UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
Commission File No. 001-13797
HAWK CORPORATION
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
(State of incorporation)
|
|
34-1608156
(I.R.S. Employer Identification No.)
|
200 Public Square, Suite 1500, Cleveland, Ohio 44114
(Address of principal executive offices) (Zip Code)
(216) 861-3553
(Registrants telephone number, including area code)
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 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):
|
|
|
|
|
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Large Accelerated Filer
o
|
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Accelerated Filer
þ
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Non-accelerated Filer
o
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|
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
As of July 31, 2010, the registrant had the following number of shares of common stock outstanding:
Class A Common Stock, $0.01 par value:
7,756,763
Class B Common Stock, $0.01 par value:
None (0)
As used in this Form 10-Q, 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-Q is as of June
30, 2010.
PART I FINANCIAL INFORMATION
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|
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ITEM 1.
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FINANCIAL STATEMENTS
|
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Note A)
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55,858
|
|
|
$
|
47,206
|
|
Short-term investments
|
|
|
4,883
|
|
|
|
35,930
|
|
Accounts receivable, less allowance of $616 in 2010 and $985 in 2009
|
|
|
37,161
|
|
|
|
27,578
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
7,802
|
|
|
|
5,503
|
|
Work-in-process
|
|
|
14,812
|
|
|
|
10,886
|
|
Finished products
|
|
|
11,516
|
|
|
|
11,106
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
34,130
|
|
|
|
27,495
|
|
Deferred income taxes
|
|
|
1,204
|
|
|
|
1,305
|
|
Other current assets
|
|
|
5,813
|
|
|
|
5,686
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
139,049
|
|
|
|
145,200
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
1,088
|
|
|
|
1,166
|
|
Buildings and improvements
|
|
|
18,599
|
|
|
|
19,264
|
|
Machinery and equipment
|
|
|
101,364
|
|
|
|
102,365
|
|
Furniture and fixtures
|
|
|
8,322
|
|
|
|
8,327
|
|
Construction in progress
|
|
|
1,672
|
|
|
|
2,186
|
|
|
|
|
|
|
|
|
|
|
|
131,045
|
|
|
|
133,308
|
|
Less accumulated depreciation
|
|
|
86,663
|
|
|
|
86,212
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
44,382
|
|
|
|
47,096
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets
|
|
|
5,738
|
|
|
|
6,015
|
|
Deferred income taxes
|
|
|
125
|
|
|
|
289
|
|
Other
|
|
|
6,103
|
|
|
|
5,892
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
11,966
|
|
|
|
12,196
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
195,397
|
|
|
$
|
204,492
|
|
|
|
|
|
|
|
|
|
|
|
Note A:
|
|
The consolidated balance sheet at December 31, 2009, has been derived from the audited
financial statements at that date, but does not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial statements. See
notes to consolidated financial statements (unaudited)
.
|
3
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Note A)
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
28,987
|
|
|
$
|
16,861
|
|
Accrued compensation
|
|
|
10,565
|
|
|
|
7,324
|
|
Accrued interest
|
|
|
2,498
|
|
|
|
3,385
|
|
Accrued taxes
|
|
|
1,362
|
|
|
|
345
|
|
Other accrued expenses
|
|
|
3,882
|
|
|
|
3,979
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
47,294
|
|
|
|
31,894
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
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|
|
Long-term debt, net of unamortized consent payment of $1,040 in 2010
|
|
|
56,050
|
|
|
|
77,090
|
|
Deferred income taxes
|
|
|
2,845
|
|
|
|
2,873
|
|
Pension liabilities
|
|
|
1,968
|
|
|
|
2,509
|
|
Other accrued expenses
|
|
|
11,920
|
|
|
|
12,656
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
72,783
|
|
|
|
95,128
|
|
|
|
|
|
|
|
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Shareholders equity
|
|
|
|
|
|
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|
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; 7,756,763 and 7,979,740 outstanding in 2010 and 2009, respectively
|
|
|
92
|
|
|
|
92
|
|
Class B common stock, $.01 par value; 10,000,000 shares authorized; none issued or outstanding
|
|
|
|
|
|
|
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|
Additional paid-in capital
|
|
|
54,929
|
|
|
|
55,323
|
|
Retained earnings
|
|
|
51,212
|
|
|
|
42,011
|
|
Accumulated other comprehensive loss
|
|
|
(8,882
|
)
|
|
|
(3,281
|
)
|
Treasury stock, at cost, 1,430,987 and 1,208,010 shares in 2010 and 2009, respectively
|
|
|
(22,032
|
)
|
|
|
(16,676
|
)
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
75,320
|
|
|
|
77,470
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
195,397
|
|
|
$
|
204,492
|
|
|
|
|
|
|
|
|
|
|
|
Note A:
|
|
The consolidated balance sheet at December 31, 2009 has been derived from the audited
financial statements at that date, but does not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial statements. See
notes to consolidated financial statements (unaudited)
.
|
4
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In Thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net sales
|
|
$
|
61,679
|
|
|
$
|
39,077
|
|
|
$
|
115,088
|
|
|
$
|
83,362
|
|
Cost of sales
|
|
|
41,306
|
|
|
|
30,686
|
|
|
|
77,493
|
|
|
|
62,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
20,373
|
|
|
|
8,391
|
|
|
|
37,595
|
|
|
|
20,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative expenses
|
|
|
9,008
|
|
|
|
7,007
|
|
|
|
17,862
|
|
|
|
14,459
|
|
Amortization of finite-lived intangible assets
|
|
|
138
|
|
|
|
139
|
|
|
|
277
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,146
|
|
|
|
7,146
|
|
|
|
18,139
|
|
|
|
14,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,227
|
|
|
|
1,245
|
|
|
|
19,456
|
|
|
|
5,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,672
|
)
|
|
|
(2,017
|
)
|
|
|
(3,519
|
)
|
|
|
(4,030
|
)
|
Interest income
|
|
|
77
|
|
|
|
106
|
|
|
|
145
|
|
|
|
269
|
|
Other income (expense), net
|
|
|
(1,001
|
)
|
|
|
167
|
|
|
|
(1,533
|
)
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before income taxes
|
|
|
8,631
|
|
|
|
(499
|
)
|
|
|
14,549
|
|
|
|
2,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
3,149
|
|
|
|
(127
|
)
|
|
|
5,262
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, after income taxes
|
|
|
5,482
|
|
|
|
(372
|
)
|
|
|
9,287
|
|
|
|
1,212
|
|
Income (loss) from discontinued operations, after income tax
(expense) benefit of ($9) and $6 for the three and six months ended
June 30, 2010 and $87 and $93 for the three and six months ended June
30, 2009
|
|
|
17
|
|
|
|
(164
|
)
|
|
|
(11
|
)
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,499
|
|
|
$
|
(536
|
)
|
|
$
|
9,276
|
|
|
$
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, after income taxes
|
|
$
|
0.70
|
|
|
$
|
(0.05
|
)
|
|
$
|
1.17
|
|
|
$
|
0.13
|
|
Discontinued operations, after income taxes
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per basic share
|
|
$
|
0.70
|
|
|
$
|
(0.07
|
)
|
|
$
|
1.17
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, after income taxes
|
|
$
|
0.67
|
|
|
$
|
(0.05
|
)
|
|
$
|
1.13
|
|
|
$
|
0.13
|
|
Discontinued operations, after income taxes
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per diluted share
(1)
|
|
$
|
0.68
|
|
|
$
|
(0.07
|
)
|
|
$
|
1.13
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding basic
|
|
|
7,798
|
|
|
|
8,174
|
|
|
|
7,881
|
|
|
|
8,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares and equivalents outstanding diluted
|
|
|
8,068
|
|
|
|
8,174
|
|
|
|
8,157
|
|
|
|
8,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
5,461
|
|
|
$
|
(574
|
)
|
|
$
|
9,201
|
|
|
$
|
963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The summation to net earnings per diluted share does not mathematically calculate due to rounding.
|
5
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,276
|
|
|
$
|
1,038
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
11
|
|
|
|
174
|
|
Depreciation and amortization
|
|
|
4,276
|
|
|
|
3,919
|
|
Deferred income taxes
|
|
|
13
|
|
|
|
(44
|
)
|
Amortization of discount on investments
|
|
|
(35
|
)
|
|
|
(95
|
)
|
Loss on sale or disposal of fixed assets
|
|
|
3
|
|
|
|
26
|
|
Write-off of deferred financing fees and consent payment
|
|
|
694
|
|
|
|
|
|
Share based compensation
|
|
|
401
|
|
|
|
551
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(12,149
|
)
|
|
|
11,307
|
|
Inventories
|
|
|
(7,798
|
)
|
|
|
10,903
|
|
Other assets
|
|
|
(979
|
)
|
|
|
(274
|
)
|
Accounts payable
|
|
|
13,376
|
|
|
|
(16,126
|
)
|
Accrued expenses
|
|
|
4,097
|
|
|
|
(7,725
|
)
|
Pension accounts, net
|
|
|
(60
|
)
|
|
|
(3,558
|
)
|
Other
|
|
|
(193
|
)
|
|
|
1,195
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing operations
|
|
|
10,933
|
|
|
|
1,291
|
|
Net cash used in operating activities of discontinued operations
|
|
|
(11
|
)
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of available for sale securities
|
|
|
(64,301
|
)
|
|
|
(75,963
|
)
|
Proceeds from available for sale securities
|
|
|
94,952
|
|
|
|
68,000
|
|
Purchases of property, plant and equipment
|
|
|
(2,073
|
)
|
|
|
(4,838
|
)
|
Acquisition of business
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities of continuing operations
|
|
|
28,131
|
|
|
|
(12,801
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(20,000
|
)
|
|
|
|
|
Proceeds from stock options
|
|
|
432
|
|
|
|
348
|
|
Payment of consent fee for senior notes indenture modification
|
|
|
(1,512
|
)
|
|
|
|
|
Stock repurchase
|
|
|
(7,247
|
)
|
|
|
(11,164
|
)
|
Tax benefit from exercise of incentive stock options
|
|
|
664
|
|
|
|
|
|
Receipts from government grants
|
|
|
|
|
|
|
225
|
|
Payments of deferred financing fees
|
|
|
|
|
|
|
(340
|
)
|
Payments of preferred stock dividends
|
|
|
(75
|
)
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities of continuing operations
|
|
|
(27,738
|
)
|
|
|
(11,006
|
)
|
Effect of exchange rate changes on cash
|
|
|
(2,663
|
)
|
|
|
29
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing operations
|
|
|
8,663
|
|
|
|
(22,487
|
)
|
Net cash used in discontinued operations
|
|
|
(11
|
)
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
8,652
|
|
|
|
(22,661
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
47,206
|
|
|
|
62,520
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
55,858
|
|
|
$
|
39,859
|
|
|
|
|
|
|
|
|
6
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2010
(In Thousands, except share data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity
with U.S. generally accepted accounting principles (GAAP) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the six month period
ended June 30, 2010 are not necessarily indicative of the results that may be expected for the full
year ending December 31, 2010. For further information, refer to the consolidated financial
statements and footnotes thereto in the Form 10-K for Hawk Corporation (the Company or Hawk) for
the year ended December 31, 2009.
Hawk Corporation, through the businesses that comprise its friction products segment, designs,
engineers, manufactures and markets specialized components used in a variety of off-highway,
on-highway, industrial, aircraft, agricultural and performance applications. Friction products are
the replacement components used in brakes, clutches and transmissions to absorb vehicular energy
and dissipate it through heat and normal mechanical wear. The Companys revenue is generated
primarily in the U.S. and Italy. The Companys largest customer, Caterpillar Inc., represented
approximately 25.3% and 14.6% of consolidated net sales in the six month periods ended June 30,
2010 and June 30, 2009, respectively.
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in the
accompanying financial statements.
