7th November 2005 - Hawk Announces Third Quarter 2005 Results

Hawk Corporation announced on the 1st of November that net sales for the third quarter of 2005 increased by 5.7% to $62.8 million from $59.4 million in the comparable prior year period. The Company's net sales benefited during the quarter from continued new customer applications and strong demand in a number of the Company's end markets, including aerospace, heavy truck, construction and appliance.

Income from operations in the third quarter of 2005 decreased $4.3 million to a loss of $0.3 million compared to income of $4.0 million in the prior year period. This loss was primarily the result of higher than anticipated restructuring costs relating to the investment in the relocation of the Company's new friction manufacturing facility to Oklahoma. In addition, there have been significant costs incurred as a result of operating inefficiencies associated with the relocation, including increased labor, benefit, training, freight, and outsourcing costs as a result of the start-up of operations in Oklahoma and operating both the Ohio and Oklahoma facilities during the production transition period.

As of September 30, 2005, all production ceased at the Company's Brook Park, Ohio facility. The Ohio facility is under contract to be sold and the Company expects that the transaction will close before December 31, 2005. The net proceeds from the sale are expected to approximate the book value of the facility.

The loss from operations in the third quarter of 2005 included charges of $2.2 million ($0.2 million of which was included in cost of sales), or $.15 per diluted share, of plant relocation restructuring costs, partially offset by a post-retirement benefit of $0.4 million, or $.03 per diluted share, for future medical benefit liabilities no longer owed by the Company. In the third quarter of 2004, income from operations included restructuring costs of $0.3 million or $.02 per diluted share. Adjusted income from operations (Table 1) was $1.5 million, or 2.4% of net sales, in the third quarter of 2005, a decrease of 65.1%, or $2.8 million, from $4.3 million, or 7.2% of net sales, in the comparable prior year period.

Ronald E. Weinberg, Hawk's Chairman and CEO, said, "The third quarter move of our Brook Park, Ohio manufacturing facility, to our new larger Oklahoma facility online and incurred significant expenses in order to meet strong customer demand. We expect that these costs will continue to affect us for the balance of 2005 but the negative impact on our operating results will lessen as we work through the start-up issues and move into 2006. With the closure of the Ohio facility in the third quarter, we will begin to benefit from the elimination of the redundant operating costs beginning in the fourth quarter of this year." Mr. Weinberg continued, "While we clearly are not satisfied with our third quarter results, we are confident that the results from our new facility will strengthen our leadership role as a world class supplier of friction materials to some of the world's most important industrial manufacturers."

For the nine month period ended September 30, 2005, net sales were $205.8 million, an increase of $22.8 million, or 12.5%, from $183.0 million in the comparable prior year period. Income from operations for the same nine month period decreased $3.3 million, or 20.9%, to $12.5 million from $15.8 million in the comparable 2004 period. Included in the Company's income from operations for the nine months ended September 30, 2005 was $4.3 million of restructuring costs related to the relocation to Oklahoma, employee medical benefit curtailment income of $0.4 million for future medical benefit liabilities no longer owed by the Company and $1.1 million of loan forgiveness costs, These net non-recurring charges, when combined, account for $.32 per diluted share. In the same nine month period of 2004, income from operations included restructuring costs and loan forgiveness costs, when combined, accounted for an expense representing $.09 per diluted share. Adjusted income from operations (Table 2) was $17.4 million, or $1.15 per diluted share, in the first nine months of 2005, an increase of 2.4%, or $0.4 million, from $17.0 million, or $1.17 per diluted share, in the comparable prior year period.

The Company reported a net loss of $1.7 million, or $.19 per diluted share in the third quarter of 2005 compared to net income of $0.6 million, or $.06 per diluted share, in the comparable prior year period. In addition to the direct restructuring costs related to the facility move, additional significant costs, primarily reflected in cost of sales, associated with operating inefficiencies during the production transfer and start-up of the Oklahoma facility are included in the loss for the three months ended September 30, 2005.

For the nine months ended September 30, 2005 net income was $2.0 million, a decrease of 48.7%, compared to $3.9 million in the comparable prior year period. Adjusted net income (Table 3) for the nine months ended September 30, 2005, was $5.0 million, or $.52 per diluted share compared to adjusted net income of $4.6 million, or $.51 per diluted share in the comparable 2004 period. Significant costs associated with operating inefficiencies during the production transfer and start-up of the Oklahoma facility are included in the Company's net income for the nine months ended September 30, 2005.

