided by operating
activities of continuing operations |
|
$ |
6,351 |
|
|
$ |
6,277 |
|
|
$ |
6,544 |
|
|
$ |
|
|
|
$ |
19,172 |
|
Net cash used in operating
activities of discontinued operations |
|
|
|
|
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
(136 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available for sale securities |
|
|
(173,837 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(173,837 |
) |
Proceeds from available for sale securities |
|
|
168,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168,997 |
|
Purchases of property, plant and equipment |
|
|
|
|
|
|
(6,495 |
) |
|
|
(1,023 |
) |
|
|
|
|
|
|
(7,518 |
) |
Proceeds from sale of property, plant and
equipment |
|
|
|
|
|
|
8 |
|
|
|
3 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities of continuing operations |
|
|
(4,840 |
) |
|
|
(6,487 |
) |
|
|
(1,020 |
) |
|
|
|
|
|
|
(12,347 |
) |
Net cash used in investing activities of
discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options |
|
|
436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
436 |
|
Stock repurchase |
|
|
(12,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,632 |
) |
Receipts from government grants |
|
|
|
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
325 |
|
Payments on long-term debt |
|
|
(10,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000 |
) |
Payment of deferred financing fees |
|
|
(340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(340 |
) |
Tax benefit from exercise of incentive stock options |
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116 |
|
Payments of preferred stock dividend |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities of continuing operations |
|
|
(22,570 |
) |
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
(22,245 |
) |
Net cash used in financing
activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
|
|
|
|
|
|
|
|
242 |
|
|
|
|
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by continuing
operations |
|
|
(21,059 |
) |
|
|
115 |
|
|
|
5,766 |
|
|
|
|
|
|
|
(15,178 |
) |
Net cash used by discontinued
operations |
|
|
|
|
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents |
|
|
(21,059 |
) |
|
|
(21 |
) |
|
|
5,766 |
|
|
|
|
|
|
|
(15,314 |
) |
Cash and cash equivalents at beginning of
period |
|
|
45,241 |
|
|
|
32 |
|
|
|
17,247 |
|
|
|
|
|
|
|
62,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
24,182 |
|
|
$ |
11 |
|
|
$ |
23,013 |
|
|
$ |
|
|
|
$ |
47,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Supplemental Consolidating Condensed
Cash Flows Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash provided by operating
activities of continuing operations |
|
$ |
2,767 |
|
|
$ |
8,348 |
|
|
$ |
12,453 |
|
|
$ |
|
|
|
$ |
23,568 |
|
Net cash provided by operating
activities of discontinued operations |
|
|
|
|
|
|
1,895 |
|
|
|
44 |
|
|
|
|
|
|
|
1,939 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations |
|
|
2,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,650 |
|
Purchases of available for sale securities |
|
|
(310,359 |
) |
|
|
|
|
|
|
(996 |
) |
|
|
|
|
|
|
(311,355 |
) |
Proceeds from available for sale securities |
|
|
339,575 |
|
|
|
|
|
|
|
996 |
|
|
|
|
|
|
|
340,571 |
|
Purchases of property, plant and equipment |
|
|
|
|
|
|
(10,884 |
) |
|
|
(4,320 |
) |
|
|
|
|
|
|
(15,204 |
) |
Proceeds from sale of property, plant and
equipment |
|
|
|
|
|
|
7 |
|
|
|
11 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities of continuing operations |
|
|
31,866 |
|
|
|
(10,877 |
) |
|
|
(4,309 |
) |
|
|
|
|
|
|
16,680 |
|
Net cash used in investing activities of
discontinued operations |
|
|
|
|
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
(51 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options |
|
|
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221 |
|
Stock repurchase |
|
|
(2,335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,335 |
) |
Receipts from government grants |
|
|
|
|
|
|
675 |
|
|
|
|
|
|
|
|
|
|
|
675 |
|
Payments on long-term debt |
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
|
|
|
|
(59 |
) |