2. Recent Accounting Developments
There were no new significant accounting updates and guidance that became effective for the
Company commencing with its second quarter of 2010. The Companys management does not believe that
any recently issued, but not yet effective, accounting standards, if currently adopted, would have
a material effect on the accompanying financial statements.
3. Discontinued Operations
There are no remaining assets or liabilities classified as discontinued operations recorded in
the Consolidated Balance Sheets at June 30, 2010 or December 31, 2009. Through June 30, 2010, the
Company continues 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 its legal presence in Mexico. This residual activity is included in the following summary of
the Companys results of discontinued operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, before income taxes
|
|
$
|
26
|
|
|
$
|
(251
|
)
|
|
$
|
(17
|
)
|
|
$
|
(267
|
)
|
Income tax expense (benefit)
|
|
|
9
|
|
|
|
(87
|
)
|
|
|
(6
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, after income taxes.
|
|
$
|
17
|
|
|
$
|
(164
|
)
|
|
$
|
(11
|
)
|
|
$
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
4. Fair Value Measurements
The Company follows the accounting guidance for fair value measurements and disclosures for
fair value measurements and disclosures for all financial assets and liabilities that are
recognized or disclosed at fair value on a recurring basis or on a non-recurring basis during the
reporting period. The fair value is an exit price, representing the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants based upon the best use of the asset or liability at the measurement date.
The Companys financial instruments include cash and cash equivalents, short and long-term
investments, short-term trade receivables, short-term notes receivable, accounts payable and debt
instruments. For short-term instruments, other than those required to be reported at fair value on
a recurring basis and for which additional disclosures are included below, management concluded the
historical carrying value is a reasonable estimate of fair value because of the short period of
time between the origination of such instruments and their expected realization.
The accounting guidance establishes a three-tier hierarchy, which prioritizes the inputs in
measuring fair value. The Companys financial instruments are classified in their entirety based
on the lowest level of input that is significant to the fair value measurement. The three levels
that may be used to measure fair value are as follows:
Level 1
Quoted prices in active markets for identical assets or liabilities.
Level 2
Inputs other than Level 1 that are either directly or indirectly observable, such
as quoted prices for similar assets or liabilities; quoted prices that are not active; or other
inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
There have been no changes in the methodologies used at June 30, 2010 and December 31, 2009.
Following is a description of the valuation methodologies used for assets measured at
fair value as of June 30, 2010 and December 31, 2009:
Money market funds
: Valued at the net asset value (NAV) of shares based on the closing
quoted price reported on the active market on which the individual securities are traded.
Commercial paper
: Corporate debt securities rated at least A1 by Standard & Poors and P1
by Moodys rating services having maturities not exceeding 90 days. The fair values of obligations
issued by U.S. corporations held by the Company were determined by obtaining quoted prices from
nationally recognized securities broker-dealers.
Mutual funds
: Valued at the NAV of shares based on the closing quoted price reported on the
active market on which the individual securities are traded.
Guaranteed income fund:
Valued at contract value which approximates fair value based on the
nature of the fund. This fund is a stable value fund designed to provide safety of principal,
liquidity and a competitive rate of return (see Guaranteed Income Fund below for further
information related to the valuation of this investment).
8
The following tables set forth the Companys financial assets and liabilities that were
recorded at fair value on a recurring basis as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
15,505
|
|
|
$
|
15,505
|
|
|
$
|
|
|
|
$
|
|
|
Other trading
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed income fund
|
|
|
779
|
|
|
|
|
|
|
|
|
|
|
|
779
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth funds
(2)
|
|
|
1,460
|
|
|
|
1,460
|
|
|
|
|
|
|
|
|
|
Value funds
(3)
|
|
|
664
|
|
|
|
664
|
|
|
|
|
|
|
|
|
|
Index fund
(4)
|
|
|
122
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
International fund
(5)
|
|
|
456
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
Fixed income fund
(6)
|
|
|
92
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
Specialty fund real estate
(7)
|
|
|
116
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
19,194
|
|
|
$
|
18,415
|
|
|
$
|
|
|
|
$
|
779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability
(1)
|
|
$
|
3,689
|
|
|
$
|
2,910
|
|
|
$
|
|
|
|
$
|
779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
3,689
|
|
|
$
|
2,910
|
|
|
$
|
|
|
|
$
|
779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
11,172
|
|
|
$
|
11,172
|
|
|
$
|
|
|
|
$
|
|
|
Commercial paper
|
|
|
34,977
|
|
|
|
|
|
|
|
34,977
|
|
|
|
|
|
Other trading
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed income fund
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
480
|
|
Mutual funds
|
|
|
2,538
|
|
|
|
2,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
49,167
|
|
|
$
|
13,710
|
|
|
$
|
34,977
|
|
|
$
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability
(1)
|
|
$
|
3,018
|
|
|
$
|
2,538
|
|
|
$
|
|
|
|
$
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
3,018
|
|
|
$
|
2,538
|
|
|
$
|
|
|
|
$
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Other trading assets represent mutual fund assets held in a rabbi trust to fund
deferred compensation plan liabilities and are included as a component of Other long-term
assets in the Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009. The
deferred compensation plan liability is the Companys liability under its deferred
compensation plan and is included in Other long-term accrued expenses in the Consolidated
Balance Sheets as of June 30, 2010 and December 31, 2009.
|
|
(2)
|
|
Growth funds seek long-term growth of capital. The funds will normally invest at least
80% of its assets in common stocks of large, mid-cap or small-cap companies based on the
defined focus of the fund.
|
|
(3)
|
|
Value funds seek high current income in addition to long-term capital appreciation.
These accounts primarily invest in dividend-paying common and preferred stocks which are
expected to provide current income and consistent, stable returns.
|
|
(4)
|
|
The index fund seeks to mirror the returns of the S&P 500 Index. The fund normally
invests at least 80% of its assets in securities included in the S&P 500 according to each
securitys weighting in the index.
|
|
(5)
|
|
The international fund seeks long-term capital appreciation and some current income by
investing worldwide with normally at least 50% of its assets invested outside the U.S. The
fund may invest in debt securities of any maturity or quality and illiquid securities.
International investing presents certain unique risks not associated with domestic
investments, including currency fluctuation and political and economic changes, which may
result in greater share price volatility.
|
|
(6)
|
|
The fixed income fund seeks current income consistent with preservation of capital. It
normally invests at least 80% of assets in bonds of which at least 60% of assets in bonds
and debt securities rated A or better at the time.
|
|
(7)
|
|
The specialty real estate fund seeks long-term capital appreciation with current
income as a secondary objective. The fund invests mainly in securities issued by real
estate investment trusts and at least 80% of assets in equities issued by companies in the
real estate industry.
|
9
At June 30, 2010, the fair values of the Companys money market funds and the majority of
certain other trading assets are determined based on quoted prices in active markets and have been
classified as Level 1. The other trading securities are maintained for the future payments under
the Companys deferred compensation plan, which is structured as a rabbi trust. The investments
are all managed by a third party and, with the exception of the guaranteed income fund whose
valuation is discussed further below, valued based on the underlying fair value of each mutual fund
held by the trust, for which there are active quoted markets. The related deferred compensation
liabilities are valued based on the underlying investment selections held in each participants
shadow account. Investment funds held by the rabbi trust, for which there is an active quoted
market, mirror the investment options selected by participants in the deferred compensation plan.
The majority of the Companys deferred compensation liability is comprised of mutual funds and is
classified as Level 1. The total net realized and unrealized losses totaled ($162) and ($324)
for the six months ended June 30, 2010 and 2009, respectively, and are included in Other income
(expense), net in the Companys Consolidated Statements of Operations. Offsetting entries to the
deferred compensation liability and compensation expense within Selling, technical and
administrative expenses, for the same amounts were also recorded during the six months ended June
30, 2010, and 2009, respectively. The fair value of a guaranteed income fund maintained in the
rabbi trust and reported in Other trading assets in the table above, and the related deferred
compensation liability have been classified as Level 3.
At December 31, 2009, a majority of the Companys financial assets were classified as Level 2.
Those assets were initially valued at the transaction price and subsequently valued typically
utilizing third party pricing services. The pricing services use many inputs to determine value,
including reportable trades, broker/dealer quotes, bids, offers, and other industry and economic
events. The Company validates the prices provided by its third party pricing services by reviewing
their pricing methods and matrices, obtaining market values from other pricing sources, and
analyzing pricing data in certain instances. Considerable judgment is required in interpreting
market data to develop estimates of fair value. Accordingly, the fair value estimates provided
herein were not necessarily indicative of the amount that the Company or its debt holders could
realize in a current market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair value. After completing its
validation procedures, the Company did not adjust or override any fair value measurements provided
by its pricing services at December 31, 2009.
During the period ended June 30, 2010, there were no transfers of financial assets between
Level 1 and Level 2.
Level 3 Gains and Losses
The table below sets forth a summary of changes in the fair value of the deferred compensation
plans Level 3 assets for the six months ended June 30, 2010:
|
|
|
|
|
|
|
Guaranteed
|
|
|
|
Income Fund
|
|
Balance January 1, 2010
|
|
$
|
480
|
|
Realized gains
|
|
|
|
|
Unrealized gains / (losses) relating to instruments still
held at reporting date
|
|
|
|
|
Purchases, sales, issuances and settlements (net)
|
|
|
299
|
|
|
|
|
|
Balance June 30, 2010
|
|
$
|
779
|
|
|
|
|
|
The deferred compensation plan has entered into an investment contract, the Guaranteed
Income Fund (fund), with Prudential Retirement Services, Inc. (Prudential). Prudential maintains
the contributions to this fund in a general account, which is credited with earnings on the
underlying investments and charged for participant withdrawals and administrative expenses.
10
The Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009 presents the fund at
contract value, which approximates fair value. Contract value is the amount deferred compensation
plan participants would receive if they were to initiate permitted transactions under the terms of
the plan. Contract value represents contributions made under the contract, plus earnings and
transfers in, less participant withdrawals, administrative expenses and transfers out. Prudential
is contractually obligated to repay the principal and a specified interest rate that is guaranteed
to the plan. Participants may ordinarily direct the withdrawal or transfer of all or a portion of
their investment at contract value. However, Prudential has the right to defer certain
disbursements (excluding retirement, termination, and death or disability disbursements) or
transfers from the fund when total amounts disbursed from the pool in a given calendar year exceed
10% of the total assets in that pool on January 1 of that year. The Company does not believe that
any events that would limit the deferred compensation plans ability to transact at contract value
with participants are probable of occurring.
There are no reserves against contract value for credit risk of the contract issuer or
otherwise. The average annual yield and crediting interest rate of the fund was approximately
2.60% for the trailing twelve months ended June 30, 2010. The crediting interest rate is based on
a formula agreed upon with Prudential, based on the yields of the underlying investments and
considering factors such as projected investment earnings, the current interest environment,
investment expenses, and a profit and risk component. The rate may never be less than 1.50% nor
may it be reduced by more than 2.10% during any calendar year. Interest rates are declared in
advance and guaranteed for six month periods.
Long-Term Financial Instruments
The carrying value and the fair value as determined by a third-party pricing service of
non-current financial liabilities that qualify as financial instruments are reported in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Long-term financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
(1)
|
|
$
|
57,090
|
|
|
$
|
57,161
|
|
|
$
|
77,090
|
|
|
$
|
76,994
|
|
|
|
|
(1)
|
|
Long-term debt of $56,050 as reported on the Consolidated Balance Sheet as of June 30,
2010 includes $1,040 of unamortized consent payments, which is accounted for as a debt
valuation account.
|
5. Investments
The Company determines the appropriate classification of its investments at the time of
purchase and reevaluates such designation as of each balance sheet date. At both June 30, 2010 and
December 31, 2009, the Company accounted for all of its short-term investments as
available-for-sale. Available-for-sale securities are reported at fair value with unrealized
holding gains and losses, net of tax, included in Accumulated other comprehensive loss in the
Consolidated Balance Sheets. The amortized cost of debt securities in this category is adjusted
for the amortization of any discount or premium to maturity computed under the effective interest
method. 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 the Consolidated Statements of
Operations. Both the cost of any security sold and the amount reclassified out of Accumulated
other comprehensive (loss) income into earnings is based on the specific identification method.
