HWK Hawk Corp

 

 

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 September 30, 2010

Commission File No. 001-13797

HAWK CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware		34-1608156
(State of incorporation)		(I.R.S. Employer Identification No.)

200 Public Square, Suite 1500, Cleveland, Ohio 44114
(Address of principal executive offices) (Zip Code)

(216) 861-3553
(Registrant’s 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):

Large Accelerated Filer o		Accelerated Filer þ		Non-accelerated Filer o		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 October 31, 2010, the registrant had the following number of shares of common stock outstanding:

Class A Common Stock, $0.01 par value:		7,759,063
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 September 30, 2010.

 

 

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			38
Item 4. Controls and Procedures			38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities			39
Item 4. Removed and Reserved			40
Item 5. Other Information			40
Item 6. Exhibits			40
SIGNATURES			40
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HAWK CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, except share data)

		September 30				December 31
		2010				2009
		(Unaudited)				(Note A)
Assets
Current assets:
Cash and cash equivalents		$	47,845			$	47,206
Short-term investments			25,440				35,930
Accounts receivable, less allowance of $626 in 2010 and $985 in 2009			42,535				27,578
Inventories:
Raw materials			7,945				5,503
Work-in-process			17,290				10,886
Finished products			12,829				11,106
Total inventories			38,065				27,495
Deferred income taxes			1,694				1,305
Other current assets			3,316				5,686
Total current assets			158,895				145,200
Property, plant and equipment:
Land and improvements			1,159				1,166
Buildings and improvements			19,089				19,264
Machinery and equipment			104,493				102,365
Furniture and fixtures			8,517				8,327
Construction in progress			2,599				2,186
			135,857				133,308
Less accumulated depreciation			90,573				86,212
Total property, plant and equipment			45,284				47,096
Other assets:
Finite-lived intangible assets			5,600				6,015
Deferred income taxes			59				289
Other			6,499				5,892
Total other assets			12,158				12,196
Total assets		$	216,337			$	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) .

HAWK CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, except share data)

		September 30				December 31
		2010				2009
		(Unaudited)				(Note A)
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable		$	33,514			$	16,861
Accrued compensation			12,089				7,324
Accrued interest			1,261				3,385
Accrued taxes			4,003				345
Other accrued expenses			4,301				3,979
Total current liabilities			55,168				31,894
Long-term liabilities:
Long-term debt, net of unamortized consent payment of $980 in 2010			56,110				77,090
Deferred income taxes			2,948				2,873
Pension liabilities			1,090				2,509
Other accrued expenses			12,590				12,656
Total long-term liabilities			72,738				95,128
Shareholders’ equity
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			—				—
Additional paid-in capital			55,058				55,323
Retained earnings			59,597				42,011
Accumulated other comprehensive loss			(4,285	)			(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			88,431				77,470
Total liabilities and shareholders’ equity		$	216,337			$	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) .

HAWK CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, except per share data)

		Three Months Ended September 30								Nine Months Ended September 30
		2010				2009				2010				2009
Net sales		$	70,145			$	43,452			$	185,233			$	126,814
Cost of sales			48,843				29,883				126,336				92,856
Gross profit			21,302				13,569				58,897				33,958
Operating expenses:
Selling, technical and administrative expenses			8,706				7,305				26,568				21,764
Amortization of finite-lived intangible assets			138				138				415				415
Total operating expenses			8,844				7,443				26,983				22,179
Income from operations			12,458				6,126				31,914				11,779
Interest expense			(1,426	)			(2,048	)			(4,945	)			(6,078	)
Interest income			133				125				278				394
Other income (expense), net			1,922				1,583				389				1,706
Income from continuing operations, before income taxes			13,087				5,786				27,636				7,801
Income tax provision			4,655				2,003				9,917				2,806
Income from continuing operations, after income taxes			8,432				3,783				17,719				4,995
Loss from discontinued operations, after income tax benefit of $6 and $12 for the three and nine months ended September 30, 2010 and $7 and $100 for the three and nine months ended September 30, 2009			(10	)			(13	)			(21	)			(187	)
Net income		$	8,422			$	3,770			$	17,698			$	4,808
Earnings per share:
Basic earnings per share:
Income from continuing operations, after income taxes		$	1.08			$	0.46			$	2.25			$	0.59
Discontinued operations, after income taxes			—				—				—				(0.02	)
Net earnings per basic share (1)		$	1.08			$	0.46			$	2.24			$	0.57
Diluted earnings per share:
Income from continuing operations, after income taxes		$	1.03			$	0.45			$	2.16			$	0.57
Discontinued operations, after income taxes			—				—				—				(0.02	)
Net earnings per diluted share		$	1.03			$	0.45			$	2.16			$	0.55
Average shares outstanding — basic			7,757				8,059				7,840				8,304
Average shares and equivalents outstanding — diluted			8,118				8,315				8,144				8,566
Income available to common shareholders		$	8,385			$	3,733			$	17,586			$	4,696

HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

		Nine Months Ended September 30
		2010				2009
Cash flows from operating activities
Net income		$	17,698			$	4,808
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations, net of tax			21				187
Depreciation and amortization			6,363				5,988
Deferred income taxes			(430	)			(337	)
Amortization of discount on investments			(43	)			(105	)
(Gain) loss on sale or disposal of fixed assets			(28	)			58
Write-off of deferred financing fees and consent payment			694				—
Share based compensation			530				756
Changes in operating assets and liabilites:
Accounts receivable			(15,433	)			10,680
Inventories			(10,919	)			13,010
Other assets			1,230				(780	)
Accounts payable			16,760				(14,798	)
Accrued expenses			6,692				(7,536	)
Pension accounts, net			(448	)			(3,213	)
Other			273				1,447
Net cash provided by operating activities of continuing operations			22,960				10,165
Net cash used in operating activities of discontinued operations			(21	)			(187	)
Cash flows from investing activities
Purchases of available for sale securities			(108,736	)			(108,880	)
Proceeds from available for sale securities			119,452				106,000
Purchases of property, plant and equipment			(3,821	)			(6,948	)
Proceeds from sale of property, plant and equipment			1				—
Acquisition of business			(447	)			—
Net cash provided by (used in) investing activities of continuing operations			6,449				(9,828	)
Cash flows from financing activities
Payments on long-term debt			(20,000	)			—
Proceeds from stock options			432				429
Payment of consent fee for senior notes indenture modification			(1,512	)			—
Stock repurchase			(7,247	)			(11,245	)
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			(112	)			(112	)
Net cash used in financing activities of continuing operations			(27,775	)			(11,043	)
Effect of exchange rate changes on cash			(974	)			723
Net cash provided by (used in) continuing operations			660				(9,983	)
Net cash used in discontinued operations			(21	)			(187	)
Net increase (decrease) in cash and cash equivalents			639				(10,170	)
Cash and cash equivalents at beginning of year			47,206				62,520
Cash and cash equivalents at end of period		$	47,845			$	52,350

HAWK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 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 nine month period ended September 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 Company’s revenue is generated primarily in the U.S. and Italy. The Company’s largest customer, Caterpillar Inc., represented approximately 25.8% and 15.8% of consolidated net sales in the nine month periods ended September 30, 2010 and September 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. Subsequent Event

On October 14, 2010, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Carlisle Companies Incorporated (Carlisle), a publicly traded Delaware corporation and HC Corporation, a Delaware corporation and wholly-owned subsidiary of Carlisle (the Purchaser). Under the terms of the Merger Agreement, Carlisle has commenced a tender offer to purchase all of the outstanding shares of the Company’s Class A common stock at a price of $50.00 per share, net to the seller in cash, without interest, less any applicable withholding taxes, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated November 1, 2010 (the Offer to Purchase) and in the related Letter of Transmittal (as amended or supplemented from time to time, the Letter of Transmittal, which together with the Offer to Purchase constitute the Offer), each of which was filed with the Securities and Exchange Commission (SEC) on November 1, 2010. The Merger Agreement provides, among other things, that following the consummation of the Offer and subject to the satisfaction and waiver of the conditions set forth in the Merger Agreement and in accordance with the relevant provisions the Delaware General Corporate Law and other applicable law, the Purchaser will merge with and into the Company, with the Company being the surviving corporation (the Merger and together with the Offer and the other transactions contemplated by the Merger Agreement, the Transaction).

The Company expects the Offer and the Merger to be completed during the fourth calendar quarter of 2010. The consummation of the Offer and Merger are subject to various closing conditions, including the tender of a majority of the shares of the Company’s Class A common stock, the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary conditions. The Offer is not subject to a financing condition.

3. Recent Accounting Developments

There were no new significant accounting updates or guidance that became effective for the Company commencing with its third quarter of 2010. The Company’s 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.