Tax benefit from exercise of incentive stock options |
|
|
908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
908 |
|
Payments of preferred stock dividend |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities of continuing operations |
|
|
(1,356 |
) |
|
|
675 |
|
|
|
(59 |
) |
|
|
|
|
|
|
(740 |
) |
Effect of exchange rate changes on cash |
|
|
|
|
|
|
|
|
|
|
(868 |
) |
|
|
|
|
|
|
(868 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing
operations |
|
|
33,277 |
|
|
|
(1,854 |
) |
|
|
7,217 |
|
|
|
|
|
|
|
38,640 |
|
Net cash provided by discontinued
operations |
|
|
|
|
|
|
1,844 |
|
|
|
44 |
|
|
|
|
|
|
|
1,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents |
|
|
33,277 |
|
|
|
(10 |
) |
|
|
7,261 |
|
|
|
|
|
|
|
40,528 |
|
Cash and cash equivalents at beginning of
period |
|
|
11,964 |
|
|
|
42 |
|
|
|
9,986 |
|
|
|
|
|
|
|
21,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
45,241 |
|
|
$ |
32 |
|
|
$ |
17,247 |
|
|
$ |
|
|
|
$ |
62,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Supplemental Consolidating Condensed
Cash Flows Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash (used in) provided by operating
activities of continuing operations |
|
$ |
(1,244 |
) |
|
$ |
10,936 |
|
|
$ |
10,723 |
|
|
$ |
|
|
|
$ |
20,415 |
|
Net cash used in operating
activities of discontinued operations |
|
|
|
|
|
|
(5,481 |
) |
|
|
(1,473 |
) |
|
|
|
|
|
|
(6,954 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued
operations |
|
|
93,354 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
93,355 |
|
Purchases of held to maturity securities |
|
|
(78,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,969 |
) |
Proceeds from held to maturity securities |
|
|
80,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,475 |
|
Purchases of available for sale securities |
|
|
(262,937 |
) |
|
|
|
|
|
|
(932 |
) |
|
|
|
|
|
|
(263,869 |
) |
Proceeds from available for sale securities |
|
|
206,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,306 |
|
Purchases of property, plant and equipment |
|
|
|
|
|
|
(4,033 |
) |
|
|
(3,615 |
) |
|
|
|
|
|
|
(7,648 |
) |
Proceeds from sale of property, plant and
equipment |
|
|
|
|
|
|
15 |
|
|
|
2 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities of continuing operations |
|
|
38,229 |
|
|
|
(4,017 |
) |
|
|
(4,545 |
) |
|
|
|
|
|
|
29,667 |
|
Net cash used in investing activities of
discontinued operations |
|
|
|
|
|
|
(1,423 |
) |
|
|
|
|
|
|
|
|
|
|
(1,423 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on short-term debt |
|
|
|
|
|
|
|
|
|
|
(980 |
) |
|
|
|
|
|
|
(980 |
) |
Proceeds from long-term debt |
|
|
10,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,964 |
|
Payments on long-term debt |
|
|
(33,874 |
) |
|
|
|
|
|
|
(132 |
) |
|
|
|
|
|
|
(34,006 |
) |
Proceeds from stock options |
|
|
1,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,233 |
|
Stock repurchase |
|
|
(3,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,694 |
) |
Payments of preferred stock dividend |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities of continuing operations |
|
|
(25,521 |
) |
|
|
|
|
|
|
(1,112 |
) |
|
|
|
|
|
|
(26,633 |
) |
Net cash used in financing
activities of discontinued operations |
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
Effect of exchange rate changes on cash |
|
|
|
|
|
|
|
|
|
|
771 |
|
|
|
|
|
|
|
771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operations |
|
|
11,464 |
|
|
|
6,919 |
|
|
|
5,837 |
|
|
|
|
|
|
|
24,220 |
|
Net cash used in discontinued
operations |
|
|
|
|
|
|
(6,918 |
) |
|
|
(1,473 |
) |
|
|
|
|
|
|
(8,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents |
|
|
11,464 |
|
|
|
1 |
|
|
|
4,364 |
|
|
|
|
|
|
|
15,829 |
|
Cash and cash equivalents at beginning of
period |
|
|
500 |
|
|
|
41 |
|
|
|
5,622 |
|
|
|
|
|
|
|
6,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
11,964 |
|
|
$ |
42 |
|
|
$ |
9,986 |
|
|
$ |
|
|
|
$ |
21,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
18. Summary of Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
Net sales |
|
$ |
44,285 |
|
|
$ |
39,077 |
|
|
$ |
43,452 |
|
|