11
The following is a summary of the Companys available-for-sale securities as of June 30, 2010
and December 31, 2009, by contractual maturity dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Gross Unrealized
|
|
|
Estimated Fair Value
|
|
June 30, 2010
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
(Net Carrying Amount)
|
|
Other debt securities due in
one year or less
|
|
$
|
4,883
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt securities due in
one year or less
|
|
$
|
35,941
|
|
|
$
|
|
|
|
$
|
(11
|
)
|
|
$
|
35,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, there are no unrealized gains or losses on available-for-sale
securities compared to unrealized losses on available-for-sale securities of $11 ($7 net of tax) at
December 31, 2009 which were included in Accumulated other comprehensive loss in the accompanying
Consolidated Balance Sheet. Unrealized gains of $11 ($7 net of tax) and unrealized losses of $45 ($29
net of tax) were reclassified out of Accumulated other comprehensive (loss) income and into
earnings during the six months ended June 30, 2010 and 2009, respectively.
6. Financing Arrangements
On February 8, 2010, the Company announced that it was soliciting consents from holders of
$75,740 of its senior notes to effect an amendment, allowing the Company to repurchase up to
$20,000 of its outstanding common stock, to the indenture governing the senior notes. On February
23, 2010, $75,585 of the senior notes consented and a fee of $1,512 was paid to the consenting
senior note holders and the Company entered into a supplemental indenture to allow for the stock
repurchase. The consent fee is accounted for as a debt valuation account and is being amortized
over the remaining life of the outstanding senior notes as interest expense. As of June 30, 2010,
$1,040 of the consent fee remains to be amortized.
In May 2010, the Company purchased $20,000 of its outstanding senior notes in the open market.
These notes have not been formally retired by the Company, but have been treated as an
extinguishment of debt for accounting purposes, as the Company has been released from being the
primary obligor under the liability. The Company reported a loss on extinguishment of debt of
$694 comprised of a pro-rata portion of unamortized debt issuance costs and unamortized consent
fees which was included in Other income (expense), net in the Consolidated Statements of Operations
for the three and six months ended June 30, 2010, and a commission expense of $50, which is
included in Selling, technical and administrative expense in the Consolidated Statements of
Operations for the three and six months ended June 30, 2010. After taking into the account the
above transaction, the remaining principal balance of senior notes outstanding as of June 30, 2010
is $57,090.
7. Transfers of Financial Assets Accounts Receivable Factoring Programs
The Company accounts for its trade accounts receivable factoring programs as required
under ASC 860,
Transfers and Servicing
and, effective January 1, 2010, the Company prospectively
adopted the guidance under ASU No. 2009-16,
Accounting for Transfers of Financial Assets
.
As part of its working capital management, the Company sells certain domestic and Italian
trade accounts receivable at its discretion to unrelated third-party financial institutions without
recourse. Under the terms of the factoring agreements, the Company retains no rights or interest,
has no obligations with respect to the sold receivables, and does not service the receivables after
the sale. As such, the factoring of trade accounts receivable under these agreements is accounted
for as a sale. The amount sold varies each month based on the amount of underlying receivables,
the cash flow needs of the Company and limitations imposed under the terms of the Companys credit
and factoring facilities. Specifically, under the terms of Companys domestic bank facility, the
maximum amount of U.S. outstanding advances at any one time is $10,000. Under the terms of the
Italian factoring agreement, the maximum available amount of the Italian-based outstanding advances
is $5,024 (4,115 Euro) and $6,751 (4,710 Euro) at June 30, 2010 and 2009, respectively, which
limitation is subject to change based on the level of eligible receivables and at the discretion of
the third-party financial institution. The Company is not obligated to draw cash immediately upon
the factoring of accounts receivable under the terms of its Italian factoring agreement, and pays
an administrative fee each month over the term of the agreement based on the dollar value of
receivables sold. Fees related to the Italian factoring agreement for the three and six months
ended June 30, 2010 and 2009 were $13, $24, $16 and $23, respectively, and are included in Selling,
technical and administrative expenses in the Consolidated Statements of Operations.
12
During the six months ended June 30, 2010 and 2009, the Company sold $11,835 and $3,842,
respectively of trade accounts receivable under its factoring agreements. The sale of these
receivables accelerated the collection of the Companys cash and reduced credit exposure. The
receivables sold pursuant to these factoring agreements have been recorded as a reduction of trade
accounts receivable and as cash provided by operating activities in the Consolidated Statements of
Cash Flows. At June 30, 2010 and December 31, 2009, the Company had $3,020 and $3,278,
respectively of receivables outstanding under receivable factoring agreements, net of advances
received, which are included in Accounts receivable in the Consolidated Balance Sheets. For
transactions in which cash is drawn immediately, proceeds on the sale reflect the face value of the
receivable less a discount. This discount is recorded as a loss in the Consolidated Statements of
Operations in the period of the sale. The Company reported a loss on the sale of receivables for
the three and six months ended June 30, 2010 and 2009 of $16, $16, $0 and $0, respectively; this
amount is recorded in Other income (expense), net in the Consolidated Statements of Operations.
8. Comprehensive Income
Comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net income (loss)
|
|
$
|
5,499
|
|
|
$
|
(536
|
)
|
|
$
|
9,276
|
|
|
$
|
1,038
|
|
Amortization of prior service cost and net loss, net of tax
|
|
|
149
|
|
|
|
88
|
|
|
|
308
|
|
|
|
487
|
|
Unrealized gain (loss) on available for sale securities, net of tax
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
(24
|
)
|
Foreign currency translation (loss) gain
|
|
|
(3,635
|
)
|
|
|
2,604
|
|
|
|
(5,916
|
)
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
2,016
|
|
|
$
|
2,155
|
|
|
$
|
3,675
|
|
|
$
|
1,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Stock Compensation Plan
The Companys Amended and Restated 2000 Long Term Incentive Plan (Plan), provides for the
granting of up to 1,315,000 shares of common stock of the Company in the form of stock options,
restricted stock awards, stock appreciation rights (SARs) and performance-based awards. The Plan
had 499,483 shares available for grants as of June 30, 2010. Options generally vest over a five
year period after the grant date and expire no more than ten years after the grant date.
Stock Options
The Company recognized $150 and $264 of compensation expense for the three month periods ended
June 30, 2010 and 2009, respectively and $311 and $551 for the six month periods ended June 30,
2010 and June 30, 2009. Net cash proceeds from the exercise of stock options were $432 and $348
for the six month periods ended June 30, 2010 and 2009, respectively, and the intrinsic value of
stock options exercised was $1,897 and $229 for the six months ended June 30, 2010 and 2009,
respectively. As of June 30, 2010, there was $719 of total unrecognized compensation cost related
to the non-vested share-based compensation arrangements under the Companys stock compensation
plans. The remaining cost is expected to be recognized over the next 2.1 years. The Company
classifies its stock option expense principally in Selling, technical and administrative expenses
in its Consolidated Statements of Operations.
13
Stock-based option activity during the six months ended June 30, 2010, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining Contract
|
|
|
Intrinsic Value
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term
|
|
|
(in thousands)
|
|
Options outstanding at
January 1, 2010
|
|
|
729,179
|
|
|
$
|
8.72
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(115,959
|
)
|
|
|
3.74
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
June 30, 2010
|
|
|
613,220
|
|
|
$
|
9.66
|
|
|
4.8 yrs.
|
|
$
|
9,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2010
|
|
|
446,219
|
|
|
$
|
7.41
|
|
|
3.7 yrs.
|
|
$
|
8,049
|
|
There were no options granted during the six months ended June 30, 2010.
The aggregate intrinsic value in the table above represents the total pre-tax difference
between the $25.45 closing price of shares of common stock of the Company on June 30, 2010, over
the exercise price of the stock option, multiplied by the number of options outstanding and
exercisable. The aggregate intrinsic value is not recorded for financial accounting purposes and
the value changes based on the daily changes in the fair market value of the Companys shares of
common stock.
Restricted Stock
On February 18, 2010, under the Plan, 10,000 shares of service-vested restricted common stock
awards were issued to certain employees of the Company. These restricted stock awards vest in
equal one-fifth installments on February 18, 2010, 2011, 2012, 2013, and 2014. Additionally, the
Company paid the taxes due on the taxable portion of the total award on behalf of the employees.
Compensation expense on these awards is being recognized from the date of grant through the end of
the vesting period on a straight-line basis. The fair value of this restricted stock award was
measured using the closing price of the Companys common stock at the date of grant of $18.71 per
share. The Company recorded $9 and $50 of compensation expense for the restricted stock awards for
the three and six months ended June 30, 2010, respectively, and $0 and $135 for the income tax
gross-up paid on behalf of the participants for the three and six months ended Jun 30, 2010,
respectively, within Selling, technical, and administrative expense in its Consolidated Statement
of Operations. As of June 30, 2010, there were 8,000 shares of restricted stock outstanding and
unvested. As of June 30, 2010, the remaining unrecognized compensation cost related to the
unvested restricted stock awards was $137, which is expected to be recognized over the remaining
vesting period of 3.7 years.
The following table summarizes restricted stock activity for the six months ended June 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested balance as of January 1, 2010
|
|
|
|
|
|
|
|
|
Granted
|
|
|
10,000
|
|
|
$
|
187
|
|
Vested
|
|
|
(2,000
|
)
|
|
$
|
(37
|
)
|
|
|
|
|
|
|
|
Unvested balance as of June 30, 2010
|
|
|
8,000
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
The intrinsic value of the unvested restricted shares as of June 30, 2010 was $204.
10. Shareholders Equity
On November 24, 2008, the Company announced a plan, approved by the Board of Directors, to
repurchase up to $15,000 of its Class A common stock in the open market, through privately
negotiated transactions or otherwise in accordance with securities laws and regulations. In the
first quarter of 2010, the Company purchased $317 of its common stock under the plan. As of
January 11, 2010, all $15,000 had been spent by the Company to repurchase 1,090,271 shares of its
Class A common stock at market prices and the plan expired.
14
On February 19, 2010, the Companys Board of Directors approved a plan (the new plan) to
repurchase up to $25,000 of its shares of Class A common stock 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, as amended (the Exchange
Act), or otherwise in accordance with securities laws and regulations. At June 30, 2010, the
provisions of the Companys credit facility, indenture and supplemental indenture allow the Company
to purchase up to the board-approved plan amount of $25,000 of its common stock. Through June 30,
2010, the Company purchased $6,930 of its common stock under the new plan.
11. Employee Benefits
A summary of the components of net periodic benefit cost of the Companys defined benefit
pension plans for the periods presented in the Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Components of net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
103
|
|
|
$
|
64
|
|
|
$
|
211
|
|
|
$
|
147
|
|
Interest cost
|
|
|
464
|
|
|
|
453
|
|
|
|
923
|
|
|
|
906
|
|
Expected return on plan assets
|
|
|
(595
|
)
|
|
|
(439
|
)
|
|
|
(1,192
|
)
|
|
|
(878
|
)
|
Amortization of prior service cost
|
|
|
60
|
|
|
|
60
|
|
|
|
120
|
|
|
|
120
|
|
Recognized net actuarial loss
|
|
|
172
|
|
|
|
301
|
|
|
|
360
|
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost of defined benefit plans
|
|
$
|
204
|
|
|
$
|
439
|
|
|
$
|
422
|
|
|
$
|
935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company contributed $490 in cash in the first half of 2010 to fund its defined
benefit pension plans for the 2009 and 2010 plan years based on revised funding requirements
provided by its third party actuaries, and anticipates contributing an additional $746 in cash
during the remainder of 2010 for both the 2010 and 2009 plan years, for total cash contributions of
$1,236.