4. Discontinued Operations

There are no remaining assets or liabilities classified as discontinued operations recorded in the Consolidated Balance Sheets at September 30, 2010 or December 31, 2009. Through September 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 Company’s results of discontinued operations:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2010				2009				2010				2009
Loss from discontinued operations, before income taxes		$	(16	)		$	(20	)		$	(33	)		$	(287	)
Income tax benefit			(6	)			(7	)			(12	)			(100	)
Loss from discontinued operations, after income taxes		$	(10	)		$	(13	)		$	(21	)		$	(187	)

5. Fair Value Measurements

The Company follows the accounting guidance 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 Company’s 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 Company’s 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 September 30, 2010 and December 31, 2009. Following is a description of the valuation methodologies used for assets measured at fair value as of September 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 Moody’s 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).

The following tables set forth the Company’s financial assets and liabilities that were recorded at fair value on a recurring basis as of September 30, 2010 and December 31, 2009:

September 30, 2010		Total				Level 1				Level 2				Level 3
Assets:
Money market funds			4,976				4,976				—				—
Commercial paper			19,996				—				19,996				—
Other trading (1)
Guaranteed income fund			1,012				—				—				1,012
Mutual funds:
Growth funds (2)			1,500				1,500				—				—
Value funds (3)			697				697				—				—
Index fund (4)			140				140				—				—
International fund (5)			516				516				—				—
Fixed income fund (6)			119				119				—				—
Specialty fund — real estate (7)			112				112				—				—
Total assets at fair value		$	29,068			$	8,060			$	19,996			$	1,012
Liabilities:
Deferred compensation plan liability (1)		$	4,096			$	3,084			$	—			$	1,012
Total liabilities at fair value		$	4,096			$	3,084			$	—			$	1,012
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

At September 30, 2010, the fair values of the Company’s 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 Company’s 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 participant’s 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 Company’s deferred compensation liability is comprised of mutual funds and is classified as Level 1. The total net realized and unrealized gains totaled $358 and $177 for the three months ended September 30, 2010 and 2009, respectively and $196 and $474 for the nine months ended September 30, 2010 and 2009, respectively, and are included in Other income (expense), net in the Company’s 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 nine months ended September 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 September 30, 2010 and December 31, 2009, certain of the Company’s 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 either September 30, 2010 or December 31, 2009.

During the period ended September 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 plan’s Level 3 assets for the nine months ended September 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)			532
Balance — September 30, 2010		$	1,012

Guaranteed Income Fund

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.

The Consolidated Balance Sheets as of September 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 plan’s 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 September 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:

		September 30, 2010								December 31, 2009
		Carrying Value				Fair Value				Carrying Value				Fair Value
Long-term financial liabilities
Long-term debt (1)		$	57,090			$	57,090			$	77,090			$	76,994

6. 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 September 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.

The following is a summary of the Company’s available-for-sale securities as of September 30, 2010 and December 31, 2009, by contractual maturity dates:

		Available-for-Sale Securities
						Gross Unrealized				Gross Unrealized				Estimated Fair Value
September 30, 2010		Amortized Cost				Gains				Losses				(Net Carrying Amount)
Other debt securities — due in one year or less		$	25,442			$	—			$	(2	)		$	25,440
December 31, 2009
Other debt securities — due in one year or less		$	35,941			$	—			$	(11	)		$	35,930

As of September 30, 2010, there is an unrealized loss on available-for-sale securities of $2 ($1 net of tax) 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 $10 ($6 net of tax) and unrealized losses of $106 ($68 net of tax) were reclassified out of Accumulated other comprehensive (loss) income and into earnings during the nine months ended September 30, 2010 and 2009, respectively.

At September 30, 2010, the Company had one investment with an amortized cost totaling $19,998 that was in an unrealized loss position totaling $2 and the Company determined that the gross unrealized loss on this investment is temporary in nature. The gross unrealized loss on this investment was due to changes in interest rates and, at September 30, 2010, the Company had both the intent and ability to hold this investment through its maturity date in the fourth quarter of 2010, at which time it expects to receive the full maturity value of $20,000.

7. 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.

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 nine months ended September 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 nine months ended September 30, 2010. As of September 30, 2010, $980 of the consent fee remains to be amortized. After taking into account the above transactions, the remaining principal balance of senior notes outstanding as of September 30, 2010 is $57,090.

8. 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 Company’s credit and factoring facilities. Specifically, under the terms of Company’s 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 $5,601 (4,115 Euro) and $6,931 (4,750 Euro) at September 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 nine months ended September 30, 2010 and 2009 were $10, $34, $9 and $31, respectively, and are included in Selling, technical and administrative expenses in the Consolidated Statements of Operations.

