11th July 2006 - Hawk Announces First Quarter 2006 Results

Hawk Corporation announced on the 2nd of May 2006 that net sales for the first quarter of 2006 increased by 8.7% to $78.4 million, a quarterly record, from $72.1 million in the comparable prior year period. The $78.4 million of net sales in the first quarter of 2006 exceeded the Company's previously issued guidance range of $74.0 million to $77.0 million.

The Company's net sales benefited during the quarter from continued strong demand in a number of the Company's end markets, continued market share gains and sales to new customer applications. The Company achieved double digit sales increases during the quarter in its construction and mining, heavy truck, friction performance automotive, fluid power, automotive and lawn and garden end markets during the quarter. The Company also experienced continued strong demand from its aerospace end market during the quarter. The effect of foreign currency exchange rates reduced reported net sales by 1.5% during the quarter.

Income from operations was $3.3 million in the first quarter of 2006, a decrease of $3.3 million, compared to $6.6 million in the comparable prior year period. The decrease was primarily the result of the continuing expected start-up costs at the Company's Tulsa friction products facility and to a lesser extent, increased medical expenses, raw material cost increases and increased depreciation expense during the period. Partially offsetting this reduction in operating income during the first quarter of 2006 were significant operating improvements at the Company's precision components segment. Income from operations in the first quarter of 2006 was marginally higher than the Company's previously issued guidance range of $2.0 million to $3.0 million.

Adjusted income from operations in the 2006 first quarter of $3.3 million compares to adjusted income from operations of $8.4 million (Table 1) in the first quarter of 2005. Adjusted income from operation in the first quarter of 2005 excludes direct restructuring and loan forgiveness costs of $1.8 million incurred during the period. There were no comparable costs in the first quarter of 2006.

Ronald E. Weinberg, Hawk's Chairman and CEO, said, "We are pleased with our 2006 first quarter results. We reported record sales during the quarter, we witnessed the beginning of the validation of our precision components technology initiatives with the introduction of several new products, and most importantly, we continued to experience progress in our new Tulsa facility." Mr. Weinberg continued, "While there is much to be done in bringing the Tulsa facility to world-class operating standards, our production and delivery metrics have continued to improve during the last three months."

The Company reported net income of $0.4 million, or $.04 per diluted share in the first quarter of 2006 compared to net income of $1.9 million, or $.21 per diluted share, in the comparable prior year period. The decrease is primarily attributable to the continued start-up costs associated with the Tulsa facility during the three months ended March 31, 2006.

Business Segment Results

Net sales in the friction products segment for the first quarter ended March 31, 2006 increased $4.7 million, or 10.6%, to $49.1 million from $44.4 million in the comparable prior year period, establishing a quarterly record for the segment. Primary drivers of this increase were strong demand in the construction and mining, heavy truck, performance automotive and aerospace markets, increased sales to the aftermarket as well as sales from new product applications to the construction and heavy truck markets. The effect of foreign currency exchange rates reduced the friction products segment's reported net sales by 2.4% during the quarter.

For the first quarter ended March 31, 2006, income from operations in the friction products segment was $1.3 million, a decrease of $3.7 million from $5.0 million in the comparable prior year period. The decrease was the primarily the result of expenses incurred due to the continued start-up costs in Tulsa previously described. Adjusted income from operations of $1.3 million in the first quarter of 2006 compares to adjusted income from operations of $6.3 million (Table 1) in the comparable quarter of 2005.

Net sales in the Company's friction products segment in the first quarter of 2006 of $49.1 million represented a 33.1% improvement compared to net sales in the fourth quarter of 2005 of $36.9 million, while income from operations for the first quarter of 2006 of $1.3 million compares to an adjusted loss from operations of $2.7 million, an improvement of $4.0 million (Table 2) from the fourth quarter of 2005. The improvement in the segment's net sales and operating income during this sequential period is due primarily to operating improvements and increased production capabilities at the new facility in Tulsa.

In the Company's precision components segment, net sales for the three months ended March 31, 2006 were up $2.8 million, or 12.3%, to $25.6 million, a quarterly record, from $22.8 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, lawn and garden and automotive markets during the quarter.

Income from operations in the precision components segment in the first quarter of 2006 was $2.1 million, an increase of $1.1 million, or 110.0% from the comparable prior year period. During the first quarter of 2006, the segment benefited from changes in product mix, margin improvement from volume related absorption of overhead and operational improvements made at the segment's Pennsylvania operations. The increase in operating income was partially offset by increased medical costs, raw material increases and increased depreciation expense relating to the segment's new technology program implementation in the first quarter of 2006 compared to the first quarter of 2005. Adjusted income from operations of $2.1 million in the first quarter of 2006 compares to adjusted income of $1.5 million (Table 1) in the first quarter of 2005.

In the Company's performance racing segment, net sales in the first quarter were $3.7 million, a decrease of $1.2 million or 24.5%, from $4.9 million in the comparable prior year period. The decrease resulted primarily from a realignment of the Company's strategic customer focus and the timing of new product introductions. At the end of 2005, the Company made a significant change in the management of its driveline business operations, and in so doing 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.

For the quarter ended March 31, 2006, loss from operations in the performance racing segment was $0.1 million compared to income of $0.5 million in the comparable prior year period primarily as a result of the reduced sales volumes. The adjusted loss from operations in the first quarter of 2006 of $0.1 million compares to adjusted income from operations of $0.6 million (Table 1) in the first quarter of 2005.

Working Capital and Liquidity

As of March 31, 2006, working capital levels increased by $11.3 million from December 31, 2005 levels primarily resulting from increased accounts receivable and inventory levels in response to the sales increase during the first quarter of 2006, payment of senior note interest of $4.8 million during the quarter and payments of the 2005 annual incentive compensation and profit sharing payments during the quarter. Net sales in the first quarter of 2006 were $18.7 million or 31.3% higher than the fourth quarter of 2005. The net increase in working capital was funded by borrowings under the Company's revolving credit facility. As of March 31, 2006, the Company had $15.3 million outstanding under its revolving credit facility. As of March 31, 2006, the Company has $12.3 million available for additional borrowings under its revolving credit facility.

Business Outlook

Hawk reaffirms its previously issued guidance expecting net sales for the full year 2006 to be between $290.0 million and $300.0 million, or an increase of between 9.3% and 13.0% compared to net sales for the full year 2005 of $265.4 million, and income from operations to increase to a range of $23.0 million to $25.0 million in 2006, or an increase of between 49.4% to 62.3%, from adjusted income from operations of $15.4 million for the full year 2005. Included in the guidance of operating income is consolidated depreciation and amortization expense for 2006 of approximately $13.0 million. As a result of the above factors, the Company continues to expect, as disclosed in previously issued releases, earnings for 2006 to be in a range of $.80 to $.90 cents per diluted common share on approximately 9.4 million fully diluted shares.

In the second quarter of 2006, the Company expects net sales to be in a range of $73.0 million to $77.0 million, an increase of between 3.0% and 8.6% from net sales reported in the second quarter of 2005 of $70.9 million.

Hawk expects income from operations in the second quarter of 2006 to be between $3.5 million and $7.0 million, or a decrease of between 53.3% and 6.7% as compared to second quarter 2005 adjusted income from operations of $7.5 million (Table 3). The second quarter 2006 forecast is impacted by the continuation of expected continued start-up costs in the Tulsa facility and increases in commodity prices.

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 5 countries

Source: Hawk Corporation Press Release