12. Income Taxes
The effective income tax rate from continuing operations for the six months ended June 30,
2010, was 36.2%, compared to 39.9% for the six months ended June 30, 2009. The Companys effective
rate differs from the U.S. statutory rate of 35.0% primarily as a result of the impact of
non-deductible expenses on the Companys worldwide taxes.
The total amount of unrecognized tax benefits as of June 30, 2010, was $647 (including $150 of
accrued interest and penalties), the recognition of which would have had an effect of $616 on the
continuing operations effective tax rate. The decrease in the unrecognized tax benefits from
December 31, 2009 was due primarily to the Companys settlement of its Italian tax audit, which
reduced the unrecognized tax benefits by $438 (including $93 of accrued interest and penalties).
The Company believes it is reasonably possible that the unrecognized tax benefit may be reduced by
$259 in the next twelve months primarily for issues that lapse due to statutes.
The Company recorded an adjustment to deferred taxes for a foreign subsidiary which increased
the tax provision $193 for the six months ended June 30, 2010. The Company does not anticipate any
further adjustments related to this matter.
The Company files income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. The Company is currently not under examination for income taxes in the
jurisdictions in which it files. The years 2003 2009 are open years available for examination
by various state, local and foreign tax authorities.
15
13. Earnings Per Share
Basic and diluted earnings per share are computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Income (loss) from continuing operations, after
income taxes
|
|
$
|
5,482
|
|
|
$
|
(372
|
)
|
|
$
|
9,287
|
|
|
$
|
1,212
|
|
Less: Preferred stock dividends
|
|
|
38
|
|
|
|
38
|
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, after
income taxes available to common shareholders
|
|
$
|
5,444
|
|
|
$
|
(410
|
)
|
|
$
|
9,212
|
|
|
$
|
1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,499
|
|
|
$
|
(536
|
)
|
|
$
|
9,276
|
|
|
$
|
1,038
|
|
Less: Preferred stock dividends
|
|
|
38
|
|
|
|
38
|
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
5,461
|
|
|
$
|
(574
|
)
|
|
$
|
9,201
|
|
|
$
|
963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
7,798
|
|
|
|
8,174
|
|
|
|
7,881
|
|
|
|
8,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
7,798
|
|
|
|
8,174
|
|
|
|
7,881
|
|
|
|
8,428
|
|
Dilutive effect of stock options
|
|
|
270
|
|
|
|
|
|
|
|
276
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
8,068
|
|
|
|
8,174
|
|
|
|
8,157
|
|
|
|
8,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) from continuing operations,
after income taxes
|
|
$
|
0.70
|
|
|
$
|
(0.05
|
)
|
|
$
|
1.17
|
|
|
$
|
0.13
|
|
Discontinued operations, after income taxes
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per basic share
|
|
$
|
0.70
|
|
|
$
|
(0.07
|
)
|
|
$
|
1.17
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) from continuing operations,
after income taxes
|
|
$
|
0.67
|
|
|
$
|
(0.05
|
)
|
|
$
|
1.13
|
|
|
$
|
0.13
|
|
Discontinued operations, after income taxes
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per diluted share
(1)
|
|
$
|
0.68
|
|
|
$
|
(0.07
|
)
|
|
$
|
1.13
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The summation to net earnings per diluted share does not mathematically
calculate due to rounding.
|
A weighted average of 22,138 and 94,659 options were not included in the calculation of
diluted weighted shares outstanding because they were anti-dilutive for the three and six months
ended June 30, 2010, respectively. A weighted average of 546,077 and 275,044 options were not
included in the calculation of diluted weighted shares outstanding because they were anti-dilutive
for the three and six months ended June 30, 2009, respectively.
On February 18, 2010, the Company issued 10,000 shares of common stock from treasury to
certain employees as a restricted stock award under the Companys Amended and Restated 2000 Long
Term Incentive Plan. These awarded shares are included in the basic and diluted weighted average
shares outstanding from the period of time outstanding. 20% of these awarded shares vested
immediately and the remaining shares vest ratably over the next four years from the grant date. No
forfeitures are anticipated over the vesting period. All restricted shares include the right to
vote and the right to receive cash and stock dividends.
16
14. Supplemental Guarantor Information
Each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and
several basis, to pay principal, premium, and interest with respect to the Companys senior notes.
The Guarantor Subsidiaries are direct or indirect wholly-owned subsidiaries of the Company.
The following supplemental consolidating condensed financial statements present:
|
|
|
Consolidating condensed Balance Sheets as of June 30, 2010 and December 31, 2009,
consolidating condensed Statements of Operations for the three and six months ended June
30, 2010 and 2009 and consolidating condensed Statements of Cash Flows for the six months
ended June 30, 2010 and 2009.
|
|
|
|
Hawk Corporation (Parent) combined Guarantor Subsidiaries and combined Non-Guarantor
Subsidiaries consisting of the Companys subsidiaries in Italy, Canada and China with their
investments in subsidiaries accounted for using the equity method.
|
|
|
|
Elimination entries necessary to consolidate the financial statements of the Parent and
all of its subsidiaries.
|
The Company does not believe that separate financial statements of the Guarantor Subsidiaries
provide material additional information to investors. Therefore, separate financial statements and
other disclosures concerning the Guarantor Subsidiaries are not presented. The Companys bank
facility contains covenants with respect to the Company and its subsidiaries that, among other
things, would prohibit the payment of dividends to the Company by the subsidiaries (including
Guarantor Subsidiaries) in the event of a default under the terms of the bank facility. The
indenture governing the senior notes permits the payment of dividends to the Company by the
subsidiaries (including Guarantor Subsidiaries) provided that no event of default has occurred
under the terms of the indenture of the senior notes.
17
Supplemental Consolidating Condensed
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,262
|
|
|
$
|
20
|
|
|
$
|
18,576
|
|
|
$
|
|
|
|
$
|
55,858
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
4,883
|
|
|
|
|
|
|
|
4,883
|
|
Accounts receivable, net
|
|
|
|
|
|
|
16,627
|
|
|
|
20,534
|
|
|
|
|
|
|
|
37,161
|
|
Inventories, net
|
|
|
|
|
|
|
23,474
|
|
|
|
10,903
|
|
|
|
(247
|
)
|
|
|
34,130
|
|
Deferred income taxes
|
|
|
510
|
|
|
|
|
|
|
|
694
|
|
|
|
|
|
|
|
1,204
|
|
Other current assets
|
|
|
2,447
|
|
|
|
804
|
|
|
|
2,562
|
|
|
|
|
|
|
|
5,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
40,219
|
|
|
|
40,925
|
|
|
|
58,152
|
|
|
|
(247
|
)
|
|
|
139,049
|
|
Investment in subsidiaries
|
|
|
59,355
|
|
|
|
|
|
|
|
|
|
|
|
(59,355
|
)
|
|
|
|
|
Inter-company advances, net
|
|
|
|
|
|
|
3,171
|
|
|
|
(3,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
33,208
|
|
|
|
11,174
|
|
|
|
|
|
|
|
44,382
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets
|
|
|
|
|
|
|
5,738
|
|
|
|
|
|
|
|
|
|
|
|
5,738
|
|
Other
|
|
|
6,103
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
6,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
6,103
|
|
|
|
5,738
|
|
|
|
125
|
|
|
|
|
|
|
|
11,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
105,677
|
|
|
$
|
83,042
|
|
|
$
|
66,280
|
|
|
$
|
(59,602
|
)
|
|
$
|
195,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
16,998
|
|
|
$
|
11,989
|
|
|
$
|
|
|
|
$
|
28,987
|
|
Accrued compensation
|
|
|
2,688
|
|
|
|
4,756
|
|
|
|
3,121
|
|
|
|
|
|
|
|
10,565
|
|
Accrued interest
|
|
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,498
|
|
Accrued taxes
|
|
|
129
|
|
|
|
31
|
|
|
|
1,232
|
|
|
|
(30
|
)
|
|
|
1,362
|
|
Other accrued expenses
|
|
|
1,498
|
|
|
|
2,010
|
|
|
|
362
|
|
|
|
12
|
|
|
|
3,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,813
|
|
|
|
23,795
|
|
|
|
16,704
|
|
|
|
(18
|
)
|
|
|
47,294
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
|
56,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,050
|
|
Deferred income taxes
|
|
|
2,534
|
|
|
|
|
|
|
|
311
|
|
|
|
|
|
|
|
2,845
|
|
Other
|
|
|
4,250
|
|
|
|
6,152
|
|
|
|
3,486
|
|
|
|
|
|
|
|
13,888
|
|
Inter-company advances, net
|
|
|
(39,290
|
)
|
|
|
30,764
|
|
|
|
8,755
|
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
23,544
|
|
|
|
36,916
|
|
|
|
12,552
|
|
|
|
(229
|
)
|
|
|
72,783
|
|
Shareholders equity
|
|
|
75,320
|
|
|
|
22,331
|
|
|
|
37,024
|
|
|
|
(59,355
|
)
|
|
|
75,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders
equity
|
|
$
|
105,677
|
|
|
$
|
83,042
|
|
|
$
|
66,280
|
|
|
$
|
(59,602
|
)
|
|
$
|
195,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Supplemental Consolidating Condensed
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,182
|
|
|
$
|
11
|
|
|
$
|
23,013
|
|
|
$
|
|
|
|
$
|
47,206
|
|
Short-term investments
|
|
|
34,977
|
|
|
|
|
|
|
|
953
|
|
|
|
|
|
|
|
35,930
|
|
Accounts receivable, net
|
|
|
|
|
|
|
12,520
|
|
|
|
15,058
|
|
|
|
|
|
|
|
27,578
|
|
Inventories, net
|
|
|
|
|
|
|
16,714
|
|
|
|
11,025
|
|
|
|
(244
|
)
|
|
|
27,495
|
|
Deferred income taxes
|
|
|
511
|
|
|
|
|
|
|
|
794
|
|
|
|
|
|
|
|
1,305
|
|
Other current assets
|
|
|
3,704
|
|
|
|
723
|
|
|
|
1,259
|
|
|
|
|
|
|
|
5,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
63,374
|
|
|
|
29,968
|
|
|
|
52,102
|
|
|
|
(244
|
)
|
|
|
145,200
|
|
Investment in subsidiaries
|
|
|
49,927
|
|
|
|
|
|
|
|
|
|
|
|
(49,927
|
)
|
|
|
|
|
Inter-company advances, net
|
|
|
|
|
|
|
2,738
|
|
|
|
(2,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
34,728
|
|
|
|
12,368
|
|
|
|
|
|
|
|
47,096
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets
|
|
|
|
|
|
|
6,015
|
|
|
|
|
|
|
|
|
|
|
|
6,015
|
|
Other
|
|
|
5,892
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
6,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
5,892
|
|
|
|
6,015
|
|
|
|
289
|
|
|
|
|
|
|
|
12,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
119,193
|
|
|
$
|
73,449
|
|
|
$
|
62,021
|
|
|
$
|
(50,171
|
)
|
|
$
|
204,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
46
|
|
|
$
|
9,696
|
|
|
$
|
7,119
|
|
|
$
|
|
|
|
$
|
16,861
|
|
Accrued compensation
|
|
|
2,455
|
|
|
|
2,599
|
|
|
|
2,270
|
|
|
|
|
|
|
|
7,324
|
|
Accrued interest
|
|
|
3,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,385
|
|
Accrued taxes
|
|
|
|
|
|
|
56
|
|
|
|
345
|
|
|
|
(56
|
)
|
|
|
345
|
|
Other accrued expenses
|
|
|
1,804
|
|
|
|
1,870
|
|
|
|
292
|
|
|
|
13
|
|
|
|
3,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,690
|
|
|
|
14,221
|
|
|
|
10,026
|
|
|
|
(43
|
)
|
|
|
31,894
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
77,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,090
|
|
Deferred income taxes
|
|
|
2,508
|
|
|
|
|
|
|
|
365
|
|
|
|
|
|
|
|
2,873
|
|
Other
|
|
|
4,499
|
|
|
|
6,534
|
|
|
|
4,132
|
|
|
|
|
|
|
|
15,165
|
|
Inter-company advances, net
|
|
|
(50,064
|
)
|
|
|
42,346
|
|
|
|
7,919
|
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
34,033
|
|
|
|
48,880
