HAWK CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period to .

Commission File Number 001-13797

HAWK CORPORATION

(Exact name of Registrant as specified in its charter)


Delaware		34-1608156
(State of incorporation)		(I.R.S. Employer Identification No.)

200 Public Square, Suite 1500, Cleveland, Ohio 44114
(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 5, 2004, the Registrant had the following number of shares of common stock outstanding:


Class A Common Stock, $0.01 par value:		8,747,390
Class B Common Stock, $0.01 par value:	None (0)

As used in this Form 10-Q, 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-Q is as of September 30, 2004.

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands, except share data)


	September 30,		December 31,
	2004		2003
Assets
Current assets:
Cash and cash equivalents	$	4,219	$	3,365
Accounts receivable, less allowance of $564 in 2004 and $429 in 2003		41,078		32,272
Inventories:
Raw materials and work-in-process		24,068		21,277
Finished products		16,237		14,147

Total inventories		40,305		35,424
Deferred income taxes		3,545		3,551
Taxes receivable		465		521
Shareholder notes		600
Other current assets		4,329		4,032
Assets of discontinued operations		5,444		4,302

Total current assets		99,985		83,467
Property, plant and equipment:
Land and improvements		1,844		1,944
Buildings and improvements		19,840		19,937
Machinery and equipment		108,499		104,370
Furniture and fixtures		9,067		8,405
Construction in progress		11,604		5,622

		150,854		140,278
Less accumulated depreciation and amortization		83,719		77,142

Total property, plant and equipment		67,135		63,136
Other assets:
Goodwill		32,495		32,495
Other intangible assets		9,354		9,904
Shareholder notes				1,000
Other		2,870		3,547

Total other assets		44,719		46,946

Total assets	$	211,839	$	193,549

HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS — (Unaudited) (Continued)
(In Thousands, except share data)


	September 30,			December 31,
	2004			2003
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	25,899		$	21,569
Accrued compensation		6,860			5,736
Accrued interest		2,092			4,153
Other accrued expenses		9,119			8,296
Short-term debt		980			1,326
Bank Facility		33,007			24,059
Current portion of long-term debt		666			1,148
Liabilities of discontinued operations		5,884			3,652

Total current liabilities		84,507			69,939
Long-term liabilities:
Long-term debt		67,661			68,443
Deferred income taxes		4,354			4,360
Other		9,334			9,102

Total long-term liabilities		81,349			81,905
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; and 8,747,390 and 8,588,720 outstanding in 2004 and 2003, respectively		92			92
Class B common stock, $.01 par value; 10,000,000 shares authorized; none issued or outstanding
Additional paid-in capital		53,973			54,483
Retained deficit		(599	)		(4,344	)
Accumulated other comprehensive loss		(4,085	)		(4,083	)
Treasury stock, at cost, 440,360 and 599,030 shares in 2004 and 2003, respectively		(3,399	)		(4,444	)

Total shareholders’ equity		45,983			41,705

Total liabilities and shareholders’ equity	$	211,839		$	193,549

Note: The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to consolidated financial statements.

HAWK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, except per share data)


	Three months ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
	2004			2003			2004			2003
Net sales	$	59,367		$	48,161		$	183,038		$	155,015
Cost of sales		45,728			36,599			137,914			117,594

Gross profit		13,639			11,562			45,124			37,421
Operating expenses:
Selling, technical and administrative expenses		9,181			7,888			28,313			25,183
Restructuring costs		286						507
Amortization of finite-lived intangible assets		184			193			550			582

Total operating expenses		9,651			8,081			29,370			25,765

Income from operations		3,988			3,481			15,754			11,656
Interest expense		(2,610	)		(2,601	)		(7,687	)		(8,083	)
Interest income		8			16			33			43
Other (expense) income, net		(101	)		107			(620	)		117

Income from continuing operations before income taxes		1,285			1,003			7,480			3,733
Income tax provision		234			872			3,207			2,000

Income from continuing operations		1,051			131			4,273			1,733
Loss from discontinued operations, net of tax of $233 for the three and nine months ended September 30, 2004 and $551 and $1,101 for the three and nine months ended September 30, 2003, respectively		(424	)		(48	)		(415	)		(1,062	)

Net income	$	627		$	83		$	3,858		$	671

Earnings per share:
Basic earnings per share:
Earnings from continuing operations	$	.12		$	.01		$	.48		$	.19
Discontinued operations		(.05	)		.00			(.05	)		(.12	)

Net earnings per basic share	$	.07		$	.01		$	.43		$	.07

Diluted earnings per share:
Earnings from continuing operations	$	.11		$	.01		$	.47		$	.19
Discontinued operations		(.05	)		.00			(.05	)		(.12	)