$ |
45,588 |
|
Gross profit |
|
|
11,998 |
|
|
|
8,391 |
|
|
|
13,569 |
|
|
|
13,517 |
|
Income from
continuing operations, after income taxes |
|
|
1,584 |
|
|
|
(372 |
) |
|
|
3,783 |
|
|
|
1,518 |
|
Discontinued operations, after income taxes |
|
|
(10 |
) |
|
|
(164 |
) |
|
|
(13 |
) |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,574 |
|
|
$ |
(536 |
) |
|
$ |
3,770 |
|
|
$ |
1,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: (1 ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations |
|
$ |
0.18 |
|
|
$ |
(0.05 |
) |
|
$ |
0.46 |
|
|
$ |
0.18 |
|
Discontinued operations |
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per basic share |
|
$ |
0.18 |
|
|
$ |
(0.07 |
) |
|
$ |
0.46 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: (1 ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations |
|
$ |
0.17 |
|
|
$ |
(0.05 |
) |
|
$ |
0.45 |
|
|
$ |
0.18 |
|
Discontinued operations |
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per diluted share |
|
$ |
0.17 |
|
|
$ |
(0.07 |
) |
|
$ |
0.45 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
Net sales |
|
$ |
65,779 |
|
|
$ |
71,801 |
|
|
$ |
74,181 |
|
|
$ |
57,887 |
|
Gross profit |
|
|
17,411 |
|
|
|
21,099 |
|
|
|
25,111 |
|
|
|
13,475 |
|
Income from continuing operations, after income taxes |
|
|
3,826 |
|
|
|
6,180 |
|
|
|
10,297 |
|
|
|
2,277 |
|
Discontinued operations, after income taxes |
|
|
(675 |
) |
|
|
(1,168 |
) |
|
|
(41 |
) |
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,151 |
|
|
$ |
5,012 |
|
|
$ |
10,256 |
|
|
$ |
2,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: (1 ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations |
|
$ |
0.42 |
|
|
$ |
0.69 |
|
|
$ |
1.14 |
|
|
$ |
0.25 |
|
Discontinued operations |
|
|
(0.07 |
) |
|
|
(0.13 |
) |
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per basic share |
|
$ |
0.35 |
|
|
$ |
0.56 |
|
|
$ |
1.14 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: (1 ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations |
|
$ |
0.40 |
|
|
$ |
0.66 |
|
|
$ |
1.09 |
|
|
$ |
0.24 |
|
Discontinued operations |
|
|
(0.07 |
) |
|
|
(0.13 |
) |
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per diluted share |
|
$ |
0.33 |
|
|
$ |
0.53 |
|
|
$ |
1.09 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Due to the quarterly computation of earnings per share, the sum of the four cumulative
quarters will not necessarily equal the annual total. |
81
Schedule II Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
|
|
Beginning of |
|
|
Costs and |
|
|
|
|
|
|
End of |
|
|
|
Year |
|
|
Expenses |
|
|
Deductions |
|
|
Year |
|
Year ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts |
|
$ |
1,328 |
|
|
$ |
(146 |
) |
|
$ |
(197) |
(1)(3) |
|
$ |
985 |
|
Slow moving and obsolete inventory
reserve |
|
|
3,793 |
|
|
|
1,424 |
|
|
|
(175) |
(2)(3) |
|
|
5,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts |
|
$ |
847 |
|
|
$ |
726 |
|
|
$ |
(245 |
)(1)(3) |
|
$ |
1,328 |
|
Slow moving and obsolete inventory
reserve |
|
|
3,477 |
|
|
|
860 |
|
|
|
(544 |
)(2)(3) |
|
|
3,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts |
|
$ |
827 |
|
|
$ |
120 |
|
|
$ |
(100 |
)(1)(3) |
|
$ |
847 |
|
Slow moving and obsolete inventory
reserve |
|
|
2,970 |
|
|
|
901 |
|
|
|
(394 |
)(2)(3) |
|
|
3,477 |
|
|
|
|
(1) |
|
Uncollectible accounts written off, net of recoveries. |
|
(2) |
|
Inventory items written off against the reserve account. |
|
(3) |
|
Impact of foreign currency on accounts. |
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures. As of December 31, 2009, we evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as such term is
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act). The evaluation
was carried out under the supervision of and with the participation of our management, including
our principal executive officer and principal financial and accounting officer. Based on this
evaluation, our Chief Executive Officer and interim Chief Accounting Officer each concluded that as
of the end of the period covered by this report, our disclosure controls and procedures were
effective.