|
|
|
|
12,416
|
|
|
|
(201
|
)
|
|
|
95,128
|
|
Shareholders equity
|
|
|
77,470
|
|
|
|
10,348
|
|
|
|
39,579
|
|
|
|
(49,927
|
)
|
|
|
77,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders
equity
|
|
$
|
119,193
|
|
|
$
|
73,449
|
|
|
$
|
62,021
|
|
|
$
|
(50,171
|
)
|
|
$
|
204,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Supplemental Consolidating Condensed
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(dollars in thousands)
|
|
Net sales
|
|
$
|
|
|
|
$
|
41,854
|
|
|
$
|
21,157
|
|
|
$
|
(1,332
|
)
|
|
$
|
61,679
|
|
Cost of sales
|
|
|
|
|
|
|
26,477
|
|
|
|
16,161
|
|
|
|
(1,332
|
)
|
|
|
41,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
15,377
|
|
|
|
4,996
|
|
|
|
|
|
|
|
20,373
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative
expenses
|
|
|
|
|
|
|
7,316
|
|
|
|
1,692
|
|
|
|
|
|
|
|
9,008
|
|
Amortization of intangibles
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
7,454
|
|
|
|
1,692
|
|
|
|
|
|
|
|
9,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
7,923
|
|
|
|
3,304
|
|
|
|
|
|
|
|
11,227
|
|
Interest (expense) income, net
|
|
|
|
|
|
|
(1,660
|
)
|
|
|
65
|
|
|
|
|
|
|
|
(1,595
|
)
|
Income from equity investee
|
|
|
5,499
|
|
|
|
1,804
|
|
|
|
|
|
|
|
(7,303
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
|
(1,003
|
)
|
|
|
2
|
|
|
|
|
|
|
|
(1,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations,
before income taxes
|
|
|
5,499
|
|
|
|
7,064
|
|
|
|
3,371
|
|
|
|
(7,303
|
)
|
|
|
8,631
|
|
Income tax provision
|
|
|
|
|
|
|
1,582
|
|
|
|
1,567
|
|
|
|
|
|
|
|
3,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations,
after income taxes
|
|
|
5,499
|
|
|
|
5,482
|
|
|
|
1,804
|
|
|
|
(7,303
|
)
|
|
|
5,482
|
|
Income from discontinued operations,
after income taxes
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,499
|
|
|
$
|
5,499
|
|
|
$
|
1,804
|
|
|
$
|
(7,303
|
)
|
|
$
|
5,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Supplemental Consolidating Condensed
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(dollars in thousands)
|
|
Net sales
|
|
$
|
|
|
|
$
|
29,453
|
|
|
$
|
10,138
|
|
|
$
|
(514
|
)
|
|
$
|
39,077
|
|
Cost of sales
|
|
|
|
|
|
|
20,145
|
|
|
|
11,055
|
|
|
|
(514
|
)
|
|
|
30,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
9,308
|
|
|
|
(917
|
)
|
|
|
|
|
|
|
8,391
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative
expenses
|
|
|
|
|
|
|
5,891
|
|
|
|
1,116
|
|
|
|
|
|
|
|
7,007
|
|
Amortization of intangibles
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
6,030
|
|
|
|
1,116
|
|
|
|
|
|
|
|
7,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
3,278
|
|
|
|
(2,033
|
)
|
|
|
|
|
|
|
1,245
|
|
Interest (expense) income, net
|
|
|
|
|
|
|
(1,970
|
)
|
|
|
59
|
|
|
|
|
|
|
|
(1,911
|
)
|
Loss from equity investee
|
|
|
(536
|
)
|
|
|
(1,788
|
)
|
|
|
|
|
|
|
2,324
|
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
|
343
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations,
before income taxes
|
|
|
(536
|
)
|
|
|
(137
|
)
|
|
|
(2,150
|
)
|
|
|
2,324
|
|
|
|
(499
|
)
|
Income tax provision (benefit)
|
|
|
|
|
|
|
235
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations, after income taxes
|
|
|
(536
|
)
|
|
|
(372
|
)
|
|
|
(1,788
|
)
|
|
|
2,324
|
|
|
|
(372
|
)
|
Loss from discontinued operations,
after income tax benefit
|
|
|
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(536
|
)
|
|
$
|
(536
|
)
|
|
$
|
(1,788
|
)
|
|
$
|
2,324
|
|
|
$
|
(536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Supplemental Consolidating Condensed
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(dollars in thousands)
|
|
Net sales
|
|
$
|
|
|
|
$
|
78,089
|
|
|
$
|
39,755
|
|
|
$
|
(2,756
|
)
|
|
$
|
115,088
|
|
Cost of sales
|
|
|
|
|
|
|
49,262
|
|
|
|
30,987
|
|
|
|
(2,756
|
)
|
|
|
77,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
28,827
|
|
|
|
8,768
|
|
|
|
|
|
|
|
37,595
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative
expenses
|
|
|
|
|
|
|
14,656
|
|
|
|
3,206
|
|
|
|
|
|
|
|
17,862
|
|
Amortization of intangibles
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
14,933
|
|
|
|
3,206
|
|
|
|
|
|
|
|
18,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
13,894
|
|
|
|
5,562
|
|
|
|
|
|
|
|
19,456
|
|
Interest (expense) income, net
|
|
|
|
|
|
|
(3,479
|
)
|
|
|
105
|
|
|
|
|
|
|
|
(3,374
|
)
|
Income from equity investee
|
|
|
9,276
|
|
|
|
3,366
|
|
|
|
|
|
|
|
(12,642
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
|
(1,432
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
(1,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations,
before income taxes
|
|
|
9,276
|
|
|
|
12,349
|
|
|
|
5,566
|
|
|
|
(12,642
|
)
|
|
|
14,549
|
|
Income tax provision
|
|
|
|
|
|
|
3,062
|
|
|
|
2,200
|
|
|
|
|
|
|
|
5,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations,
after income taxes
|
|
|
9,276
|
|
|
|
9,287
|
|
|
|
3,366
|
|
|
|
(12,642
|
)
|
|
|
9,287
|
|
Loss from discontinued operations, after
income tax benefit
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,276
|
|
|
$
|
9,276
|
|
|
$
|
3,366
|
|
|
$
|
(12,642
|
)
|
|
$
|
9,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Supplemental Consolidating Condensed
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(dollars in thousands)
|
|
Net sales
|
|
$
|
|
|
|
$
|
61,159
|
|
|
$
|
23,529
|
|
|
$
|
(1,326
|
)
|
|
$
|
83,362
|
|
Cost of sales
|
|
|
|
|
|
|
41,192
|
|
|
|
23,107
|
|
|
|
(1,326
|
)
|
|
|
62,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
19,967
|
|
|
|
422
|
|
|
|
|
|
|
|
20,389
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative
expenses
|
|
|
|
|
|
|
12,126
|
|
|
|
2,333
|
|
|
|
|
|
|
|
14,459
|
|
Amortization of intangibles
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
12,403
|
|
|
|
2,333
|
|
|
|
|
|
|
|
14,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
7,564
|
|
|
|
(1,911
|
)
|
|
|
|
|
|
|
5,653
|
|
Interest (expense) income, net
|
|
|
|
|
|
|
(3,915
|
)
|
|
|
154
|
|
|
|
|
|
|
|
(3,761
|
)
|
Income from equity investee
|
|
|
1,038
|
|
|
|
(1,880
|
)
|
|
|
|
|
|
|
842
|
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
|
338
|
|
|
|
(215
|
)
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations,
before income taxes
|
|
|
1,038
|
|
|
|
2,107
|
|
|
|
(1,972
|
)
|
|
|
842
|
|
|
|
2,015
|
|
Income tax provision (benefit)
|
|
|
|
|
|
|
895
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations, after income taxes
|
|
|
1,038
|
|
|
|
1,212
|
|
|
|
(1,880
|
)
|
|
|
842
|
|
|
|
1,212
|
|
Loss from discontinued operations, after
income tax benefit
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,038
|
|
|
$
|
1,038
|
|
|
$
|
(1,880
|
)
|
|
$
|
842
|
|
|
$
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Supplemental Consolidating Condensed
Cash Flows Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(dollars in thousands)
|
|
Net cash provided by operating
activities of continuing operations
|
|
$
|
4,795
|
|
|
$
|
873
|
|
|
$
|
4,265
|
|
|
$
|
|
|
|
$
|
10,933
|
|
Net cash used in operating
activities of discontinued operations
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available for sale securities
|
|
|
(58,976
|
)
|
|
|
|
|
|
|
(5,325
|
)
|
|
|
|
|
|
|
(64,301
|
)
|
Proceeds from available for sale
securities
|
|
|
94,999
|
|
|
|
|
|
|
|
953
|
|
|
|
|
|
|
|
94,952
|
|
Purchases of property, plant and
equipment
|
|
|
|
|
|
|
(853
|
)
|
|
|
(1,220
|
)
|
|
|
|
|
|
|
(2,073
|
)
|
Acquisition of business
|
|
|
|
|
|
|
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities of continuing operations
|
|
|
36,023
|
|
|
|
(853
|
)
|
|
|
(6,039
|
)
|
|
|
|
|
|
|
28,131
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
Proceeds from stock options
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
432
|
|
Stock repurchase
|
|
|
(7,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,247
|
)
|
Payment of consent fee for senior
notes indenture modification
|
|
|
(1,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,512
|
)
|
Tax benefit from exercise of incentive
stock options
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
664
|
|
Payments of preferred stock dividend
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities of continuing operations
|
|
|
(27,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,738
|
)
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
(2,663
|
)
|
|
|
|
|
|
|
(2,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing
operations
|
|
|
13,080
|
|
|
|
20
|
|
|
|
(4,437
|
)
|
|
|
|
|
|
|
8,663
|
|
Net cash used by discontinued
operations
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
13,080
|
|
|
|
9
|
|
|
|
(4,437
|
)
|
|
|
|
|
|
|
8,652
|
|
Cash and cash equivalents at beginning of
period
|
|
|
24,182
|
|
|
|
11
|
|
|
|
23,013
|
|
|
|
|
|
|
|
47,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
37,262
|
|
|
$
|
20
|
|
|
$
|
18,576
|
|
|
$
|
|
|
|
$
|
55,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Supplemental Consolidating Condensed
Cash Flows Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net cash (used in) provided by operating
activities of continuing operations
|
|
$
|
(3,533
|
)
|
|
$
|
4,095
|
|
|
$
|
729
|
|
|
$
|
|
|
|
$
|
1,291
|
|
Net cash used in operating
activities of discontinued operations
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
(174
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available for sale securities
|
|
|
(75,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,963
|
)
|
Proceeds from available for sale
securities
|
|
|
68,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,000
|
|
Purchases of property, plant and
equipment
|
|
|
|
|
|
|
(4,146
|
)
|
|
|
(692
|
)
|
|
|
|
|
|
|
(4,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities of continuing operations
|
|
|
(7,963
|
)
|
|
|
(4,146
|
)
|
|
|
(692
|
)
|
|
|
|
|
|
|
(12,801
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
Stock repurchase
|
|
|
(11,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,164
|
)
|
Receipts from government grants
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
Payments of deferred financing fees
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(340
|
)
|
Payments of preferred stock dividend
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities of continuing operations
|
|
|
(11,231
|
)
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
(11,006
|
)
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by continuing
operations
|
|
|
(22,727
|
)
|
|
|
174
|
|
|
|
66
|
|
|
|
|
|
|
|
(22,487
|
)
|
Net cash used in discontinued
operations
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
|
(22,727
|
)
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
(22,661
|
)
|
Cash and cash equivalents at beginning of
period
|
|
|
45,241
|
|
|
|
32
|
|
|
|
17,247
|
|
|
|
|
|
|
|
62,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
22,514
|
|
|
$
|
32
|
|
|
$
|
17,313
|
|
|
$
|
|
|
|
$
|
39,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
|
You should read this discussion in conjunction with the consolidated financial statements,
notes and tables included in Part I, Item 1 of this Form 10-Q. 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 that
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 a guarantee
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 expectations 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.
