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Hawk Corp. Reports Operating Results (10-Q/A)

May 06, 2009 | About:

Hawk Corp. (HWK) filed Amended Quarterly Report for the period ended 2009-03-31.

Hawk Corporation is a holding company the principal assets of which consist of the capital stock of its manufacturing subsidiaries. Through its subsidiaries Hawk designs engineers manufactures and markets specialized components principally made from powder metals used in a wide variety of aerospace industrial and commercial applications. The company is a leading worldwide supplier of friction products for brakes clutches and transmissions used in aerospace industrial and specialty applications. Hawk Corp. has a market cap of $134.8 million; its shares were traded at around $15.52 with a P/E ratio of 6.3 and P/S ratio of 0.5. Hawk Corp. had an annual average earning growth of 3.4% over the past 5 years.

Highlight of Business Operations:

Cost of Sales. Cost of sales was $32.3 million during the first quarter of 2009, a decrease of $16.1 million, or 33.3%, compared to cost of sales of $48.4 million in the first quarter of 2008. The primary drivers of the reduction in our cost of sales in the first quarter of 2009 were decreased sales and production volumes through all of our manufacturing facilities, which represented approximately 24.8 percentage points of the total cost of sales decrease. Additionally, product mix represented 6.0 percentage points of the total decrease of 33.3% during the quarter. The effect of foreign currency exchange rates accounted for 2.5 percentage points of our total cost of sales decrease of 33.3% during the first quarter of 2009. As a percent of sales, our cost of sales represented 72.9% of our net sales in the first quarter of 2009 compared to 73.6% of net sales in the first quarter of 2008. The improvement in our cost of sales percentage was driven by labor reductions and a benefit from product mix partially offset by the lower production volumes and the effect of foreign currency exchange rates on our cost of sales. During the first quarter of 2009, we reduced our global production workforce by approximately 20.0% from December 31, 2008 levels in response to production requirements.

Gross Profit. Gross profit was $12.0 million during the first quarter of 2009, a decrease of $5.4 million, or 31.0%, compared to gross profit of $17.4 million in the first quarter of 2008. Our gross profit margin improved to 27.1% of our net sales in the first quarter of 2009 compared to 26.4% of our net sales in the first quarter of 2008. The factors impacting the change in gross margin are detailed under Net Sales and Cost of Sales.

Selling, Technical and Administrative Expenses. Selling, technical and administrative (ST&A) expenses decreased $2.2 million, or 22.7%, to $7.5 million in the first quarter of 2009 from $9.7 million during the first quarter of 2008. As a percentage of net sales, ST&A was 16.9% in the first quarter of 2009 compared to 14.7% in the first quarter of 2008. The decrease in ST&A expenses resulted primarily from a decrease in incentive compensation totaling approximately 11.1 percentage points of the 22.7% decrease in response to the lower levels of business activity during the quarter, compared to the first quarter of 2008. Additionally, sales and marketing expenses, down in response to lower demand represented 4.0 percentage points of the total 22.7%. We spent $1.2 million, or 2.7% of our net sales on product research and development in the first quarter of 2009, compared to $1.3 million or 2.0%, of our net sales for the first quarter of 2008.

Income from Operations. As a result of the factors discussed above, income from operations was $4.4 million in the first quarter of 2009, a decrease of $3.1 million or 41.3%, compared to $7.5 million during the first quarter of 2008. Income from operations as a percentage of net sales decreased to 9.9% in the first quarter of 2009 from 11.4% in the same period of 2008 for the reasons discussed above. The effect of foreign currency exchange rates accounted for 5.3 percentage points of our total operating income decrease of 41.3% during the first quarter of 2009.

Net Income. As a result of the factors noted above, we reported net income of $1.6 million in the first quarter of 2009, a decrease of $1.6 million, or 50.0% compared to net income of $3.2 million during the first quarter of 2008.

Cash used in our operating activities from continuing operations in the first quarter of 2009 was $7.6 million, $0.4 million lower than the same period in 2008. The first quarter of our fiscal year historically results in negative cash from operating activities, for reasons that include a ramp up of sales activity with resulting increases in accounts receivable and the use of cash for our payments of bi-annual interest on our Senior Notes, incentive compensation and profit sharing. However, we experienced lower levels of sales in the first quarter of 2009 compared to prior periods due to the impact of the economic slow-down, causing accounts receivable levels to decrease in the period, a source of operating cash flow. During the first quarter of 2009, in addition to the payments noted above, we also made a voluntary supplemental contribution into our domestic pension plans of $3.9 million, which resulted in a decrease in an operating accrual and a use of operating cash. Additionally, we have slowed the level of purchases with inventory and service suppliers in the first quarter of 2009 to reduce inventory levels and control our working capital, which resulted in a u

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