Net earnings per diluted share	$	.06		$	.01		$	.42		$	.07

HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)


	September 30,			September 30,
	2004			2003
Cash flows from operating activities
Net income	$	3,858		$	671
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations, net of tax		415			1,062
Depreciation and amortization		8,328			8,681
Loss on fixed assets		217			234
Changes in operating assets and liabilities:
Accounts receivable		(8,915	)		(1,979	)
Inventories		(4,940	)		700
Other assets		435			3,013
Accounts payable		4,397			3,655
Accrued expenses		369			4,903
Other liabilities and other		258			1,328

Net cash provided by operating activities of continuing operations		4,422			22,268
Net cash provided by operating activities of discontinued operations		1,480			628
Cash flows from investing activities
Purchases of property, plant and equipment		(12,686	)		(5,377	)
Proceeds from the sale of property, plant and equipment					528

Net cash used in investing activities of continuing operations		(12,686	)		(4,849	)
Net cash used in investing activities of discontinued operations		(173	)		(877	)
Cash flows from financing activities
Proceeds on short-term debt					3,029
Payments on short-term debt		(337	)
Proceeds from long-term debt		83			543
Payments on long-term debt		(1,335	)		(2,758	)
Proceeds from Bank Facility		78,228			47,846
Payments on Bank Facility		(69,280	)		(64,378	)
Net proceeds from exercise of stock options		539
Payments of preferred stock dividends		(113	)		(113	)

Net cash provided by (used in) financing activities of continuing operations		7,785			(15,831	)
Net cash (used in) provided by continuing operations		(479	)		1,588
Net cash provided by (used in) discontinued operations		1,307			(249	)
Effect of exchange rate changes on cash		26			83

Net increase in cash and cash equivalents		854			1,422
Cash and cash equivalents at beginning of year		3,365			1,702

Cash and cash equivalents at end of year	$	4,219		$	3,124

HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2004
(In Thousands, except per share data)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto in the Form 10-K for Hawk Corporation (Company) for the year ended December 31, 2003.

The Company, through its business segments, designs, engineers, manufactures and markets specialized components used in a variety of industrial, commercial and aerospace 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.

Certain amounts have been reclassified in 2003 to conform to the 2004 presentation.

NOTE 2 – INTANGIBLE ASSETS

The components of finite-lived intangible assets are as follows:


	September 30, 2004						December 31, 2003
			Accumulated						Accumulated
	Gross		Amortization		Net		Gross		Amortization		Net
Product certifications.	$	20,820	$	11,527	$	9,293	$	20,820	$	10,984	$	9,836
Other intangible assets		2,719		2,658		61		2,719		2,651		68

	$	23,539	$	14,185	$	9,354	$	23,539	$	13,635	$	9,904

Product certifications were acquired and valued based on the acquired company’s position as a certified supplier of friction materials to the major manufacturers of commercial aircraft brakes.

The Company estimates that amortization expense for finite-lived intangible assets for each of the next five years will be approximately $800.

The weighted average amortization period for product certifications and other intangible assets is 29 years and 14 years, respectively.

NOTE 3 – COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is as follows:


	Three months ended					Nine months ended
	September 30,					September 30,
	2004		2003			2004			2003
Net income	$	627	$	83		$	3,858		$	671
Foreign currency translation		401		(134	)		(2	)		1,526

Comprehensive income (loss)	$	1,028	$	(51	)	$	3,856		$	2,197

NOTE 4 – 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.

NOTE 5 – EMPLOYEE STOCK OPTION PLAN

In accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) the Company has elected to continue applying the provisions of Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations in accounting for its stock-based compensation plans. Under the provisions of APB 25, because the exercise price of the stock option equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The following illustrates the pro forma effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 for the three and nine month periods ended September 30, 2004 and 2003:


	Three months ended					Nine months ended
	September 30,					September 30,
	2004		2003			2004		2003
Net income, as reported	$	627	$	83		$	3,858	$	671
Employee stock-based compensation expense determined under fair value based methods, net of tax		62		382			154		621

Pro forma net earnings (loss)	$	565	$	(299	)	$	3,704	$	50

Basic earnings (loss) per share:
As reported	$	.07	$	.01		$	.43	$	.07

Pro forma	$	.06	$	(.04	)	$	.41	$	(.01	)

Diluted earnings (loss) per share:
As reported	$	.06	$	.01		$	.42	$	.07

Pro forma	$	.06	$	(.04	)	$	.40	$	(.01	)

NOTE 6 – DISCONTINUED OPERATIONS

During the fourth quarter of 2003, the Company committed to a plan to sell its motor segment, which has operations in Monterrey, Mexico (Mexico) and Alton, Illinois (Alton). This segment, which manufactures die-cast aluminum rotors for fractional and subfractional horsepower electric motors, failed to achieve a certain level of profitability and, after completing an extensive analysis, the Company determined that a divestiture of this segment would allow the Company to concentrate on its major business segments. During the third quarter of 2004, the Company reached an agreement to sell certain assets of its Alton facility to a third party; the transaction will close during the fourth quarter of 2004. No further fair market value write-downs are required based on the Company’s initial analysis. The Company continues to actively market the remaining operations of this segment.