Managements Report on Internal Control over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control over financial reporting as
such term is defined in Rule 13(a)-15(f) of the Exchange Act, which is to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles
defined in the Exchange Act. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies and procedures may
deteriorate. Under the supervision and with the participation of management, including our Chief
Executive Officer and interim Chief Accounting Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based upon the framework in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on that evaluation, our management concluded that our internal
control over financial reporting was effective as of December 31, 2009.
82
Attestation Report of Independent Registered Public Accounting Firm. Ernst & Young LLP, our
independent registered public accounting firm, has audited the consolidated financial statements
included in this Annual Report on
Form 10-K and, as a part of their audit, has issued their attestation report, set forth in
Item 8 of this Form 10-K, on the effectiveness of our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting. There have been no changes in our
internal control over financial reporting during the quarter ended December 31, 2009 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
None
PART III
|
|
|
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by Item 10 is incorporated herein by reference to the Registrants
definitive Proxy Statement relating to its 2010 Annual Meeting of Stockholders (Proxy Statement),
under the captions Structure and Practices of the Board of Directors, Executive Officers
Section 16(a) Beneficial Ownership Reporting Compliance Summary Compensation) and Code of
Business Conduct and Ethics. This Proxy Statement will be filed with the SEC prior to April 30,
2010.
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
The information required by Item 11 is contained under the caption Compensation Discussion
and Analysis, Compensation Committee Report, and Structure and Practices of the Board of
Directors Director Compensation Compensation Committee Interlocks and Insider Participation in
the Proxy Statement and is incorporated herein by reference. This Proxy Statement will be filed
with the SEC prior to April 30, 2010.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
Information required with respect to security ownership of certain beneficial owners is set
forth under the caption Principal Stockholders, and Equity Compensation Plan Information in the
Companys definitive Proxy Statement to be filed prior to April 30, 2010, and is incorporated by
reference.
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by Item 13 is contained under the caption Certain Relationships and
Related Transactions and Structure and Practices of the Board of Directors Director
Independence in the Proxy Statement and is incorporated herein by reference. This Proxy Statement
will be filed with the SEC prior to April 30, 2010.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by Item 14 is contained under the caption Audit Committee Report
Principal Accountant Fees and Services in the Proxy Statement and is incorporated herein by
reference. This Proxy Statement will be filed with the SEC prior to April 30, 2010.
83
Part IV
|
|
|
ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Financial Statements and Schedules
|
1. |
|
The following consolidated financial statements of Hawk Corporation are filed as part
of this report under Item 8 Financial Statements and Supplementary Data: |
|
(i) |
|
Consolidated Balance Sheets at December 31, 2009 and 2008 |
|
|
(ii) |
|
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 |
|
|
(iii) |
|
Consolidated Statements of Shareholders Equity for the years ended December 31, 2009, 2008 and 2007 |
|
|
(iv) |
|
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007 |
|
|
(v) |
|
Notes to Consolidated Financial Statements for the years ended December 31,
2009, 2008 and 2007 |
|
2. |
|
Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2009,
2008 and 2007 |
All other financial schedules are not required under the related instructions, or are inapplicable
and therefore have been omitted.