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 law.
Recent Events
|
|
|
On July 1, 2010, we announced that our Board of Directors commenced a process to explore
and consider possible strategic alternatives, including a possible sale of the Company. A
Special Committee of our Board has been formed and has retained Harris Williams & Co., as
its financial advisor to assist and advise the Special Committee. A definitive timetable
for completion of the evaluation has not been set and we cannot provide any assurance that
this process will lead to the approval or completion of any definitive agreement or other
transaction.
|
|
|
|
On July 28, 2010, we announced that the Staff of the Division of Enforcement of the SEC
notified Hawk that it has completed its investigation and will not recommend enforcement
action against Hawk relating to the previously- disclosed SEC investigation. Hawk has also
been informed that the Staff has completed its investigation and will not recommend
enforcement action against Joseph J. Levanduski, Hawks Senior Vice President and Director
of Corporate Development. With the completion of the SEC investigation, Mr. Levanduski has
been restored to his role as Chief Financial Officer with the title of Senior Vice
President Chief Financial Officer and Director of Corporate Development. John T.
Bronstrup, who served as interim Chief Accounting Officer, has resumed his previous
position as Corporate Controller of Hawk.
|
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 increases in raw material prices through to
our customers, 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,
|
26
|
|
|
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 have a major presence in
the on-site stationary fuel cell market.
|
Critical Accounting Policies
The following discussion of our financial position and results of operations is based on the
consolidated financial statements included in this Form 10-Q, which have been prepared in
accordance with U.S. generally accepted accounting principles. 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. During the second quarter of
2010, there have been no significant changes to the critical accounting policies that we disclosed
in Managements Discussion and Analysis of Financial Position and Results of Operations on our 2009
Form 10-K filed with the Securities and Exchange Commission (SEC) on March 10, 2010.
Recent Accounting Pronouncements
There were no new significant accounting updates and guidance that became effective for us
commencing with our second quarter of 2010. We do not believe that any recently issued, but not
yet effective, accounting standards, if currently adopted, would have a material effect on the
accompanying financial statements.
27
Second Quarter of 2010 Compared to the Second Quarter of 2009
The following tables show our net sales by principal market and geographic location for the
three months ended June 30, 2010 and 2009:
Sales by Principal Markets
Three Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
% of Sales
|
|
Market
|
|
2010
|
|
|
2009
|
|
Construction and Mining
|
|
|
47.4
|
%
|
|
|
33.1
|
%
|
Aircraft and Defense
|
|
|
15.6
|
%
|
|
|
26.6
|
%
|
Agriculture
|
|
|
13.2
|
%
|
|
|
13.2
|
%
|
Truck
|
|
|
9.7
|
%
|
|
|
10.4
|
%
|
Performance Friction
|
|
|
6.1
|
%
|
|
|
9.1
|
%
|
Specialty Friction
|
|
|
4.5
|
%
|
|
|
6.2
|
%
|
Alternative Energy
|
|
|
3.5
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
Sales by Geographic Location of our Manufacturing Facilities
Three Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
% of Sales
|
|
Location
|
|
2010
|
|
|
2009
|
|
United States
|
|
|
69.2
|
%
|
|
|
75.4
|
%
|
Italy
|
|
|
25.4
|
%
|
|
|
20.4
|
%
|
Other foreign
|
|
|
5.4
|
%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
28
The following table summarizes our results of operations for the three months ended June 30,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
2010
|
|
|
Sales
|
|
|
2009
|
|
|
Sales
|
|
|
|
(dollars in millions)
|
|
Net sales
|
|
$
|
61.7
|
|
|
|
100.0
|
%
|
|
$
|
39.1
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
$
|
41.3
|
|
|
|
66.9
|
%
|
|
$
|
30.7
|
|
|
|
78.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
20.4
|
|
|
|
33.1
|
%
|
|
$
|
8.4
|
|
|
|
21.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative expenses
|
|
$
|
9.0
|
|
|
|
14.6
|
%
|
|
$
|
7.0
|
|
|
|
17.9
|
%
|
Income from operations
|
|
$
|
11.2
|
|
|
|
18.2
|
%
|
|
$
|
1.2
|
|
|
|
3.1
|
%
|
Interest expense
|
|
$
|
(1.7
|
)
|
|
|
-2.8
|
%
|
|
$
|
(2.0
|
)
|
|
|
-5.1
|
%
|
Interest income
|
|
$
|
0.1
|
|
|
|
0.2
|
%
|
|
$
|
0.1
|
|
|
|
0.3
|
%
|
Other income (expense), net
|
|
$
|
(1.0
|
)
|
|
|
-1.6
|
%
|
|
$
|
0.2
|
|
|
|
0.5
|
%
|
Income tax provision
|
|
$
|
3.1
|
|
|
|
5.0
|
%
|
|
$
|
(0.1
|
)
|
|
|
-0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, after income taxes
|
|
$
|
5.5
|
|
|
|
8.9
|
%
|
|
$
|
(0.4
|
)
|
|
|
-1.0
|
%
|
Discontinued operations, net of tax
|
|
$
|
|
|
|
|
0.0
|
%
|
|
$
|
(0.2
|
)
|
|
|
-0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5.5
|
|
|
|
8.9
|
%
|
|
$
|
(0.5
|
)
|
|
|
-1.3
|
%
|
Net Sales.
Our net sales for the second quarter of 2010 were $61.7 million, an increase of
$22.6 million, or 57.8%, from the same period in 2009. Sales increases during the period resulted
primarily from volume increases to customers in our construction and mining end-markets and new
product introductions. Of our total sales increase of 57.8% in the second quarter of 2010, volume
represented approximately 63.0 of the total percentage point increase. Offsetting the favorable
impact of volume, foreign exchange and pricing negatively impacted the total sales increase by
approximately 3.1 and 2.1 percentage points, respectively.
Our sales to the construction and mining market, our largest, were up 126.2% in the second
quarter of 2010 compared to the second quarter of 2009 as a result of an expansion of activity
primarily in the mining market as customers continued to replenish inventory levels. Sales to our
agriculture market were up 58.2% in the second quarter of 2010 compared to the
second quarter of 2009, primarily as a result of improved market conditions, especially in
Europe. Sales to our truck market increased 48.2% in the second quarter of 2010 compared to the
second quarter of 2009, due to increased freight volumes being shipped with existing vehicles and
the impact of new truck builds. Sales in our friction direct aftermarket that we service through
the VelveTouch
®
and Hawk Performance
®
brand names increased 16.7% in the
second quarter of 2010 compared to the second quarter of 2009. Although a small percentage of our
total net sales, sales to the alternative energy market were up 299.4% in the second quarter of
2010 compared to the second quarter of 2009 as shipments of units in this product line continued to
increase. Our aircraft and defense markets were down 7.1% in the second quarter of 2010 compared
to the second quarter of 2009, as one of our primary defense customers aligned its inventory
levels, partially offset by an increase in our aircraft market.
Net sales from our foreign facilities represented 30.8% of our total net sales in the second
quarter of 2010 compared to 24.6% for the comparable period of 2009. The increase in our foreign
facility revenues as a percent of total revenues was due primarily to the improvements in the end
markets that we serve in the European and Asian markets. Sales at our Italian operation, on a
local currency basis, were up 111.8% in the second quarter of 2010 compared to the second quarter
of 2009, and sales at our Chinese operation, on a local currency basis, were up 164.1% in the
second quarter of 2010, primarily due to improvements in the construction and agriculture markets
served by those facilities.
Cost of Sales.
Cost of sales was $41.3 million in the second quarter of 2010, an increase of
$10.6 million, or 34.5%, compared to cost of sales of $30.7 million in the second quarter of 2009.
As a percent of sales, our cost of sales represented 66.9% of our net sales in the second quarter
of 2010 compared to 78.5% of net sales in the second quarter of 2009. The decrease in our cost of
sales percentage was driven primarily by the positive impact that higher production volumes in the
second quarter of 2010 had on our absorption of manufacturing costs, and by overall cost
improvements, partially offset by a less favorable product mix than in the second quarter of 2009.
Of our total cost of sales increase of 34.5% in 2010, the impact of our increased sales volumes
represented approximately 53.6 percentage points and the shift in product mix represented 13.5
percentage points. Offsetting these increases, our higher absorption of manufacturing overhead and
overall cost improvements and foreign exchange favorably impacted the total cost of sales increase
by approximately 29.5 and 3.1 percentage points, respectively.
29
Selling, Technical and Administrative Expenses.
Selling, technical and administrative (ST&A)
expenses increased $2.0 million, or 28.6%, to $9.0 million in the second quarter of 2010 from $7.0
million during the second quarter of 2009. As a percentage of net sales, ST&A was 14.6% in the
second quarter of 2010 compared to 17.9% in the second quarter of 2009. The decrease in ST&A as a
percentage of net sales primarily resulted from our continued successful efforts to control
discretionary costs in 2010, which are increasing at lower rates than our overall sales volume
increases. Of our total ST&A increase of 28.6%, higher incentive compensation expense as a result
of our improved profitability level in the second quarter of 2010 compared to the second quarter of
2009 represented approximately 29.0 percentage points.
We spent $1.3 million, or 2.1% of our net sales, on product research and development in the
second quarter of 2010, compared to $1.2 million or 3.1%, of our net sales for the second quarter
of 2009.
Interest Expense.
Interest expense decreased to $1.7 million in the second quarter of 2010
from $2.0 million in the second quarter of 2009 due to our aggregate purchases of $30.0 million of
our senior notes on the open market between November 2009 and May 2010. These repurchased notes
are being held by us in treasury, which reduced our fixed interest expense for 2010 as compared to
2009. We did not have any borrowings under our variable rate domestic or Italian bank facilities
in the second quarters of 2010 or 2009. Included as a component of Interest expense in our
Consolidated Statements of Operations is the amortization of deferred financing costs for both 2010
and 2009 and the amortization of a consent payment related to our senior notes amendment in
February 2010 for the three months ended June 30, 2010.
Interest Income
. We invested our excess cash in various short-term interest bearing
investments. Interest income was $0.1 million in the second quarter of both 2010 and 2009.
Other Income (Expense), Net
. Other expense was $1.0 million in the second quarter of 2010
compared to $0.2 million of income reported in the second quarter of 2009. The components of Other
income (expense), net for the three months ended June 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in millions)
|
|
Components of Other income (expense), net
|
|
|
|
|
|
|
|
|
Net realized and unrealized trading (losses) gains
|
|
$
|
(0.3
|
)
|
|
$
|
0.3
|
|
Foreign currency transaction gains (losses)
|
|
|
|
|
|
|
(0.2
|
)
|
Write off of deferred financing fees and consent payment
|
|
|
(0.7
|
)
|
|
|
|
|
Other
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
Total Other income (expense), net
|
|
$
|
(1.0
|
)
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
Income Taxes.
We recorded a tax provision from our continuing operations of $3.1 million for
the quarter ended June 30, 2010, compared to a tax benefit of $0.1 million in the second quarter of
2009. Our effective rate of 36.5% in the second quarter of 2010 differs from the current U.S.
statutory rate of 35.0% primarily as a result of the impact of non-deductible expenses on our
worldwide taxes.
Discontinued Operations.
The loss from discontinued operations, after income taxes of $0.2
million for the three months ended June 30, 2009 consists primarily of adjustments to amounts
previously reported in discontinued operations and related legal and professional expenses.