Business Segment Results

Net sales in the friction products segment for the third quarter ended September 30, 2005 increased $3.2 million, or 8.6%, to $40.2 million from $37.0 million in the comparable prior year period. Primary drivers of this increase were sales from new product applications in the construction and heavy truck markets, strong world-wide demand in the construction, aerospace and heavy truck markets and increased sales to the aftermarket. The effect of foreign currency exchange rates on the friction products segment's net sales accounted for 0.3% of the 8.6% increase during the quarter. For the nine months ended September 30, 2005, net sales in this segment were $130.2 million, an increase of 16.3%, from $112.0 million in the comparable prior year period.

Net sales at the Company's Italian facility, on a local currency basis, increased 13.0% in the third 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 41.1% in the third quarter of 2005 compared to the same period in 2004.

For the third quarter ended September 30, 2005, income from operations in the friction products segment decreased $3.9 million to a loss of $0.4 million from income of $3.5 million in the comparable prior year period. The decrease was the primarily the result of restructuring costs and additional costs incurred as a result of the start-up inefficiencies described above. For the nine months ended September 30, 2005 income from operations in this segment was $9.5 million, a decrease of $2.6 million, or 21.5%, from $12.1 million in the comparable prior year period.

In the Company's precision components segment, net sales for the three months ended September 30, 2005 were up $0.2 million, or 1.1%, to $19.1 million from $18.9 million in the comparable prior period. The segment's net sales increases were the result of new product introductions, primarily in the appliance market during the quarter. For the nine months ended September 30, 2005 net sales in this segment were $63.2 million, an increase of $3.9 million, or 6.6%, from $59.3 million in the comparable prior year period.

Income from operations in the precision components segment in the third quarter of 2005 was $0.4 million, a decrease of $0.1 million, or 20.0% from the comparable prior year period. During the third quarter of 2005, the segment benefited from sales product mix which was offset by phase-in costs associated with the segment's new powder metal technologies and the continued support of its new facility in China. For the nine months ended September 30, 2005, income from operations in this segment was $2.6 million, a decrease of $0.3 million from $2.9 million in the comparable prior year period.

In the Company's performance racing segment, net sales in the third quarter were the same as in the prior year quarter at $3.5 million. For the nine months ended September 30, 2005, net sales were $12.4 million, an increase of $0.7 million, or 6.0%, from $11.7 million in the comparable prior year period.

For the quarter ended September 30, 2005, loss from operations in the performance racing segment was $0.3 million compared to break even results for the comparable prior year period. For the nine months ended September 30, 2005 income from operations in this segment was $0.4 million, a decrease of $0.4 million from $0.8 million in the comparable prior year period. The third quarter 2005 results were negatively impacted by cost increases on various driveline components, and reserves created to reflect parts determined to be obsolete due to rule changes in the racing circuits served by this segment.

Working Capital and Liquidity

As of September 30, 2005, working capital levels increased by $1.3 million from December 31, 2004 levels. When compared to June 30, 2005, working capital levels were essentially flat. The increase in working capital during the nine moths ended September 30, 2005 was largely the result of increased inventory requirements to support the move of production equipment to the Company's new facility in Oklahoma. The net increase in working capital was funded by borrowings under the Company's revolving credit facility. As of September 30, 2005, the Company had $2.3 million outstanding under its revolving credit facility. As of September 30, 2005, the Company has $25.2 million available for additional borrowings under its revolving credit facility.

Business Outlook

The Company is confirming its forecast provided on September 28, 2005:

The Company will issue its full year 2006 guidance on December 15, 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 1,800 employees at 17 manufacturing, research, sales and administrative sites in 6 countries.

Forward-Looking Statements

This press release includes forward-looking statements concerning sales, market share, foreign operations, working capital 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: higher than anticipated costs related to the relocation of the friction products segment facility; the ability to hire and train qualified people at the Company's new friction products facility; the ability to transfer production to the new facility and commence production at the new facility without causing customer delays or dissatisfaction; the ability to achieve the projected cost savings at the new facility, including whether the cost savings can be achieved in a timely manner; 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 the transfer of manufacturing to China and other lower wage locations by other manufacturers who compete with the Company; 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; 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; the effect of any interruption in the Company's supply of raw materials or a substantial increase in the price of raw materials; and, the continuity of business relationships with major customers.

Source: Hawk Corporation Press Release