(b) Exhibits:
|
|
|
|
|
|
3.1 |
|
|
Form of Hawk Corporations Second Amended and Restated Certificate of Incorporation
(Incorporated by reference to the Companys Registration Statement on Form S-1 as filed on
November 19, 1997 with the Securities and Exchange Commission (Reg. No. 333-40535)) |
|
|
|
|
|
|
3.2 |
|
|
Hawk Corporations Amended and Restated By-laws (Incorporated by reference to the Companys
Current Report on Form 8-K as filed on March 2, 2000 with the Securities and Exchange
Commission) |
|
|
|
|
|
|
3.3 |
|
|
Hawk Corporations Amendment No. 1 to Amended and Restated By-laws, dated August 19, 2008
(Incorporated by reference to the Companys Current Report on Form 8-K as filed on August 22,
2008 with the Securities and Exchange Commission) |
|
|
|
|
|
|
4.1 |
|
|
Stockholders Voting Agreement, effective as of November 27, 1996, by and among Hawk
Corporation, Norman C. Harbert, the Harbert Family Limited Partnership, Ronald E. Weinberg,
the Weinberg Family Limited Partnership, Byron S. Krantz and the Krantz Family Limited
Partnership (Incorporated by reference to the Companys Registration Statement on Form S-4 as
filed with the Securities and Exchange Commission (Reg. No. 333-18433)) |
|
|
|
|
|
|
4.2 |
|
|
Letter agreement, dated January 5, 1998, amending the Stockholders Voting Agreement,
effective as of November 27, 1996, by and among Hawk Corporation, Norman C. Harbert, the
Harbert Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited
Partnership, Byron S. Krantz and the Krantz Family Limited Partnership (Incorporated by
reference to the Companys Amendment No. 4 to Registration Statement on Form S-1/A as filed on
January 23, 1998 with the Securities and Exchange Commission (Reg. No. 333-40535)) |
|
|
|
|
|
|
4.3 |
|
|
Indenture, dated as of November 1, 2004, among Hawk Corporation, the Guarantors named
therein, and HSBC Bank USA, National Association, as Trustee (Incorporated by reference to the
Companys Form 8-K as filed on November 1, 2004 with the Securities and Exchange Commission) |
|
|
|
|
|
|
4.4 |
|
|
Registration Rights Agreement, dated as of November 1, 2004, among Hawk Corporation, the
Guarantors named therein, and Jefferies & Company, Inc. (Incorporated by reference to the
Companys Form 8-K as filed on November 1, 2004 with the Securities and Exchange Commission) |
|
|
|
|
|
|
4.5 |
|
|
Amended and Restated Rights Agreements dated as of January 4, 2008, by and between Hawk
Corporation and National City Bank, as Rights Agent (Incorporated by reference to the
Companys Form 8-K as filed on January 4, 2008 with the Securities and Exchange Commission) |
84
|
|
|
|
|
|
4.6 |
|
|
Form of 8 3/4% Senior Exchange Note due 2014 (Incorporated by reference to the Companys
Registration Statement on Form S-4 as filed on December 3, 2004 with the Securities and
Exchange Commission (Reg. No. 333-120991)) |
|
|
|
|
|
|
4.8 |
|
|
Supplemental Indenture, dated as of February 23, 2010, among Hawk Corporation, the Guarantors
named therein, and HSBC Bank USA, National Association, as Trustee (Incorporated by reference
to the Companys Form 8-K as filed on February 24, 2010 with the Securities and Exchange
Commission) |
|
|
|
|
|
|
10.1 |
|
|
Hawk Corporation 1997 Stock Option Plan (Incorporated by reference to the Companys
Registration Statement on Form S-1 as filed on November 19, 1997 with the Securities and
Exchange Commission (Reg. No. 333-40535)) |
|
|
|
|
|
|
10.2 |
|
|
First Amendment to Hawk Corporation 1997 Stock Option Plan dated December 31, 2008
(Incorporated by reference to the Companys Form 10-K for the period ended December 31, 2008
as filed on March 10, 2009 with the Securities and Exchange Commission) |
|
|
|
|
|
|
10.3 |
|
|
Hawk Corporation Amended and Restated 2000 Long Term Incentive Plan (Incorporated by
reference to the Annex A of the Companys Definitive Proxy Statement as filed on April 29,
2008 with the Securities and Exchange Commission) |
|
|
|
|
|
|
10.4 |
|
|
First Amendment to Hawk Corporation 2000 Long Term Incentive Plan dated December 31, 2008
(Incorporated by reference to the Companys Form 10-K for the period ended December 31, 2008
as filed on March 10, 2009 with the Securities and Exchange Commission) |
|
|
|
|
|
|
10.5 |
|
|
Hawk Corporation Annual Incentive Compensation Plan (Incorporated by reference to the
Companys Form 10-K for the period ended December 31, 2000 as filed on March 23, 2001 with the
Securities and Exchange Commission) |
|
|
|
|
|
|
10.6 |
|
|
Hawk Corporation Deferred Compensation Plan (Incorporated by reference to the Companys
Registration Statement on Form S-8 as filed on December 5, 2007 with the Securities and
Exchange Commission (Reg. No. 333-147832)) |
|
|
|
|
|
|
10.7 |
|
|
Form of Intellectual Property Security Agreement, dated as of August 10, 2001, by and between
Hawk Corporation and each of the following subsidiaries of Hawk Corporation: Allegheny Powder
Metallurgy, Inc., Clearfield Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc.,
Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings, Inc., Net Shape
Technologies LLC, Quarter Master Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings,
Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and Wellman Friction Products U.K.