Also during the third quarter of 2004, an agreement was reached with a third party to sell the Alton land and building for $355. The net book value of the land and building as of September 30, 2004 was $632. These assets had previously been included with continuing operations as the “held for sale” criteria as proscribed by SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), had not been met prior to the third quarter of 2004. The Company recognized a $177 fair market value adjustment (loss), net of tax, in the results of discontinued operations for the three and nine months ended September 30, 2004 in accordance with SFAS 144.

Results of operations of the Company have been restated to reclassify the net earnings, assets, and liabilities of the motors segment as discontinued operations for all periods presented. Corporate expenses previously allocated to this segment have been reallocated to the remaining continuing operations, resulting in a restatement of operating profit by segment (see Note 10).

Operating results from discontinued operations are summarized as follows:


	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2003			2004			2003
Net sales	$	3,351		$	3,393		$	9,884		$	11,057

Loss from operations before income taxes	$	(657	)	$	(600	)	$	(648	)	$	(2,163	)
Income tax benefit		233			552			233			1,101

Loss from operations, net of tax	$	(424	)	$	(48	)	$	(415	)	$	(1,062	)

The assets and liabilities of this segment, which have been classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheets, consist of the following at September 30, 2004 and December 31, 2003:


	September 30,		December 31,
	2004		2003
Accounts receivable	$	3,204	$	2,801
Inventory		718		739
Other current assets		634		40
Property, plant and equipment,(net)		484		320
Other long-term assets		404		402

Total assets of discontinued operations	$	5,444	$	4,302

Accounts payable	$	5,082	$	2,870
Other accrued expenses		802		465
Current portion of long-term debt				317

Total liabilities of discontinued operations	$	5,884	$	3,652

NOTE 7 – RESTRUCTURING

In the fourth quarter of 2003, the Company committed to a restructuring program to achieve cost savings in its friction products segment by moving operations at its Brook Park, Ohio location to a new production facility in Catoosa (Tulsa), Oklahoma. The Company has signed a lease agreeing to the terms on the construction of a new approximately 240,000 square foot facility to be completed in early 2005. The Company anticipates pre-tax charges of approximately $1,200 in 2004 and $4,000 to $4,500 in 2005 related to the relocation of the Brook Park, Ohio facility and employee severance expense. For the three and nine months ended September 30, 2004, the Company has incurred $286 and $507 in charges related to the relocation of the facility.

NOTE 8 – EMPLOYEE BENEFITS

The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $1,927 to its defined benefit pension plans in 2004. As of September 30, 2004, $1,326 of contributions have been made. Hawk presently anticipates contributing an additional $296 to fund its pension plans in 2004 for a total of $1,622. The decrease in anticipated pension contributions resulted from changes enacted by the Pension Funding Equity Act of 2004, which became effective on April 15, 2004 reducing the quarterly contribution requirements and the annual true-up of required contributions as current year participant information becomes available to the actuaries.

The components of net periodic benefit cost are as follows:


	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2003			2004			2003
Service cost	$	217		$	210		$	639		$	630
Interest cost		348			333			1,025			997
Expected return on plan assets		(362	)		(318	)		(1,063	)		(952	)
Amortization of prior service cost		20			18			62			53
Amortization of net (gain) loss		81			90			243			272
Pension curtailment		—			—			—			140

Net periodic benefit cost	$	304		$	333		$	906		$	1,140

NOTE 9 – EARNINGS PER SHARE

Basic and diluted earnings per share are computed as follows:


	Three months ended				Nine months ended
	September 30,				September 30,
	2004		2003		2004		2003
Income from continuing operations	$	1,051	$	131	$	4,273	$	1,733
Less: Preferred stock dividends		38		38		113		113


		Page
PART I.	FINANCIAL INFORMATION
	Item 1. Financial Statements (Unaudited)		3
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		23
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		38
	Item 4. Controls and Procedures		38
PART II.	OTHER INFORMATION
	Item 1. Legal Proceedings		39
	Item 6. Exhibits		39
SIGNATURES			40