During the nine months ended September 30, 2010 and 2009, the Company sold $28,842 and $5,499, respectively of trade accounts receivable under its factoring agreements. The sale of these receivables accelerated the collection of the Company’s 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 September 30, 2010 and December 31, 2009, the Company had $3,034 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 nine months ended September 30, 2010 and 2009 of $39, $55, $0 and $0, respectively; this amount is recorded in Other income (expense), net in the Consolidated Statements of Operations.

9. Comprehensive Income

Comprehensive income is as follows:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2010				2009				2010				2009
Net income		$	8,422			$	3,770			$	17,698			$	4,808
Amortization of prior service cost and net loss, net of tax			336				231				644				718
Unrealized (loss) gain on available for sale securities, net of tax			(1	)			8				6				(16	)
Foreign currency translation gain (loss)			4,262				1,688				(1,654	)			1,753
Comprehensive income		$	13,019			$	5,697			$	16,694			$	7,263

10. Stock Compensation Plan

The Company’s 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 September 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 $120 and $205 of compensation expense for the three month periods ended September 30, 2010 and 2009, respectively and $431 and $756 for the nine month periods ended September 30, 2010 and September 30, 2009, respectively. Net cash proceeds from the exercise of stock options were $432 and $429 for the nine month periods ended September 30, 2010 and 2009, respectively, and the intrinsic value of stock options exercised was $1,897 and $329 for the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, there was $599 of total unrecognized compensation cost related to the non-vested share-based compensation arrangements under the Company’s stock compensation plans. The remaining cost is expected to be recognized over the next 1.9 years. The Company classifies its stock option expense principally in Selling, technical and administrative expenses in its Consolidated Statements of Operations.

Stock-based option activity during the nine months ended September 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 September 30, 2010			613,220			$	9.66			4.6 yrs.				$	20,609
Exercisable at September 30, 2010			452,219			$	7.53			3.5 yrs.				$	16,164

There were no options granted during the nine months ended September 30, 2010.

The aggregate intrinsic value in the table above represents the total pre-tax difference between the $43.27 closing price of shares of common stock of the Company on September 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 Company’s 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 Company’s common stock at the date of grant of $18.71 per share. The Company recorded $9 and $59 of compensation expense for the restricted stock awards for the three and nine months ended September 30, 2010, respectively, and $0 and $135 for the income tax gross-up paid on behalf of the participants for the three and nine months ended September 30, 2010, respectively, within Selling, technical, and administrative expense in its Consolidated Statement of Operations. As of September 30, 2010, there were 8,000 shares of restricted stock outstanding and unvested. As of September 30, 2010, the remaining unrecognized compensation cost related to the unvested restricted stock awards was $128, which is expected to be recognized over the remaining vesting period of 3.4 years.

The following table summarizes restricted stock activity for the nine months ended September 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 September 30, 2010			8,000			$	150

The intrinsic value of the unvested restricted shares as of September 30, 2010 was $346.

11. 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.

On February 19, 2010, the Company’s 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 September 30, 2010, the provisions of the Company’s credit facility, indenture and supplemental indenture allowed the Company to purchase up to the board-approved plan amount of $25,000 of its common stock. The Company made no purchases of its common stock during the three months ended September 30, 2010. From February 19, 2010 through June 30, 2010, the Company purchased $6,930 of its common stock under the new plan.

12. Employee Benefits

A summary of the components of net periodic benefit cost of the Company’s defined benefit pension plans for the periods presented in the Consolidated Statements of Operations is as follows:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2010				2009				2010				2009
Components of net periodic pension cost:
Service cost		$	101			$	106			$	312			$	253
Interest cost			455				457				1,378				1,363
Expected return on plan assets			(594	)			(440	)			(1,786	)			(1,319	)
Amortization of prior service cost			60				60				180				180
Recognized net actuarial loss			174				284				534				924
Settlement expense			189				—				189				—
Net periodic pension cost of defined benefit plans		$	385			$	467			$	807			$	1,401

During the third quarter of 2010, the Company’s Canadian pension plan incurred a partial settlement of its projected benefit obligation resulting from a significant lump sum death benefit distribution. The settlement expense of $189 has been recorded as a component of Cost of sales in the 2010 Consolidated Statement of Operations.

The Company contributed $1,267 of cash in the first nine months 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 $49 in cash during the remainder of 2010 for the 2010 plan year, for total cash contributions of $1,314.

13. Income Taxes

The effective income tax rate from continuing operations for the nine months ended September 30, 2010, was 35.9%, compared to 36.0% for the nine months ended September 30, 2009. The Company’s 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 Company’s worldwide taxes.

