- Net sales increased 17.4% to $73.7 million
- Third quarter income from operations increased to $6.6 million from prior
year loss
CLEVELAND, Oct. 31 /PRNewswire-FirstCall/ -- Hawk Corporation (Amex:
HWK) announced today that net sales for the third quarter of 2006 increased
by 17.4% to $73.7 million from $62.8 million in the comparable prior year
period. The Company's net sales benefited during the quarter from the
impact of pricing actions taken with respect to certain customers in its
friction products segment, continued new product introductions and strong
economic conditions in many of the Company's end markets, including the
construction and mining, heavy truck, fluid power, appliance and
agriculture markets.
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Income from operations in the third quarter was $6.6 million in 2006
compared to a loss of $0.3 million in the comparable period of 2005. As a
percentage of net sales, the Company's operating margin increased to 9.0%
in the third quarter of 2006 compared to a negative operating margin in the
comparable quarter of 2005. This operating margin improvement was primarily
the result of the price increases and operating improvements at the
Company's Tulsa friction products facility. These gains were partially
offset by increased raw material, higher than anticipated medical costs,
increased wage and incentive compensation expenses, product mix and higher
depreciation expense during the period. The net operating improvements in
the third quarter were also partially offset by poor operating results in
the Company's performance racing segment.
The loss from operations in the third quarter of 2005 included $2.2
million of restructuring costs related to the Tulsa plant move and $0.4
million of income resulting from a reduction in an actuarially computed
liability related to future employee benefit costs. In the third quarter of
2006, there were no comparable items included in income from operations.
Adjusted income from operations before consideration of these charges was
$1.5 million, or 2.4% of net sales, in the third quarter of 2005 (Table 1).
Ronald E. Weinberg, Hawk's Chairman and CEO, said, "We are pleased with
the third quarter results as we continue to make progress in the
operational performance of our Tulsa plant and experience strong sales
performance in our friction products and precision components segments.
Additionally, we benefited during the quarter from pricing actions to
certain customers reflecting our respected position as a critical leading
supplier of friction materials. A portion of these price increases in the
third quarter will continue to provide benefit into future periods. We have
continued to focus on a number of lean manufacturing initiatives at our
friction products and precision components segments to improve our level of
customer service."
For the nine month period ended September 30, 2006, net sales were
$228.4 million, an increase of $22.6 million, or 11.0%, from $205.8 million
in the comparable prior year period. Income from operations for the same
nine month period increased $3.5 million, or 28.0%, to $16.0 million from
$12.5 million in the comparable prior period. Included in the Company's
income from operations for the nine months ended September 30, 2005 were
$4.3 million of direct restructuring costs related to the move to Tulsa and
$0.7 million of net other costs. In the same nine month period of 2006,
there were no restructuring costs or comparable net other costs. Adjusted
income from operations in the first nine months of 2005 before
consideration of the restructuring and other costs was $17.5 million, or
8.5% of net sales, compared to $16.0 million or 7.0% of net sales, in the
first nine months of 2006 (Table 2).
The Company reported net income of $2.1 million, or $.22 per diluted
share, on 9.5 million shares outstanding in the third quarter of 2006,
compared to a net loss of $1.7 million, or a net loss of $.19 per diluted
share, on 8.9 million shares outstanding in the comparable prior year
period. The Company reported a worldwide effective tax rate of 52.8% and
49.8% in the third quarter and nine month period ending September 30, 2006,
respectively, compared to 42.7% and 57.7% in the comparable periods of 2005
primarily resulting from the effect of the restructuring costs on the
Company's domestic taxable income. For the nine months ended September 30,
2006, net income was $4.4 million, or $.45 per diluted share, an increase
of 120.0%, compared to $2.0 million or $.20 per diluted share, in the
comparable prior year period.
Business Segment Results
Net sales in the friction products segment for the third quarter ended
September 30, 2006 increased $10.0 million, or 24.9%, to $50.2 million from
$40.2 million in the comparable prior year period. In addition to the
segment's pricing actions, the primary drivers of the sales increase in the
third quarter were strong worldwide demand in the construction and mining,
heavy truck, and performance automotive markets, and increased sales to the
industrial and performance automotive aftermarkets as well as sales from
new product applications to the construction and heavy truck markets. For
the nine months ended September 30, 2006 net sales in this segment were
$149.4 million, up 14.7%, from $130.2 million in the comparable prior year
period.
