Hawk Announces Record 2008 First Quarter Sales and Income from Operations
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Net sales increase by 21.4% to record $65.8 million
Income from continuing operations, after taxes increases 100.0% to $3.8 million
Company raises earnings guidance for 2008
CLEVELAND, May 9 -- Hawk Corporation (AMEX:HWK)announced today that net sales from continuing operations for the first quarter ended March 31, 2008 increased by 21.4% to a record $65.8 million from $54.2 million in the comparable prior year period. The Company's first quarter 2008 net sales benefited from strong economic conditions in most of its end markets, pricing actions to offset cost increases, favorable foreign currency exchange rates and new product introductions. The effect of foreign currency exchange rates accounted for 6.6% of the total net sales increase of 21.4% during the first quarter of 2008. The Company experienced strong sales growth from all of its facilities in the first quarter of 2008, especially in Italy and China. On a local currency basis, net sales increased 22.5% in Italy and 60.6% in China during the first quarter of 2008 compared to the first quarter of 2007.
Income from continuing operations for the first quarter ended March 31, 2008 was $6.5 million, an increase of $3.0 million, or 85.7%, from $3.5 million in the prior year. Income from continuing operations benefited from the impact of sales volume increases, pricing, foreign currency exchange rates and a continued implementation of the Company's lean manufacturing processes. This increase during the first quarter of 2008 compared to 2007 was partially offset by increases in wages, employee benefits and variable incentive compensation expense, as well as, increases in raw material costs during the quarter.
Ronald E. Weinberg, Hawk's Chairman and CEO, said, "We are very pleased with our first quarter 2008 results. We achieved record sales and earnings from continuing operations during the quarter as a result of a strong global economy in our industrial and performance automotive markets, served by our Wellman friction business. As a result of our decision to focus our management resources on the friction products business, we recently announced a plan to sell our performance racing segment. This will allow us to focus all of our resources on maintaining our world leadership position in the development and manufacture of friction products." Mr. Weinberg continued, "We continue to pursue acquisitions and organic growth in the friction products segment. Our capital expenditure program for the full year 2008 should allow us to broaden our base of current business while adding new products and customers. Our geographic expansion continues to show favorable results as our foreign operations continue to register healthy quarter over quarter sales increases. The results that we have achieved in the first quarter of 2008 give us confidence about the growth potential we see for the balance of the year."
For the quarter ended March 31, 2008, the Company reported income from continuing operations, after income taxes, of $3.8 million, or $0.40 per diluted share, an improvement of $1.9 million or 100.0%, compared to $1.9 million, or $0.20 per diluted share, in the comparable prior year period.
For the three months ended March 31, 2008, the Company reported net income of $3.2 million, or $0.33 per diluted share, a decrease of $9.6 million, compared to $12.8 million in the first quarter of 2007. The net income of $3.2 million included an impairment loss of $0.8 million ($0.5 million net of tax), or $0.05 per diluted share, related to the performance racing discontinued operation. The first quarter of 2007 included a gain on the sale of the Company's precision components segment of $15.0 million ($11.8 million, net of tax), or $1.25 per diluted share.
Business Segment ----------------
During the first quarter of 2008, the Company continued its strategic plan to focus its resources on the friction products business and committed to sell its performance racing segment. This segment engineers and manufactures premium branded clutch, transmissions and driveline systems for the performance racing market. As a result of the decision to sell the performance racing segment, the Company's consolidated financial statements and other information provided in this press release reflect the racing segment as a discontinued operation for all periods presented. After reclassifying the racing segment to discontinued operations, the Company has one remaining operating segment, the friction products segment. The friction products segment manufactures friction products used in off-highway, industrial, agricultural, performance and aircraft applications. The Company will retain its Hawk Performance(R) brake business, which has always been a component of its friction products segment.
Working Capital and Liquidity -----------------------------
At March 31, 2008, working capital increased by $3.8 million to $118.1 million from $114.3 million at December 31, 2007. The increase in working capital was largely the result of increased accounts receivable levels at March 31, 2008 as a result of first quarter 2008 sales increases and a decrease in accounts payable levels during the quarter. The increase was partially offset by lower cash levels during the quarter as a result of senior note interest, incentive compensation and profit sharing payments during the first quarter of 2008.
As of March 31, 2008, the Company had no borrowings under its revolving credit facility and $19.8 million was available for additional borrowings under that facility based on its eligible collateral.
During the first quarter of 2008, the Company spent $3.4 million on capital expenditures compared to $2.5 million during the first quarter of 2007.
Business Outlook ----------------
With the performance racing segment being treated as a discontinued operation, the Company is revising its guidance to reflect only the expected results of its friction products segment for the 2008 year.
Based on the strong performance of its global industrial markets, the Company expects that its net sales from continuing operations for 2008 will increase between 13.5% and 15.8% to between $245.0 million and $250.0 million compared to 2007 net sales from continuing operations of $215.9 million.
The Company is increasing its guidance with respect to pre-tax income from continuing operations for the full year 2008 to between $21.0 million and $23.0 million, an increase of between 7.7% and 18.0% compared to 2007 pre-tax income from continuing operations of $19.5 million. The Company expects to benefit from improved operating leverage due to increased sales volumes and continued operating improvements through the balance of 2008. Although the Company experienced limited commodity inflationary pressures in the first quarter of 2008, the revised pre-tax income from continuing operations for the balance of 2008 factors in expected escalation of steel and other commodity prices as well as increased incentive compensation expense. These costs will partially offset the sales volume benefits. The Company will seek to minimize the effect of any material cost increases through efficient purchasing and potential price increases. However, the ability of the Company to pass on the expected cost increases to its customers is dependent on market conditions.
The Company continues to anticipate that its capital spending in 2008 will be $15.0 million which will be used primarily to increase capacity, to continue its lean manufacturing projects, and for equipment expenditures for its fuel cell and carbon composite product line initiatives. The Company expects depreciation and amortization expense to be approximately $8.0 million in 2008. The Company believes that its 2008 effective tax rate will be approximately 41.0%.
Based on current market conditions and the Company's position in its friction markets, the Company believes that it has significant opportunities to gain additional new business. While the Company does not believe that these opportunities will result in meaningful net sales increases in 2008, the Company may incur additional capital expenditures and other expenses above the current forecast for 2008 as it seeks to take advantage of these opportunities. The Company can provide no assurance that these opportunities will be realized.
Hawk Corporation is a leading supplier of friction materials for brakes, clutches and transmissions used in airplanes, trucks, construction and mining equipment, farm equipment, recreational and performance automotive vehicles. Headquartered in Cleveland, Ohio, Hawk has approximately 1,100 employees at 11 manufacturing, research, sales and administrative sites in 7 countries.