The total amount of unrecognized tax benefits as of September 30, 2010, was $692 (including $138 of accrued interest and penalties) the recognition of which would have had an effect of $644 on the continuing operations effective tax rate. The change in the unrecognized tax benefits from December 31, 2009 was due primarily to the Company’s 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 nine months ended September 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.

14. Earnings Per Share

Basic and diluted earnings per share are computed as follows:

		Three Months Ended September 30								Nine Months Ended September 30
		2010				2009				2010				2009
Income from continuing operations, after income taxes		$	8,432			$	3,783			$	17,719			$	4,995
Less: Preferred stock dividends			37				37				112				112
Income from continuing operations, after income taxes available to common shareholders		$	8,395			$	3,746			$	17,607			$	4,883
Net income		$	8,422			$	3,770			$	17,698			$	4,808
Less: Preferred stock dividends			37				37				112				112
Net income available to common shareholders		$	8,385			$	3,733			$	17,586			$	4,696
Weighted average shares outstanding (in thousands) :
Basic weighted average shares outstanding			7,757				8,059				7,840				8,304
Diluted:
Basic weighted average shares outstanding			7,757				8,059				7,840				8,304
Dilutive effect of stock options			361				256				304				262
Diluted weighted average shares outstanding			8,118				8,315				8,144				8,566
Earnings per share:
Basic earnings from continuing operations, after income taxes		$	1.08			$	0.46			$	2.25			$	0.59
Discontinued operations, after income taxes			—				—				—				(0.02	)
Net earnings per basic share (1)		$	1.08			$	0.46			$	2.24			$	0.57
Diluted earnings from continuing operations, after income taxes		$	1.03			$	0.45			$	2.16			$	0.57
Discontinued operations, after income taxes			—				—				—				(0.02	)
Net earnings per diluted share		$	1.03			$	0.45			$	2.16			$	0.55

A weighted average of 0 and 7,112 options were not included in the calculation of diluted weighted shares outstanding because they were anti-dilutive for the three and nine months ended September 30, 2010, respectively. A weighted average of 228,044 and 251,044 options were not included in the calculation of diluted weighted shares outstanding because they were anti-dilutive for the three and nine months ended September 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 Company’s 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.

15. 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 Company’s 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 September 30, 2010 and December 31, 2009, consolidating condensed Statements of Operations for the three and nine months ended September 30, 2010 and 2009 and consolidating condensed Statements of Cash Flows for the nine months ended September 30, 2010 and 2009.

•

Hawk Corporation (Parent) combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries consisting of the Company’s 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 Company’s 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.

Supplemental Consolidating Condensed
Balance Sheet

		September 30, 2010
						Combined				Combined
						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		(dollars in thousands)
Assets
Current assets:
Cash and cash equivalents		$	24,816			$	2			$	23,027			$	—			$	47,845
Short-term investments			19,995				—				5,445				—				25,440
Accounts receivable, net			—				20,162				22,373				—				42,535
Inventories, net			—				25,126				13,242				(303	)			38,065
Deferred income taxes			932				—				762				—				1,694
Other current assets			554				542				2,220				—				3,316
Total current assets			46,297				45,832				67,069				(303	)			158,895
Investment in subsidiaries			75,800				—				—				(75,800	)			—
Inter-company advances, net			—				2,763				(2,763	)			—				—
Property, plant and equipment, net			—				33,107				12,177				—				45,284
Other assets:
Finite-lived intangible assets			—				5,600				—				—				5,600
Other			6,499				—				59				—				6,558
Total other assets			6,499				5,600				59				—				12,158
Total assets		$	128,596			$	87,302			$	76,542			$	(76,103	)		$	216,337
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable		$	120			$	19,086			$	14,308			$	—			$	33,514
Accrued compensation			4,275				4,552				3,262				—				12,089
Accrued interest			1,261				—				—				—				1,261
Accrued taxes			1,770				—				2,231				2				4,003
Other accrued expenses			1,855				2,095				339				12				4,301
Total current liabilities			9,281				25,733				20,140				14				55,168
Long-term liabilities:
Long-term debt, net			56,110				—				—				—				56,110
Deferred income taxes			2,601				—				347				—				2,948
Other			4,428				5,542				3,710				—				13,680
Inter-company advances, net			(32,255	)			23,812				8,760				(317	)			—
Total long-term liabilities			30,884				29,354				12,817				(317	)			72,738
Shareholders’ equity			88,431				32,215				43,585				(75,800	)			88,431
Total liabilities and shareholders’ equity		$	128,596			$	87,302			$	76,542			$	(76,103	)		$	216,337

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