5th August 2005 - Hawk Announces Second Quarter 2005 Results

Hawk Corporation announced today that net sales for the second quarter of 2005 increased by 11.8% to $70.9 million from $63.4 million in the comparable prior year period. The Company's net sales benefited during the quarter from improved economic conditions and new product introductions in a majority of the Company's end markets, including heavy truck, aerospace, construction, specialty friction, fluid power and automotive. The effect of foreign currency exchange rates accounted for only 0.8% of the net sales increase during the quarter.

Income from operations in the second quarter of 2005 increased 1.6% to $6.2 million compared to $6.1 million in the prior year period. As a percentage of net sales, the Company's operating margin decreased to 8.7% in the second quarter of 2005 from 9.6% in the comparable quarter of 2004. This unfavorable operating leverage was primarily the result of previously announced restructuring costs relating to relocation of one of the Company's friction manufacturing facilities from Ohio to Oklahoma and operating inefficiencies due to the relocation, including increased labor, benefit, freight and outsourcing costs, as a result of operating both the Ohio and Oklahoma facilities during the production transition period.

Income from operations in the second quarter of 2005 included $1.3 million ($0.2 million of which was included in cost of sales), or $.09 per diluted share, of the restructuring costs. In the second quarter of 2004, income from operations included restructuring costs of $0.2 million or $.02 per diluted share. Operating income before these charges was $7.6 million, or 10.7% of net sales, in the second quarter of 2005, an increase of 20.6%, or $1.3 million, from $6.3 million, or 9.9% of net sales, in the comparable prior year period.

Ronald E. Weinberg, Hawk's Chairman and CEO, said, "We are pleased with the second quarter results particularly because of our continued sales growth despite the disruptions created by moving a facility to Oklahoma." Mr. Weinberg continued, "The majority our markets continued to show positive momentum during the quarter and we continued to benefit from new product introductions to our customer base."

For the six month period ended June 30, 2005, net sales were $142.9 million, an increase of $19.2 million, or 15.5%, from $123.7 million in the comparable prior year period. Income from operations for the same six month period increased $1.0 million, or 8.5%, to $12.8 million from $11.8 million in the comparable prior period. Included in the Company's income from operations for the six months ended June 30, 2005 was $2.1 million of restructuring costs related to the move to Oklahoma and $1.1 million of loan forgiveness costs, which combined accounted for $.22 per diluted share. In the same six month period of 2004, income from operations included restructuring costs of $0.2 million and loan forgiveness costs of $0.7 million, which combined accounted for $.07 per diluted share. Operating income before these charges was $16.0 million, or 11.2% of net sales, in the first six months of 2005, an increase of 26.0%, or $3.3 million, from $12.7 million, or 10.3% of net sales, in the comparable prior year period.

The Company reported net income of $1.7 million, an increase of 13.3%, or $.17 per diluted share, on 9.4 million diluted shares in the second quarter of 2005 compared to net income of $1.5 million, or $.16 per diluted share, on 8.8 million diluted shares in the comparable prior year period. The increase in the number of shares outstanding from 2004 to 2005 was the result of 0.2 million shares issued from treasury for the exercise of employee stock options and the dilutive result of 0.4 million unexercised option shares which are "in the money" as of June 30, 2005. The Company reported a worldwide effective tax rate of 52.4% in the second quarter of 2005 compared to 55.8% in the comparable quarter of 2004 primarily resulting from the effect of the restructuring costs on the Company's domestic tax losses. The Company expects that its full year 2005 effective tax rate will be consistent with its prior guidance of 48.0% to 53.0%. For the six months ended June 30, 2005 net income was $3.6 million, an increase of 12.5%, compared to $3.2 million in the comparable prior year period.

Business Segment Results

Net sales in the friction products segment for the second quarter ended June 30, 2005 increased $6.1 million, or 15.4%, to $45.6 million from $39.5 million in the comparable prior year period. Primary drivers of this increase were from sales arising from new product introductions in the construction and heavy truck markets, strong world-wide economic growth in the Company's construction, heavy truck and aerospace markets and increased sales to the aftermarket. The effect of foreign currency exchange rates on the friction products segment's net sales accounted for 1.3% of the 15.4% increase during the quarter. For the six months ended June 30, 2005 net sales in this segment were $90.0 million, up 20.0%, from $75.0 million in the comparable prior year period.

Net sales at the Company's Italian facility, on a local currency basis, increased 8.3% in the second quarter of 2005 compared to the same period in 2004 as a result of market share gains and new product introductions in the period. Total shipments at the Company's Chinese friction products facility increased 73.8% in the second quarter of 2005 compared to the same period in 2004.

For the second quarter ended June 30, 2005, income from operations in the friction products segment increased $0.1 million, or 2.1%, to $4.8 million from $4.7 million in the comparable prior year period. The increase was the primarily the result of improved sales volumes in most of the markets served by the segment which provided a higher absorption of fixed manufacturing costs. These gains were partially offset by increased operating costs to support the higher sales activity, restructuring costs of $1.3 million ($0.2 million of which was included in cost of sales) related to the plant relocation and manufacturing and overhead cost inefficiencies from having both the Ohio and Oklahoma facilities in production during the transition period. For the six months ended June 30, 2005 income from operations in this segment was $9.9 million, an increase of $1.3 million, or 15.1%, from $8.6 million in the comparable prior year period.