For the third quarter ended September 30, 2006, income from operations
in the friction products segment increased $7.7 million to $7.3 million
from a loss of $0.4 million in the third quarter of 2005. The increase in
income from operations was primarily the result of pricing actions,
increased production flow from the Tulsa plant, and improved control of
manufacturing expenses as the facility benefited from improved
manufacturing efficiencies. This increase was partially offset by expenses
incurred due to the continued start-up costs, including logistic and scrap
expenses in Tulsa, increased medical and incentive compensation expenses
and increased raw material costs. Adjusted income from operations of $7.3
million in the third quarter of 2006 compares to adjusted income from
operations of $1.4 million in the comparable quarter of 2005 (Table 1). For
the nine months ended September 30, 2006, income from operations in this
segment was $13.8 million, an increase of $4.3 million, or 45.3%, from $9.5
million in the comparable prior year period. Adjusted income from
operations was $13.8 million for the nine month period ended September 30,
2006 compared to $13.9 million in the comparable prior year period (Table
2).
In the Company's precision components segment, net sales for the three
months ended September 30, 2006 increased $1.6 million, or 8.4%, to $20.7
million from $19.1 million in the comparable prior period. The segment's
net sales increases were the result of strong end market demand and new
product introductions, primarily in the fluid power and appliance markets
during the quarter. The new product introductions were enabled in large
part because of the segment's recent investments in innovative
manufacturing capacity. The segment continues to gain new business awards
setting a new record for the organization of $18.0 million of net new
business awards as of September 30, 2006 reflecting the success of the
technology program and the segment's Conversioneering(R) initiative. For
the nine months ended September 30, 2006 net sales in this segment were
$69.1 million, an increase of $6.0 million, or 9.5%, from $63.1 million in
the comparable prior year period.
Loss from operations in the precision components segment in the third
quarter of 2006 was $0.3 million compared to income from operations of $0.4
million, a decrease of $0.7 million, from the comparable prior year period.
During the third quarter of 2006, the segment was negatively impacted by
increased medical costs, continuing start-up costs of the segment's China
facility, higher incentive compensation expense, increased labor and raw
material costs, product mix and increased depreciation expense relating to
the segment's new technology equipment. The decrease in operating income
was partially offset by margin improvement from volume related absorption
of fixed overhead. For the nine months ended September 30, 2006 income from
operations in this segment was $3.2 million, an increase of $0.6 million,
or 23.1% from $2.6 million in the comparable prior year period.
In the Company's performance racing segment, net sales in the third
quarter were $2.8 million, a decrease of $0.7 million or 20.0%, from $3.5
million in the comparable prior year period. The decrease resulted
primarily from a realignment of the Company's strategic customer focus at
its driveline transmission facility. At the end of 2005, the Company made a
significant change in the management of its driveline business operations,
and began repositioning itself in the marketplace by increasing the level
of engineering and product design capabilities while aligning itself with a
new provider of premium gears for the racing market. These measures were
taken to meet increased competition in the transmission market. For the
nine months ended September 30, 2006, net sales were $9.9 million, a
decrease of $2.5 million, or 20.2%, from $12.4 million in the comparable
prior year period.
For the quarter ended September 30, 2006, loss from operations in the
performance racing segment was $0.5 million compared to a loss of $0.3
million in the comparable prior year period primarily as a result of the
reduced sales volume and increased costs of component inventory. For the
nine months ended September 30, 2006 loss from operations in this segment
was $1.1 million, a decrease of $1.5 million from income from operations of
$0.4 million in the comparable prior year period.
Working Capital and Liquidity
As of September 30, 2006, working capital increased by $9.0 million to
$59.3 million from December 31, 2005 levels primarily from increased
accounts receivable and inventory levels as a result of the sales increase
during the first nine months of 2006. The net increase in working capital
was funded by cash flow from operations, as well as borrowings under the
Company's revolving credit facility. As of September 30, 2006, the Company
had $6.6 million outstanding under its revolving credit facility compared
to $10.0 million outstanding as of June 30, 2006 and $15.3 million
outstanding as of March 31, 2006. The Company had $21.2 million available
for additional borrowings under its revolving credit facility as of
September 30, 2006. The Company had capital expenditures of approximately
$2.6 million and $8.8 million for the three and nine months ended September
30, 2006, respectively.