30
First Six Months of 2010 Compared to the First Six Months of 2009
The following tables show our net sales by market segment and geographic location for the six
months ended June 30, 2010 and 2009:
Sales by Principal Market
Six Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
% of Sales
|
|
Market
|
|
2010
|
|
|
2009
|
|
Construction and Mining
|
|
|
47.0
|
%
|
|
|
34.8
|
%
|
Aircraft and Defense
|
|
|
16.7
|
%
|
|
|
28.6
|
%
|
Agriculture
|
|
|
14.1
|
%
|
|
|
14.6
|
%
|
Truck
|
|
|
9.3
|
%
|
|
|
9.4
|
%
|
Performance Friction
|
|
|
6.1
|
%
|
|
|
7.3
|
%
|
Specialty Friction
|
|
|
3.6
|
%
|
|
|
4.3
|
%
|
Alternative Energy
|
|
|
3.2
|
%
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
Sales by Geographic Location of our Manufacturing Facilities
Six Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
% of Sales
|
|
Location
|
|
2010
|
|
|
2009
|
|
United States
|
|
|
69.1
|
%
|
|
|
73.7
|
%
|
Italy
|
|
|
25.7
|
%
|
|
|
22.3
|
%
|
Other foreign
|
|
|
5.2
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
The following table summarizes our results of operations for the six months ended June 30,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
2010
|
|
|
Sales
|
|
|
2009
|
|
|
Sales
|
|
|
|
(dollars in millions)
|
|
Net sales
|
|
$
|
115.1
|
|
|
|
100.0
|
%
|
|
$
|
83.4
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
$
|
77.5
|
|
|
|
67.3
|
%
|
|
$
|
63.0
|
|
|
|
75.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
37.6
|
|
|
|
32.7
|
%
|
|
$
|
20.4
|
|
|
|
24.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, technical and administrative expenses
|
|
$
|
17.9
|
|
|
|
15.6
|
%
|
|
$
|
14.5
|
|
|
|
17.4
|
%
|
Income from operations
|
|
$
|
19.5
|
|
|
|
16.9
|
%
|
|
$
|
5.7
|
|
|
|
6.8
|
%
|
Interest expense
|
|
$
|
(3.5
|
)
|
|
|
-3.0
|
%
|
|
$
|
(4.0
|
)
|
|
|
-4.8
|
%
|
Interest income
|
|
$
|
0.1
|
|
|
|
0.1
|
%
|
|
$
|
0.3
|
|
|
|
0.4
|
%
|
Other income (expense), net
|
|
$
|
(1.5
|
)
|
|
|
-1.3
|
%
|
|
$
|
0.1
|
|
|
|
0.1
|
%
|
Income tax provision
|
|
$
|
5.3
|
|
|
|
4.6
|
%
|
|
$
|
0.8
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, after income taxes
|
|
$
|
9.3
|
|
|
|
8.1
|
%
|
|
$
|
1.2
|
|
|
|
1.4
|
%
|
Discontinued operations, net of tax
|
|
$
|
|
|
|
|
0.0
|
%
|
|
$
|
(0.2
|
)
|
|
|
-0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9.3
|
|
|
|
8.1
|
%
|
|
$
|
1.0
|
|
|
|
1.2
|
%
|
31
Net Sales.
Our net sales for the first six months of 2010 were $115.1 million, an increase of
$31.7 million or 38.0% from the same period in 2009. Sales increases during the period resulted
primarily from the overall economic improvement in most of our end-markets as customers started the
reordering process and shipments began to increase in response to increasing orders and production.
Of our total sales increase of 38.0% in the first six months of 2010, volume represented
approximately 40.9 of the total percentage point increase and pricing decreases accounted for a
reduction of approximately 2.5 to the total percentage point change. The impact of foreign
exchange was not material to the change between 2010 and 2009.
Our sales to the construction and mining market, our largest, were up 86.5% in the first six
months of 2010 compared to 2009, primarily as a result of new product introductions and an
expansion of activity as customers replenished inventory levels. Sales to our agriculture market
were up 32.6% in the first six months of 2010 compared to 2009, primarily as a result of improved
market conditions, especially in Europe. Sales to our heavy truck market increased 36.4% during the
first six months of 2010 compared to the first six months of 2009, due to increased freight volumes
being shipped with existing vehicles and new truck builds. Sales in our friction direct
aftermarket that we service through the VelveTouch
®
and Hawk Performance
®
brand names increased
13.8% in the first six months of 2010 compared to the first six months of 2009. Although a small
percentage of our total net sales, sales to the alternative energy market were up 354.6% in the
first six months of 2010 compared to the first six months of 2009 as shipments of units in this
product line continued to increase. Our aggregate aircraft and defense markets were down 19.5% in
the first six months of 2010 compared to the first six months of 2009 as one of our primary defense
customers aligned its inventory levels, partially offset by an increase in aircraft demand.
Net sales from our foreign facilities represented 30.9% of our total net sales in the first
six months of 2010 compared to 26.3% for the comparable period of 2009. The increase in our
foreign facility revenues as a percent of total revenue was due primarily to improvements in the
end markets that we serve in the European and Asian markets. Sales at our Italian operation, on a
local currency basis, were up 60.6% in the first six months of 2010, compared to the first six
months of 2009, and sales at our Chinese operation, on a local currency basis, were up 128.9%
during the same period, primarily due to improvements in the construction and agriculture markets
served by those facilities.
Cost of Sales.
Cost of sales was $77.5 million during the first six months of 2010, an
increase of $14.5 million, or 23.0%, compared to cost of sales of $63.0 million in the first six
months of 2009. As a percent of sales, our cost of sales represented 67.3% of our net sales in the
first six months of 2010 compared to 75.5% of net sales in the comparable period of 2009. The
improvement in our cost of sales percentage was driven by primarily by the positive impact that
higher production volumes had on our absorption of manufacturing costs, and by overall cost
improvements, offset somewhat by a less favorable product mix than in the first six months of 2009
and increased labor costs. Of our total cost of sales increase of 23.0% in 2010, increased sales
and production volumes represented 33.7 percentage points and an unfavorable shift in product mix
represented 12.0 percentage points. Offsetting these components, our higher absorption of
manufacturing overhead and
overall cost improvements and the effect of foreign exchange favorably impacted the total cost
of sales increase by 22.2 and 0.5 percentage points, respectively.
Selling, Technical and Administrative Expenses.
ST&A expenses increased $3.4 million, or
23.4%, to $17.9 million in the first six months of 2010 from $14.5 million during the first six
months of 2009. As a percentage of net sales, ST&A was 15.6% in the first six months of 2010
compared to 17.4% in the first six months of 2009 as we continued our successful efforts to control
discretionary spending, which has not increased at a rate proportional to our rapid sales volume
increase. Of our total ST&A increase, higher incentive compensation related to our improved
profitability level in the first half of 2010 compared to 2009 represented 23.9 percentage points
of the total increase.
We spent $2.4 million on product research and development in the first six months of 2010 and
2009, or 2.1% and 2.9% of our net sales, respectively.
Interest Expense.
Interest expense decreased to $3.5 million in the first six months of 2010
compared to $4.0 million in the first six months of 2009 due to our purchase of an aggregate of
$30.0 million of our senior notes in the open market between November 2009 and May 2010. These
notes are being held by us in treasury, which reduced our fixed interest expense for 2010 as
compared to 2009. We did not have any borrowings under our variable rate domestic or Italian bank
facilities in the first six months of 2010 or 2009. Included as a component of Interest expense in
our Consolidated Statements of Operations is the amortization of deferred financing fees for both
2010 and 2009 and the amortization of a consent payment related to our senior notes amendment in
February 2010, or the six months ended June 30, 2010.
Interest Income.
We invested our excess cash in various short-term interest bearing
investments. Interest income was $0.1 million in the first six months of 2010 compared to $0.3
million during the first six months of 2009. The decrease was the result of lower invested cash
balances during the period ended June 30, 2010 compared to the six months ended June 30, 2009.
Effective interest rates remain at historically low levels in all periods presented.
32
Other Income (Expense), Net
. Other expense was $1.5 million in the first six months of 2010
compared to $0.1 million of income reported in the first six months of 2009. The components of
Other income (expense), net for the six months ended June 30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in millions)
|
|
Components of Other income (expense), net
|
|
|
|
|
|
|
|
|
Net realized and unrealized trading (losses) gains
|
|
$
|
(0.2
|
)
|
|
$
|
0.3
|
|
Foreign currency transaction losses
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
Senior notes consent solicitation third-party expenses
|
|
|
(0.6
|
)
|
|
|
|
|
Write off of deferred financing fees and consent payment
|
|
|
(0.7
|
)
|
|
|
|
|
Other
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other income (expense), net
|
|
$
|
(1.5
|
)
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
Income Taxes.
We recorded a tax provision from our continuing operations of $5.3 million for
the six months ended June 30, 2010, compared to a tax provision of $0.8 million in the comparable
period of 2009. Our effective rate of 36.2% in the six months ended June 30, 2010 differs from the
current U.S. statutory rate of 35.0% primarily as a result of the impact of non-deductible expenses
on our worldwide taxes. Our worldwide provision for income taxes is based on annual tax rates for
the year applied to all sources of income.
Discontinued Operations.
The loss from discontinued operations, after income taxes of $0.2
million for the six months ended June 30, 2009 consists primarily of adjustments to amounts
previously reported in discontinued operations and related legal and professional expenses.
Liquidity, Capital Resources and Cash Flows
Our primary liquidity requirements are for capital expenditures, for funding our day-to-day
working capital requirements and to pay interest on our indebtedness. Our access to capital
resources that provide liquidity has not been affected by the recent volatility in the global
credit markets. We are not aware of any material trend, event or capital commitment which would
potentially adversely affect our liquidity. To date, we have not been materially adversely
affected by customer, supplier or subcontractor credit problems or bankruptcies, and we continue to
monitor and take measures to limit our credit exposure.
We believe that our net cash and short-term investment position, coupled with our availability
under our bank facilities and factoring programs, 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.
33
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:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(dollars in millions)
|
|
LIQUIDITY
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55.9
|
|
|
$
|
47.2
|
|
Short-term investments
|
|
$
|
4.9
|
|
|
$
|
35.9
|
|
Working capital
(1)
|
|
$
|
91.8
|
|
|
$
|
113.3
|
|
Current ratio
(2)
|
|
|
2.9 to 1.0
|
|
|
|
4.6 to 1.0
|
|
Net debt as a % of capitalization
(3) (4)
|
|
|
N/A
|
|
|
|
N/A
|
|
Average number of days sales in accounts receivable
|
|
|
66 days
|
|
|
|
58 days
|
|
Average number of days sales in inventory
|
|
|
89 days
|
|
|
|
80 days
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in millions)
|
|
CASH FLOWS
|
|
|
|
|
|
|
|
|
Cash provided by operating activities of continuing operations
|
|
$
|
10.9
|
|
|
$
|
1.3
|
|
Cash provided by (used in) investing activities of continuing operations
|
|
|
28.1
|
|
|
|
(12.8
|
)
|
Cash used in financing activities of continuing operations
|
|
|
(27.7
|
)
|
|
|
(11.0
|
)
|
Effect of exchange rates on cash
|
|
|
(2.6
|
)
|
|
|
|
|
Cash (used in) provided by discontinued operations
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
8.7
|
|
|
$
|
(22.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Working capital is defined as total current assets minus total current
liabilities.
|
|
(2)
|
|
Current ratio is defined as total current assets divided by total current
liabilities.
|
|
(3)
|
|
Net debt is defined as gross long-term debt, including current portion, and
short-term borrowings, less cash and short-term investments. Capitalization is defined
as net debt plus shareholders equity.
|
|
(4)
|
|
We have zero net debt at June 30, 2010 and December 31, 2009 because our cash,
cash equivalents and short-term investments were $3.7 million and $6.0 million greater
than gross total debt, respectively.
|
Cash and cash equivalents increased $8.7 million to $55.9 million as of June 30, 2010, from
$47.2 million at December 31, 2009. Short-term investments decreased $31.0 million at June 30,
2010 from the December 31, 2009 balance. The primary driver of the decrease in aggregate cash and
equivalents and short-term investments in the first half of 2010 was our purchase of $20.0 million
of our senior notes in open market transactions in May of 2010. The combined decrease also
resulted in part from our payments of $3.4 million of bi-annual interest on our senior notes and
$3.7 million of annual incentive compensation, which had been accrued in our 2009 annual reporting
period. In the first quarter of 2010, we also made a $1.5 million payment to consenting senior
note holders to allow for additional stock repurchases, and we repurchased $7.2 million of our
common stock pursuant to our stock repurchase programs in the first half of 2010. These uses of
cash were partially offset by our positive cash generated from operating activities in 2010.