In the Company's precision components segment, net sales for the three months ended June 30, 2005 were up $1.4 million, or 7.1%, to $21.2 million from $19.8 million in the comparable prior period. The segment's net sales increases were driven by market improvements and new product introductions primarily in the fluid power and automotive markets during the quarter. For the six months ended June 30, 2005 net sales in this segment were $44.0 million, an increase of $3.5 million, or 8.6%, from $40.5 million in the comparable prior year period.

Income from operations in the precision components segment in the second quarter of 2005 and 2004 was flat at $1.2 million. During the second quarter of 2005 the segment benefited from product mix and overall sales volume increases which was offset by phase-in costs associated with the segment's new powder metal technologies, sales volume declines at one of its plants, the continued support of its new facility in China and outsourcing and freight expediting costs. For the six months ended June 30, 2005 income from operations in this segment was $2.2 million, a decrease of $0.2 million from $2.4 million in the comparable prior year period.

In the Company's performance racing segment, net sales in the second quarter were the same as in the prior year quarter at $4.0 million. For the six months ended June 30, 2005, net sales were $8.9 million, an increase of $0.7 million, or 8.5%, from $8.2 million in the comparable prior year period.

For the quarter ended June 30, 2005, income from operations in the performance racing segment was also flat at $0.2 million compared to the prior year period. For the six months ended June 30, 2005 income from operations in this segment was $0.7 million, a decrease of $0.1 million from $0.8 million in the comparable prior year period.

Working Capital and Liquidity

As of June 30, 2005, working capital increased by $1.3 million from December 31, 2004 levels. However, the Company reduced its working capital by $3.8 million compared to March 31, 2005 levels. The decrease in working capital during the second quarter of 2005 was largely the result of increased accounts receivable collections partially offset by increased inventory requirements to support the move to the Company's new facility in Oklahoma. The cash generated by the reduction in working capital during the quarter was used to pay down the Company's outstanding loans. As of June 30, 2005, the Company had no outstanding loans under its revolving credit facility.

Business Outlook

As a result of the impact of new business awards and the improved economic conditions in our markets, the Company is increasing the range of expected revenues for the year ended December 31, 2005 to between $270.0 and $273.0 million, which represents an 11.9% to 13.2% increase over full year 2004 revenues of $241.2 million. The Company anticipates second half revenues will increase between 8.2% and 10.7% to a range of $127.1 million to $130.1 million for the six months ended December 31, 2005 as compared to second half revenues of $117.5 million for the six months ended December 31, 2004.

The Company is reaffirming its full year guidance that income from operations will increase 7.0% to 9.0% when compared to 2004, after giving effect to restructuring charges for the full year 2005 relating to the move of a friction manufacturing facility. The Company expects that the restructuring charges for the full year 2005 will be approximately $4.5 million, the high end of the previously-announced range.

"The move of our friction products facility to Oklahoma is well underway. Notwithstanding this transition, the group has achieved 20.0% revenue growth for the first half of 2005," stated Mr. Weinberg. "The challenges that this segment has successfully met in the first six months of 2005 in dealing with increased production demands while at the same time migrating out of an existing facility, is truly a credit to our management team."

Mr. Weinberg continued, "The challenges and costs associated with the move of our facilities are expected to peak in the third quarter of 2005. Operating two facilities at less than full capacity, with the attended fixed overhead of each and the ramping up of the new facility will negatively impact the third quarter and to a lesser extent, the fourth quarter of 2005. In addition, our previously announced restructuring costs, such as severance and other direct costs associated with the plant relocation will be approximately $1.5 million for the quarter ended September 30, 2005 and approximately $0.9 million in the quarter ended December 31, 2005."

"Considering these factors, as well as initiatives being undertaken within our performance racing segment to improve their operational efficiency and increase their focus on new product development, the Company anticipates second half 2005 income from operations will be flat compared to income from operations of $5.5 million for the six month period ended December 31, 2004," stated Mr. Weinberg.

Excluding the effect of approximately $2.4 million in restructuring costs, the Company currently anticipates income from operations for the second half of 2005 to improve approximately 23.0% to approximately $7.9 million when compared to income from operations for the six month period ended December 31, 2004 of $6.4 million, after adjusting for $0.9 million of restructuring costs.

The Company is also reaffirming its full year net income guidance of $.35 to $.40 per diluted share, after taking into account restructuring charges of approximately $.30 per diluted share for the year ended December 31, 2005.

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, trucks and telecommunications equipment. The Company's performance racing group manufactures clutches and gearboxes for motorsport applications and performance automotive markets. Headquartered in Cleveland, Ohio, Hawk has approximately 1,700 employees at 17 manufacturing, research, sales and administrative sites in 6 countries.

Source: Hawk Corporation Press Release