Business Outlook
The Company is confirming its guidance range for revenue for the year
ending December 31, 2006 of $290.0 million to $300.0 million.
The Company is adjusting its previously issued guidance on income from
operations of $23.0 million to $25.0 million to a revised range of $20.0
million to $22.0 million reflecting higher commodity costs, including
copper and other raw materials, higher than anticipated medical costs, and
the operating results of its performance racing segment for the balance of
2006.
Depreciation and amortization expense is expected to be $13.0 million
for the year, and cash outlays for capital expenditures are estimated to be
between $13.0 million and $15.0 million for the calendar year ending
December 31, 2006. The Company's worldwide effective tax rate is expected
to be 49.8%, an increase from the original estimate of 42.1%, for the year
ending December 31, 2006 reflecting the impact of the mix of domestic and
foreign income. The Company estimates that there will be approximately 9.5
million fully diluted shares outstanding for the full year ended December
31, 2006. As a result, the Company now expects that its earnings per share
from continuing operations will be in a range from $0.45 to $0.55 per fully
diluted share for the full year ended December 31, 2006.
Mr. Weinberg said, "We are pleased to report that through our research
and development projects and technical selling activities with our customer
base, we expect to see the benefit of strong sales volume increases as we
finish up 2006 and move into 2007." Mr. Weinberg continued, "We are excited
by the market leadership of our friction products and precision components
segments and the positive results that we anticipate achieving in the
future. We continue to focus on operational improvements which we have
named 'Total Lean'. We look forward to introducing a reinvigorated
driveline components business in our performance racing segment as we move
into the 2007 race season."
On October 26, 2006 the Company announced that it was exploring the
possible sale of its precision components segment. The Company believes
that a sale of the precision components business would allow the Company to
focus on the many growth opportunities available in its friction products
and performance racing businesses. There is no assurance that a sale of its
precision components segment will occur. Consequently, the results of the
precision components segment are appropriately reflected in the continuing
operations of Hawk Corporation for the period ending September 30, 2006.
The guidance ranges provided include the Company's expectations for its
precision components segment for the full year ending December 31, 2006.
The Company
Hawk Corporation is a leading worldwide supplier of highly engineered
products. Its friction products group is a leading supplier of friction
materials for brakes, clutches and transmissions used in airplanes, trucks,
construction equipment, farm equipment, recreational and performance
automotive vehicles. Through its precision components group, the Company is
a leading supplier of powder metal and metal injected molded components
used in industrial, consumer and other applications, such as pumps, motors
and transmissions, lawn and garden equipment, appliances, small hand tools
and trucks. The Company's performance racing group manufactures clutches
and gearboxes for motorsport applications and performance automotive
markets. Headquartered in Cleveland, Ohio, Hawk has approximately 1,800
employees at 17 manufacturing, research, sales and administrative sites in
5 countries.
Forward-Looking Statements
This press release includes forward-looking statements concerning
sales, income from operations, earnings, earnings per share, market share,
foreign operations, working capital, the possible sale of the precision
components segment and other statements that involve risks and
uncertainties. These forward-looking statements are based upon management's
expectations and beliefs concerning future events. Forward-looking
statements are necessarily subject to risks, uncertainties and other
factors, many of which are outside the control of the Company and which
could cause actual results to differ materially from such statements. These
risks and uncertainties include, but are not limited to: continuing impact
of operational inefficiencies at the Tulsa friction products facility; the
ability to hire and train qualified people at the Company's new friction
products facility; the ability to achieve the projected cost savings at the
new facility; the effect of any interruption in the Company's supply of raw
materials or a substantial increase in the price of raw materials; whether
a sale of its precision components group will occur; whether the Company
will be successful in capitalizing on growth opportunities in the friction
products and performance racing segments should a sale of the precision
components segment occur; the impact on the Company's gross profit margins
as a result of changes in product mix; the ability of the Company to begin
generating profits from its powder metal facility in China; the effect of
other manufacturers who compete with the Company transferring manufacturing
operations to China and other lower wage locations; the effect on the
Company's international operations of unexpected changes in legal and
regulatory requirements, export restrictions, currency controls, tariffs
and other trade barriers, difficulties in staffing and managing foreign
operations, political and economic instability, difficulty in accounts
receivable collection and potentially adverse tax consequences; the effect
of foreign currency exchange rates as the Company's non-U.S. sales continue
to increase; the ability of the Company to meet the terms of its credit
facilities, including the numerous financial covenants and other
restrictions; the Company's vulnerability to adverse general economic and
industry conditions and competition; the ability of the Company to
successfully negotiate new agreements, as they expire, with its unions
representing certain of its employees, on terms favorable to the Company
without experiencing work stoppages; the ability of the Company to utilize
tax loss carryforwards in future periods; the actual or anticipated
fluctuations in operating results, including those arising as a result of
any impairment of goodwill or other intangible assets related to past or
future acquisitions; whether or not the Company's motor segment will be
sold and if sold whether the sale can take place in the time or at the
price projected by the Company; and, the continuity of business
relationships with major customers.