Corp. (Incorporated by reference to the Companys Form 10-Q for the quarterly period ended
June 30, 2001 as filed on August 14, 2001 with the Securities and Exchange Commission) |
|
|
|
|
|
|
10.8 |
|
|
Credit and Security Agreement, dated November 1, 2004, among Hawk Corporation, Allegheny
Clearfield, Inc., Friction Products Co., Hawk MIM, Inc., Hawk Motors, Inc., Hawk Precision
Components, Inc., Helsel, Inc., Logan Metal Stampings, Inc., Net Shape Technologies LLC,
Quarter Master Industries, Inc., Sinterloy Corporation, S.K. Wellman Corp., S.K. Wellman
Holdings, Inc., Tex Racing Enterprises, Inc., Wellman Products Group, Inc., and Wellman
Products, LLC, as Borrowers, and KeyBank National Association, as Administrative Agent and LC
Issuer (Incorporated by reference to the Companys Form 8-K as filed on November 1, 2004 with
the Securities and Exchange Commission) |
|
|
|
|
|
|
10.9 |
|
|
Amendment No. 1 to Credit and Security Agreement made as of August 31, 2006 among Hawk
Corporation, Allegheny Clearfield, Inc., Friction Products Co., Hawk MIM, Inc., Hawk Motors,
Inc., Hawk Precision Components Group, Inc., Helsel, Inc., Logan Metal Stampings, Inc., Net
Shape Technologies LLC, Quarter Master Industries, Inc., Sinterloy Corporation, S.K. Wellman
Corp., S.K. Wellman Holdings, Inc., Tex Racing Enterprises, Inc., Wellman Products Group,
Inc., and Wellman Products, LLC, as borrowers, the Lenders listed on the signature pages
thereto, and KeyBank National Association, as Administrative Agent and LC Issuer (Incorporated
by reference to the Companys Form 8-K as filed on September 1, 2006 with the Securities and
Exchange Commission) |
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10.10 |
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Amendment No. 2 to Credit and Security Agreement made as of August 31, 2006 among Hawk
Corporation, Allegheny Clearfield, Inc., Friction Products Co., Hawk MIM, Inc., Hawk Motors,
Inc., Hawk Precision Components Group, Inc., Helsel, Inc., Logan Metal Stampings, Inc., Net
Shape Technologies LLC, Quarter Master Industries, Inc., Sinterloy Corporation, S.K. Wellman
Corp., S.K. Wellman Holdings, Inc., Tex Racing Enterprises, Inc., Wellman Products Group,
Inc., and Wellman Products, LLC, as borrowers, the Lenders listed
on the signature pages thereto, and KeyBank National Association, as Administrative Agent
and LC Issuer (Incorporated by reference to the Companys Form 8-K as filed on February 8,
2006 with the Securities and Exchange Commission) |
85
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10.11 |
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Amendment No. 4 and Consent to Credit and Security Agreement and Omnibus Amendment to
Certain Other Loan Documents, made as of May 30, 2008, among Hawk Corporation, Friction
Products Co., Hawk Motors, Inc., Logan Metal Stampings, Inc., Quarter Master Industries, Inc.,
S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Tex Racing Enterprises, Inc., Wellman
Products Group, Inc., and Wellman Products, LLC, as borrowers, the Lenders listed on the
signature pages of the Agreement, KeyBank National Association, as Administrative Agent, and
KeyBank National Association, as LC Issuer (Incorporated by reference to the Companys Form
8-K as filed on June 3, 2008 with the Securities and Exchange Commission) |
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10.12 |
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Form of Pledge and Security Agreement Borrower in favor of KeyBank National Association
(Incorporated by reference to the Companys Form 10-Q for the quarterly period ended September
30, 2004 as filed on November 15, 2004 with the Securities and Exchange Commission) |
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10.13 |
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Form of Collateral Assignment of Security Interest in Trademarks and Licenses, dated as of
