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)

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)

Title of Each Class		Name of Exchange on Which Registered
Class A Common Stock, par value $.01		NYSE Amex
8 3/4% Senior Notes due 2014		NYSE Amex

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 o NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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):

Large Accelerated Filer o		Accelerated Filer þ		Non-accelerated Filer o		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.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s 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

ITEM 1.		BUSINESS

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:

•

a leading domestic and international supplier of brake and clutch friction materials for construction and mining equipment, agricultural equipment and trucks,

•

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,

•

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

•

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:

•

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:

		Year Ended December 31
		2009				2008				2007
		(dollars in millions)
Net sales		$	—			$	7.4			$	20.1
(Loss) from discontinued operations, before income taxes		$	(0.2	)		$	(1.8	)		$	(3.1	)
(Loss) gain on sale of discontinued operations, before income taxes			—				(1.9	)			15.0
Income tax (benefit) expense			(0.1	)			(2.0	)			2.4
(Loss) income from discontinued operations, after income taxes		$	(0.1	)		$	(1.7	)		$	9.5

Business Strategy

Our business strategy includes the following principal elements:

	•		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.
	•		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.
	•		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.
	•		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.
	•		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.
	•		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.

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

		% of Sales
Market		2009				2008
Construction and Mining			36.5	%			47.2	%
Aircraft and Defense			27.5	%			20.3	%
Agriculture			14.2	%			15.0	%
Truck			9.7	%			9.2	%
Performance Friction			6.9	%			3.9	%
Specialty Friction			3.8	%			3.6	%
Alternative Energy			1.4	%			0.8	%
Total			100.0	%			100.0	%

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.

•

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.

	•		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.
			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 model’s aircraft braking system for as long as the model continues to fly because it is generally not economically feasible to redesign a braking system once it is certified by the 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.
			We supply brake pads for military vehicles and for a number of military aircraft applications.
	•		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.
	•		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.
	•		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 BMW’s, 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.
	•		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:

	•		Blending/compounding: Composite metal alloys in powder form are blended with lubricants and other additives according to scientific formulas, many of which are proprietary. The formulas are designed to produce precise performance characteristics necessary for a customer’s particular application. We often work together with our customers to develop new formulas that will produce materials with greater energy absorption characteristics, durability and strength.
	•		Molding/compacting: At room temperature, a specific amount of a metal powder alloy and other materials are compacted under pressure into a desired shape.
	•		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.

•

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

		% of Sales
Location		2009				2008
United States			72.8	%			58.4	%
Italy			22.9	%			36.4	%
Other foreign			4.3	%			5.2	%
Total			100.0	%			100.0	%

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.”

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 Company’s commercial aircraft and certain of Bombardier’s 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 Hawk’s 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.

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.

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.

ITEM 1A.		RISK FACTORS

This discussion includes forward-looking statements which are subject to certain risks and uncertainties as discussed in Item 2 “Management’s 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) Hawk’s 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 Hawk’s 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) Hawk’s 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.

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 DOJ’s 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 management’s 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.

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:

•

Discharges of pollutants into the air and water;

•

The management and disposal of hazardous substances; and

•

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:

	•		the discovery of new information concerning past releases of hazardous substances;
	•		the discovery or occurrence of compliance problems relating to our operations; and
	•		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.

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:

	•		foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including exchange controls;
	•		fluctuations in 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;
	•		unexpected adverse changes in foreign laws or regulatory requirements may occur;
	•		there are difficulties inherent in the management and operation of an enterprise spread over various countries;
	•		there are complexities associated with the necessity of using non-U.S. representatives and consultants;
	•		there may be uncertainty in the ability of non-U.S. customers to finance purchases;
	•		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
	•		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.

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 “Management’s 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.

ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

Hawk’s 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:

		Approximate
Location		Square Footage		Principal Functions
Catoosa (Tulsa), Oklahoma(1)		240,000		Manufacturing of friction products, metal stampings and support
Medina, Ohio		219,000		Manufacturing of friction products, product engineering, and support
Orzinuovi, Italy		106,000		Manufacturing of friction products, sales and marketing, product application development, customer service and support and administration
Suzhou, China(1)		73,000		Manufacturing of friction products, sales and marketing, customer service and support, and administration
Akron, Ohio		71,000		Manufacturing of metal stampings
Solon, Ohio(1)		58,000		Research and development, sales and marketing, customer service and support, and administration
Concord, Ontario, Canada(1)		15,000		Manufacturing of friction products, distribution and warehousing, customer service and support
Cleveland, Ohio(1)		9,000		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.

ITEM 3.		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.

	•		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) Hawk’s 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 Hawk’s 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) Hawk’s periodic disclosure requirements related to the foregoing. As previously disclosed, Hawk has also been contacted by the DOJ in connection with the DOJ’s related investigation.

			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 SEC’s 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.
			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.
			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.
			Hawk has no reason to believe that the SEC and DOJ investigations will result in any restatement of Hawk’s financial statements for any period.
			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 Hawk’s business and results of operations.
	•		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.

ITEM 4.
Reserved.

Part II

ITEM 5.		MARKET FOR REGISTRANT’S 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.

Quarterly Stock Prices

Quarter Ended		High				Low
2009
December 31, 2009		$	18.35			$	13.68
September 30, 2009		$	15.38			$	13.40
June 30, 2009		$	16.00			$	11.61
March 31, 2009		$	18.15			$	9.65
2008
December 31, 2008		$	20.25			$	11.40
September 30, 2008		$	24.70			$	15.57
June 30, 2008		$	18.84			$	15.28
March 31, 2008		$	20.20			$	15.32

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.

Approximate Dollar

Total Number of

Value of Shares That

Total

Shares Purchased

may yet be

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

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.

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.

ITEM 6.		SELECTED FINANCIAL DATA

Years ended December 31		2009				2008				2007				2006(4)				2005
		(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				4.4
Net income (loss)		$	6.4			$	20.8			$	17.3			$	3.0			$	(1.3	)
Earnings (Loss) Per Share:
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	)
Diluted net earnings (loss) per share		$	0.73			$	2.21			$	1.83			$	0.30			$	(0.17	)
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

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

ITEM 7.		MANAGEMENT’S 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.

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.

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:

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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 customer’s 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.

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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.

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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.

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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.

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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.

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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.

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.

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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 plan’s 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.

Sensitivity Analysis

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 year’s 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.

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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.

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.

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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 subsidiary’s 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:

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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 entity’s 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 entity’s 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.

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The Financial Accounting Standards Board (FASB) issued a technical amendment to employer’s 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 company’s 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.

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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.

In addition, the following accounting updates and guidance have been issued by the FASB which will be adopted by us in future periods:

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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.

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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 entity’s 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.

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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 entity’s 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.

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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.

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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.

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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	%

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.

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.

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%.

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.

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.

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

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.

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.

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

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

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 Hawk’s 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 holder’s 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.

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 Lender’s 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;

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.

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
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm			40
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm — Internal Controls			41
Consolidated Balance Sheets			42
Consolidated Statements of Operations			44
Consolidated Statements of Shareholders’ Equity			45
Consolidated Statements of Cash Flows			46
Notes to Consolidated Financial Statements			47

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 Company’s 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 Corporation’s 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

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors
Hawk Corporation

We have audited Hawk Corporation’s 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 (the COSO criteria). Hawk Corporation’s 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 Management’s Report on Internal Control over Financial Reporting (Item 9A). Our responsibility is to express an opinion on the company’s 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 company’s 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 company’s 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 company’s 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

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.

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.

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.

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