Actual results and events may differ significantly from those projected
in the forward-looking statements. Reference is made to Hawk's filings with
the Securities and Exchange Commission, including its annual report on Form
10-K for the year ended December 31, 2005, its quarterly reports on Form
10-Q, and other periodic filings, for a description of the foregoing and
other factors that could cause actual results to differ materially from
those in the forward-looking statements. Any forward-looking statement
speaks only as of the date on which such statement is made, and the Company
undertakes no obligation to update any forward-looking statement, whether
as a result of new information, future events or otherwise.
Investor Conference Call
A live Internet broadcast of the Company's conference call discussing
quarterly and year to date results can be accessed via the investor
relations page on Hawk Corporation's web site (http://www.hawkcorp.com) on
Tuesday, October 31, 2006 at 11:00 a.m. Eastern time. An archive of the
call will be available shortly after the end of the conference call on the
investor relations page of the Company's web site.
Hawk Corporation is online at: http://www.hawkcorp.com/
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005
Net sales $73,673 $62,808 $228,375 $205,753
Cost of sales 55,776 52,952 180,114 159,693
Gross profit 17,897 9,856 48,261 46,060
Selling, technical and
administrative expenses 11,202 8,429 31,898 29,568
Restructuring costs - 1,977 - 3,880
Employee benefit curtailment - - - (424)
Amortization of intangibles 126 184 379 552
Total expenses 11,328 10,166 32,277 33,576
Income (loss) from operations 6,569 (310) 15,984 12,484
Interest expense (2,852) (2,625) (8,508) (7,866)
Interest income 40 6 63 21
Other income (expense), net 52 (51) 132 (307)
Income (loss) from
continuing operations before
income taxes 3,809 (2,980) 7,671 4,332
Income tax provision (benefit) 2,012 (1,273) 3,820 2,501
Income (loss) from continuing
operations 1,797 (1,707) 3,851 1,831
Income from discontinued
operations, net of tax 307 14 562 125
Net income (loss) $2,104 $(1,693) $4,413 $1,956
Diluted earnings (loss)
per share:
Earnings (loss) from
continuing operations $.19 $(.19) $.39 $.19
Discontinued operations,
net of tax .03 .00 .06 .01
Earnings (loss) per diluted
share $.22 $(.19) $.45 $.20
Diluted shares outstanding 9,498 8,880 9,518 9,345
Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005
Segment data:
Net sales
Friction products $50,140 $40,192 $149,379 $130,205
Precision components 20,717 19,134 69,106 63,146
Performance racing 2,816 3,482 9,890 12,402
Total $73,673 $62,808 $228,375 $205,753
Gross profit
Friction products $14,347 $6,262 $33,726 $30,988
Precision components 3,139 3,096 12,787 12,162
Performance racing 411 498 1,748 2,910
Total $17,897 $9,856 $48,261 $46,060
Depreciation and
amortization:
Friction products $1,776 $1,681 $5,225 $5,196
Precision components 1,321 1,014 3,885 3,053
Performance racing 61 58 177 170
Total $3,158 $2,753 $9,287 $8,419
Income (loss) from
operations:
Friction products $7,346 $ (404) $13,815 $9,480
Precision components (251) 380 3,249 2,589
Performance racing (526) (286) (1,080) 415
Total $6,569 $(310) $15,984 $12,484
Reconciliation of Financial Measures
This earnings release discloses income from operations, income from
operations per diluted share and adjusted income from operations (income
from operations before restructuring, employee benefit curtailment and loan
forgiveness costs) for each business segment or for the Company in total,
each of which excludes amounts that differ from the most directly
comparable measure calculated in accordance with U.S. generally accepted
accounting principles (GAAP). A reconciliation of each of these financial
measures to the most comparable GAAP measure is included below in this
earnings release. Management believes that these financial measures are
useful to investors because they exclude the Company's non-recurring
restructuring and other costs, allowing investors to more easily compare
the Company's financial performance period to period. Management uses this
information in monitoring and evaluating the on-going performance of the
Company and each of its business segments.