November 1, 2004, among Hawk Corporation and the other Grantors named therein and KeyBank
National Association (Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended September 30, 2004 as filed on November 15, 2004 with the Securities and Exchange
Commission) |
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10.14 |
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Form of Collateral Assignment of Security Interest in Patents and Patent Applications, dated
as of November 1, 2004, among Hawk Corporation and the other Grantors named therein and
KeyBank National Association (Incorporated by reference to the Companys Form 10-Q for the
quarterly period ended September 30, 2004 as filed on November 15, 2004 with the Securities
and Exchange Commission) |
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10.15 |
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Form of Collateral Assignment of Security Interest in Copyrights, dated as of November 1,
2004, among Hawk Corporation and the other Grantors named therein and KeyBank National
Association (Incorporated by reference to the Companys Form 10-Q for the quarterly period
ended September 30, 2004 as filed on November 15, 2004 with the Securities and Exchange
Commission) |
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10.16 |
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Form of Limited License Agreement (Borrower) in favor of KeyBank National Association
(Incorporated by reference to the Companys Form 10-Q for the quarterly period ended September
30, 2004 as filed on November 15, 2004 with the Securities and Exchange Commission) |
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10.17 |
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Depositary Agreement appointing HSBC Bank USA, National Association, as exchange agent
(Incorporated by reference to Amendment No. 1 to the Companys Registration Statement on Form
S-4 as filed on December 20, 2004 with the Securities and Exchange Commission (Reg. No.
333-120991)) |
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10.18 |
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Amended and Restated Wage Continuation Agreement, dated as of December 31, 2001, by and
among Hawk Corporation, Friction Products Co. and Norman C. Harbert (Incorporated by reference
to the Companys Form 10-K for the period ended December 31, 2001 as filed on April 1, 2002
with the Securities and Exchange Commission) |
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10.19 |
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Second Amendment to Restated Wage Continuation Agreement dated as of December 31, 2008 by
and between Norman C. Harbert and Hawk Corporation (Incorporated by reference to the
Companys Form 10-K for the period ended December 31, 2008 as filed on March 10, 2009 with the
Securities and Exchange Commission) |
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10.20 |
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Amended and Restated Senior Advisor Agreement dated as of December 31, 2008 by and between
Hawk Corporation and Norman C. Harbert (Incorporated by reference to the Companys Form 10-K
for the period ended December 31, 2008 as filed on March 10, 2009 with the Securities and
Exchange Commission) |
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10.21 |
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Employment Agreement, dated August 14, 2006, by and between Hawk Corporation and Joseph J.
Levanduski (Incorporated by reference to the Companys Form 10-Q for the quarterly period
ended June 30, 2006 as filed on August 14, 2006 with the Securities and Exchange Commission) |
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10.22 |
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Amendment to Agreements, dated November 10, 2006, between Hawk Corporation and Joseph J.