In assessing liquidity, we review certain working capital measurements. At June 30, 2010, our
working capital was $91.8 million, a decrease of $21.5 million from December 31, 2009. The
decrease in working capital in the first half of 2010 was primarily due to a decrease in our
overall cash and equivalents and short-term investments position experienced during the period for
the reasons noted in the prior paragraph. Our accounts receivable and inventory levels are
evaluated through the computation of days sales outstanding and inventory turnover. Days sales in
accounts receivable was 66 days at June 30,
2010, compared to 58 days at December 31, 2009, primarily due to our overall increase in sales
volumes in 2010 compared to the fourth quarter of 2009, including increases at our Italian
facility, which extends longer terms to its customers, which is customary in the European market.
We have not experienced any significant change in accounts receivable collectability, and continue
to monitor the financial condition of our major customers. As part of our working capital
management in an effort to accelerate our cash flows and reduce our credit exposure to certain
customers, we sell certain trade accounts receivable to third party financial institutions on a
non-recourse basis pursuant to factoring agreements. The amount sold varies each month based on
the amount of underlying receivables and the cash flow needs of the Company.
34
Days sales in inventory was 89 days at June 30, 2010, compared to 80 days at December 31,
2009, primarily resulting from increased inventory levels to support our higher customer demand and
sales volumes. We continue to focus on controlling overall inventory levels while maintaining
levels sufficient to meet current customer demands.
At June 30, 2010, our current ratio was 2.9, a decrease from the current ratio of 4.6 at
December 31, 2009. The reduction in the current ratio in the first half of 2010 was due primarily
to the overall reduction of our net cash and investment balances and the increase in accounts
payable resulting from increased spending levels for inventory and expense items to levels
commensurate with our increased current business demands.
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, changes in customer and supplier credit policies, and changes in customer payment
patterns.
Cash provided by our operating activities from continuing operations in the first half of 2010
was $10.9 million, compared to cash provided by operating activities of $1.3 million in the first
half of 2009. We experienced higher levels of sales in the first half of 2010 compared to the same
period in 2009 due to the impact of the economic recovery, which necessitated increased purchases
of inventories and service supplies, resulting in higher accounts payable at June 30, 2010,
generating cash of $13.4 million in the period. Offsetting this source of operating cash flows
were increased levels of accounts receivable and inventory, which are uses of operating cash flow.
Investing Activities
Our investing activities from continuing operations provided $28.1 million in the six months
ended June 30, 2010 compared to using $12.8 million in the six months ended June 30, 2009. Net
short-term investment purchases and sales through the second quarter of 2010 provided cash of $30.7
million compared to using cash of $8.0 million in the 2009 period.
During the first quarter of 2010, our Chinese facility utilized cash of $0.5 million to
acquire a former key supplier.
We used $2.1 million and $4.8 million for the purchase of property, plant and equipment in the
six months ended June 30, 2010 and 2009, 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 $7.0 million to $9.0 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 $27.7 million and $11.0 million in the first half of
2010 and 2009, respectively.
During the first quarter of 2010, we solicited consents from holders of our non-affiliated
senior notes to amend the indenture governing our senior notes to permit an extension of our stock
repurchase program. In connection with this consent solicitation, we paid a $1.5 million fee to
consenting senior note holders, which is being amortized to interest expense over the remaining
life of our senior notes. We used $7.2 million and $11.2 million to repurchase shares of our
common stock pursuant to our stock repurchase programs in the six month periods ended June 30,
2010, and 2009, respectively. At June 30, 2010, the approximate dollar value of shares that may be
purchased under our stock repurchase program was $18.1 million.
During the second quarter of 2010, we purchased $20.0 million of senior notes in open market
transactions. We had no outstanding borrowings under our domestic or Italian bank facilities at
June 30, 2010 or December 31, 2009.
We received cash proceeds from the exercise of stock options of $0.4 million and $0.3 million
in the first half of 2010 and 2009, respectively. Also during the first half of 2010, we
recognized a tax benefit from the exercise of incentive stock options of $0.7 million.
35
During the first half of 2009, we received $0.3 million in government grants. 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
In May 2010, the Company purchased $20.0 million of its senior notes in open market purchases.
The remaining principal balance outstanding is $57.1 million as of June 30, 2010. Annual interest
accrues at 8
3
/
4
% per annum, or $5.0 million per year, which is paid semi-annually on January 1 and
July 1.
There have been no other material changes to the table presented in our Annual Report on Form
10-K for the year ended December 31, 2009. The table excludes our liability for unrecognized tax
benefits, which totaled $0.6 million at June 30, 2010 and $1.2 million at December 31, 2009, since
we cannot predict with reasonable reliability the timing of cash settlements with the respective
taxing authorities.
Debt
The following table summarizes the components of our indebtedness:
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in millions )
|
|
Senior notes
|
|
$
|
57.1
|
|
|
$
|
77.1
|
|
Unamortized consent payment
|
|
|
(1.0
|
)
|
|
|
|
|
Bank facilities (domestic and foreign)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
56.1
|
|
|
$
|
77.1
|
|
|
|
|
|
|
|
|
In May 2010, we purchased $20.0 million of our outstanding senior notes in the open market.
These notes have not been formally retired by the Company, but have been treated as an
extinguishment of debt for accounting purposes. After taking into the account the above
transaction, the remaining principal balance of senior notes outstanding as of June 30, 2010 is
$57.1 million.
At June 30, 2010, we had no borrowings under our credit facilities. A total of $21.1 million
was available for borrowing under our domestic revolving credit facility based on eligible
collateral. Additionally, we had $2.8 million (2.3 million Euro) available to borrow under our foreign
short-term line of credit.
As of June 30, 2010 and December 31, 2009, 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.
|
|
|
ITEM 3.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
There have been no material changes in our exposure to market risk since December 31, 2009.
See Item 7A in our
Form 10-K
for the year ended December 31, 2009, filed with the SEC on March 10,
2010.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
. As of June 30, 2010, we evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as such term is
defined in Rule 13a-15(e) of the Exchange Act. The evaluation was carried out under the supervision
of and with the participation of our management, including our principal executive officer and
principal financial and accounting officer. Based on this evaluation, our Chief Executive Officer
and
Chief Financial Officer each concluded that as of the end of the period covered by this
report, our disclosure controls and procedures were effective.
36
Changes in Internal Control Over Financial Reporting
. There have been no changes in our
internal control over financial reporting during the quarter ended June 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II
|
|
|
ITEM 1.
|
|
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 asserted. In our opinion, the outcome of these lawsuits will not have a material adverse
effect on our financial position, results of operations or cash flows. We are not aware of any
material legal proceedings instituted against us during the second quarter of 2010 or of any
material developments in any of the legal proceedings previously disclosed in our Form 10-K for the
year ended December 31, 2009 filed with the SEC on March 10, 2010, except as disclosed below.
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) Hawks 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 Hawks 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) Hawks periodic disclosure requirements related to the foregoing. Hawk was also
contacted by the U.S. Department of Justice in Cleveland, Ohio (the DOJ) in connection with the
DOJs related investigation.
On July 23, 2010, the staff of the SEC (the Staff) notified Hawk that it completed its
investigation and will not recommend enforcement action against Hawk relating to its investigation.
With the completion of the SEC investigation, Hawk does not believe that the DOJ will continue its
related investigation with respect to Hawk.
On August 4, 2009, Joseph J. Levanduski, our then Chief Financial Officer, received a
notification from the staff of the SEC (the Staff), commonly referred to as a Wells Notice. This
notice indicated that the Staff intended 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 SECs 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.
In a July 23, 2010 letter, the Staff informed Mr. Levanduski that the investigation has been
completed as to Mr. Levanduski and the Staff did not intend to recommend any enforcement against
him.
We have no material changes to the risk factors previously disclosed in our Form 10-K for the
year ended December 31, 2009 filed with the SEC on March 10, 2010, other than as noted below.
The recently enacted federal healthcare legislation could impact the healthcare benefits required
to be provided by us and cause our compensation and administrative costs to increase, potentially
reducing our net income and adversely affecting our cash flows.
The recently enacted federal healthcare legislation contains provisions that could materially
impact our future healthcare and administrative costs. Although we cannot yet determine the
legislations ultimate impact on us, the new law could
increase our compensation and administrative compliance costs which would reduce our net
income and adversely impact our cash flows.
37
Any currently proposed or to-be-proposed U.S. or foreign legislation concerning climate change or a
publicly perceived risk associated with climate change could potentially negatively impact our
financial position, results of operations or cash flows.
Changing environmental and energy laws and regulations, including those relating to climate
change and greenhouse gas emissions, new interpretations of existing laws and regulations,
increased governmental enforcement or other developments in the United States and foreign countries
where we operate could result in increased operating and capital expenditure costs for us. To the
extent these new laws or regulations cause changes in the supply, demand or available sources of
energy that we need to operate our facilities or affect the availability or costs of raw materials
we use in our operations, our financial position, results of operations or cash flows could be
negatively impacted.
|
|
|
ITEM 2.
|
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
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 June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Value of Shares That may yet
|
|
|
|
Total Number
|
|
|
|
|
|
|
Part of Publicly
|
|
|
be Purchased Under the
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Announced Plans or
|
|
|
Plans or Programs
(1)
|
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
|
Programs
(1)
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/1/10 to 4/30/10
|
|
|
96,241
|
|
|
$
|
21.16
|
|
|
|
274,664
|
|
|
$
|
19.4 million
|
|
5/1/10 to 5/31/10
|
|
|
59,032
|
|
|
$
|
22.52
|
|
|
|
333,696
|
|
|
$
|
18.1 million
|
|
6/1/10 to 6/30/10
|
|
|
0
|
|
|
$
|
|
|
|
|
333,696
|
|
|
$
|
18.1 million
|
|
|
|
|
(1)
|
|
On February 19, 2010, our Board of Directors approved a plan to repurchase up to $25.0
million of our shares of Class A common stock in the open market, through privately
negotiated transactions or otherwise, in accordance with securities laws and regulations
(the plan). After June 30, 2010, the value of additional shares that could be repurchased
pursuant to the plan was $18.1 million. The plan expires when the aggregate repurchase
price limit is met, unless terminated earlier by our Board of Directors.
|
|
|
|
ITEM 3.
|
|
DEFAULTS UPON SENIOR SECURITIES
|
None
ITEM 4.
Reserved
|
|
|
ITEM 5.
|
|
OTHER INFORMATION
|
None
38
(a) Exhibits
|
|
|
|
31.1
|
*
|
|
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
31.2
|
*
|
|
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.1
|
*
|
|
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.2
|
*
|
|
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
*
|
|
Filed or Furnished herewith
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
HAWK CORPORATION
|
|
Date: August 5, 2010
|
By:
|
/s/ RONALD E. WEINBERG
|
|
|
|
Ronald E. Weinberg
|
|
|
|
Chairman of the Board and Chief Executive Officer
(principal executive officer)
|
|
|
|
|
Date: August 5, 2010
|
By:
|
/s/ JOSEPH J. LEVANDUSKI
|
|
|
|
Joseph J. Levanduski
|
|
|
|
Chief Financial Officer
(principal financial and accounting officer)
|
|
39
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