Table 1
Adjusted income from operations
Three months ended
September 30
Income (loss) Adjusted
from operations, Restructuring Other (income) income (loss)
as reported costs(1) costs, net(2) from operations
(GAAP)
2006 2005 2006 2005 2006 2005 2006 2005
Friction
products $7,346 $(404) $- $2,217 $- $(424) $7,346 $1,389
Precision
components (251) 380 - - - (251) 380
Performance
racing (526) (286) - - - (526) (286)
Total
pre-tax $6,569 $(310) $- $2,217 $- $(424) $6,569 $1,483
Operating
margin 9.0% (0.5%) 9.0% 2.4%
1. Restructuring costs in this table for the third quarter ended September
30, 2005 include $0.2 million classified in the Company's Consolidated
Statement of Income as Cost of sales items.
2. Other (income) costs, net includes employee benefit curtailment income
for the third quarter ended September 30, 2005.
Table 2
Adjusted income from operations
Nine months ended
September 30
Income (loss) Adjusted
from operations, Restructuring Other (income) income (loss)
as reported costs(1) costs, net(2) from operations
(GAAP)
2006 2005 2006 2005 2006 2005 2006 2005
Friction
products $13,815 $9,480 $- $4,288 $- $169 $13,815 $13,937
Precision
components 3,249 2,589 - - - 443 3,249 3,033
Performance
racing (1,080) 415 - - - 64 (1,080) 479
Total
pre-tax $15,984 $12,484 $- $4,288 $- $676 $15,984 $17,448
Operating
margin 7.0% 6.1% 7.0% 8.5%
1. Restructuring costs in this table for the nine months ended September
30, 2005 include $0.2 million classified in the Company's Consolidated
Statement of Income as Cost of sales items.
2. Other (income ) costs, net include loan forgiveness costs and employee
benefit curtailment costs for the nine months ended September 30, 2005.
HAWK CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands)
September 30, December 31,
2006 2005
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $5,893 $7,111
Accounts receivable, net 48,506 36,225
Inventories 50,475 46,379
Taxes receivable 42 347
Deferred income taxes 4,546 4,430
Other current assets 5,245 5,660
Assets held for sale - 1,644
Assets of discontinued operations 3,980 3,633
Total current assets 118,687 105,429
Property, plant and equipment, net 70,826 70,918
Goodwill 32,495 32,495
Finite-lived intangible assets 8,056 8,435
Deferred income taxes 916 916
Other assets 7,728 8,035
49,195 49,881
Total assets $238,708 $226,228
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $31,785 $30,444
Other accrued expenses 23,524 19,629
Short-term debt 1,146 1,386
Current portion of long-term debt 247 307
Liabilities of discontinued operations 2,693 3,334
Total current liabilities 59,395 55,100
Long-term debt 117,321 115,892
Deferred income taxes 1,026 885
Pension liabilities 10,554 10,522
Other 3,580 3,113
Shareholders' equity 46,832 40,716
Total liabilities and shareholders' equity $238,708 $226,228
SOURCE Hawk Corporation
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CONTACT:
Joseph J. Levanduski, CFO, +1-216-861-3553,
or Thomas A. Gilbride, Vice President - Finance, +1-216-861-3553,
both of Hawk Corporation; or Investor Relations, John Baldissera
of BPC Financial Marketing, +1-800-368-1217, for Hawk Corporation
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