Levanduski (Incorporated by reference to the Companys Form 10-Q for the quarterly period
ended September 30, 2006 as filed on November 13, 2006 with the Securities and Exchange
Commission) |
86
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10.23 |
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Second Amendment to Employment Agreement dated as of December 30, 2008, by and between Hawk
Corporation and Joseph J. Levanduski (Incorporated by reference to the Companys Form 10-K for
the period ended December 31, 2008 as filed on March 10, 2009 with the Securities and Exchange
Commission) |
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10.24 |
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Hawk Corporation Annual Incentive Compensation Plan (Incorporated by reference to Annex B of
the Companys Definitive Proxy Statement as filed April 29, 2008 with the Securities and
Exchange Commission) |
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10.25 |
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Form of Change in Control Agreement by and among Hawk Corporation and certain executive
officers (Incorporated by reference to the Companys Form 10-Q for the quarterly period ended
June 30, 2006 as filed on August 14, 2006 with the Securities and Exchange Commission) |
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10.26 |
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Form of Amendment No. 1 to Change in Control Agreement by and among Hawk Corporation and
certain executive officers (Incorporated by reference to the Companys Form 10-K for the
period ended December 31, 2008 as filed on March 10, 2009 with the Securities and Exchange
Commission) |
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10.27 |
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Hawk Corporation Annual Incentive Compensation Plan (Incorporated by reference to Annex A of
the Companys Definitive Proxy Statement as filed April 17, 2009 with the Securities and
Exchange Commission) |
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10.28 |
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Amended and Restated Employment Agreement dated March 31, 2009, by and between Hawk
Corporation and Ronald E. Weinberg (Incorporated by reference to the Companys Form 8-K as
filed on April 3, 2009 with the Securities and Exchange Commission) |
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10.29 |
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Credit and Security Agreement, dated as of June 12, 2009, among Hawk Corporation, Friction
Products Co., Logan Metal Stampings, Inc., S.K. Wellman Corp., S.K. Wellman Holdings, Inc.,
Wellman Products Group, Inc., and Wellman Products, LLC, as borrowers, the Lenders listed on
the signature pages of the Agreement, KeyBank National Association, as Administrative Agent,
and KeyBank National Association, as LC Issuer (Incorporated by reference to the Companys
Form 8-K as filed on June 15, 2009 with the Securities and Exchange Commission) |
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10.30 |
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Amended and Restated Employment Agreement dated as of August 21, 2009, by and between Hawk,
Wellman Products Group, Inc. and Christopher DiSantis (Incorporated by reference to the
Companys Form 8-K as filed on August 27, 2009 with the Securities and Exchange Commission ) |
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10.31 |
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Amended and Restated Change in Control Agreement between Hawk Corporation and B. Christopher
DiSantis (Incorporated by reference to the Companys Form 8-K as filed on August 27, 2009 with
the Securities and Exchange Commission) |
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10.32 |
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Split-Dollar Agreement dated as of August 21, 2009, between Hawk Corporation and B.
Christopher DiSantis (Incorporated by reference to the Companys Form 8-K as filed on August
27, 2009 with the Securities and Exchange Commission) |
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14 |
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Code of Business Conduct and Ethics (Incorporated by reference to the Companys Form 8-K as
filed on May 30, 2006 with the Securities and Exchange Commission) |
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21.1* |
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Subsidiaries of the Registrant |
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23.1* |
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Consent of Independent Registered Public Accounting Firm |
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31.1* |
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Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2* |
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Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1* |
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Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2* |
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Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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* |
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Filed or furnished herewith |
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Indicates management contract or compensatory plan or arrangement |
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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HAWK CORPORATION
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By: |
/s/ JOHN T. BRONSTRUP
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John T. Bronstrup |
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interim Chief Accounting Officer |
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Date: March 10, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
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SIGNATURE |
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TITLE |
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DATE |
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/s/ Ronald E. Weinberg
Ronald E. Weinberg
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Chairman of the Board, Chief Executive
Officer, and Director
(principal executive officer)
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March 10, 2010 |
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/s/ Norman C. Harbert
Norman C. Harbert
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Chairman Emeritus, Founder
and Director
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March 10, 2010 |
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/s/ John T. Bronstrup
John T. Bronstrup
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interim Chief Accounting
Officer (principal
financial and accounting officer)
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March 10, 2010 |
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/s/ Byron S. Krantz
Byron S. Krantz
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Secretary and Director
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March 10, 2010 |
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/s/ Paul R. Bishop
Paul R. Bishop
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Director
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March 10, 2010 |
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/s/ Dan T. Moore, III
Dan T. Moore, III
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Director
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March 10, 2010 |
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/s/ Andrew T. Berlin
Andrew T. Berlin
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Director
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March 10, 2010 |
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/s/ Richard T. Marabito
Richard T. Marabito
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Director
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March 10, 2010 |
88