Hawk Corporation

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Hawk Corporation

200 Public Square, Suite 30-5000
Cleveland, Ohio 44114-2301
U.S.A.
Telephone: (216) 861-3553
Fax: (216) 861-4546
Web site: http://www.hawkcorp.com

Public Company
Incorporated: 1989 as The Hawk Group of Companies, Inc.
Employees: 1,680
Sales: $197.3 million (2002)
Stock Exchanges: New York
Ticker Symbol: HWK
NAIC: 551112 Offices of Other Holding Companies

Hawk Corporation is a Cleveland public company that manufactures specialized components across four product groups. The Wellman Products Group is a leading producer of friction-related assemblies used in the aerospace industry, trucks, motorcycles, mountain bikes, construction vehicles, agricultural vehicles, off-road vehicles, and industrial vehicles. Wellman products are distributed around the world and manufactured in plants located in North America, Europe, and China. Hawk's Precision Components Group manufactures advanced powder metal parts used in a wide range of applications: fluid power, trucks, home appliances, power tools, lawn and garden equipment, construction equipment, office equipment, and automotive products. Hawk's Motor Group supplies rotors for use in large and small household appliances as well as automated office machines. Finally, the Hawk Performance Group manufactures high-performance parts, such as gears, bearings, driveshafts, bellhousings, and starters for use in a variety of applications, including high-performance auto, severe-duty fleet, motor sports, emergency vehicles, light truck, motorcycle, snowmobile, and military.

Establishing Hawk in 1989

Hawk Corporation was founded in Cleveland in 1989 by Ronald E. Weinberg and Norman C. Harbert. Weinberg was born in Memphis, Tennessee, and educated at Harvard, where he earned a bachelor's degree in business and an M.B.A. from the Harvard Business School. He launched his career in New York City, first with the accounting firm of Arthur Andersen & Co. and later as an investment banker with Wertheim & Co. Weinberg had risen to the post of vice-president of corporate finance at Wertheim when in 1975 a Harvard classmate, Jeffrey Cole, head of National Corp., convinced him to strike out on his own, move to Cleveland, and start investing in companies. Weinberg helped to form Intercapco Inc., a venture capital company. Through Intercapco he became involved in the leveraged buyout of a local manufacturing company, Anderson International Corp. By default, Weinberg became the company's chief executive officer, which proved to be an unpleasant experience. Weinberg sold out in 1983 and started Collins & Weinberg to arrange acquisitions and provide management services. When partner Richard Collins left, the firm became known as Weinberg Capital Corp. Taking advantage of the contacts he made from his Wall Street days, Weinberg invested in a slate of companies, intentionally avoiding the assumption of majority control. One of his minority stakes was in Cleveland Magazine. When Gerald H. Gordon, the general manager of Sun Newspapers, a small independent chain, met with Weinberg to discuss his desire to buy Cleveland Magazine, they instead dwelled on the potential of Sun Newspapers. The two men became partners to purchase Sun Newspapers, with Weinberg supplying the financial expertise and Gordon tasked with running the operation. It was this type of delineation of roles that would later be employed at Hawk.

Representing Weinberg in the Sun transaction was a well-connected attorney named Byron Krantz. Weinberg and Krantz had become acquainted at a party shortly after Weinberg had moved to Cleveland and the two started doing business together. Two years after they completed the Sun deal, they were on a flight together when Weinberg told Krantz about a friend's idea. As Weinberg had done in publishing, his friend suggested he could find a partner with experience in manufacturing, roll up small manufacturers and create a major manufacturing company. Krantz immediately recommended that Weinberg meet with Norman Harbert, who had a wealth of manufacturing experience. Then the CEO of Warren, Ohio-based Ajax Magnethermic Corp., a heating equipment maker, and the owner and chairman of Maverick Tube Corp., Harbert also had 22 years of experience at Reliance Electric on his resume. Coincidentally, he was eager to move back to Cleveland and was looking for a business partner. He had a company lined up to buy but needed someone with financial experience to help him complete it. Krantz, who was a Maverick director, arranged a Sunday breakfast meeting. Weinberg and Harbert "hit it off immediately," according to Harbert, and they agreed to work together.

Friction Products: First Acquisition in 1981

The company in which Harbert was interested was Friction Products, a Medina, Ohio, company that made brake pads and discs for airliners and motorcycles, and transmission components for trucks, farm equipment, and construction equipment. It had a strong share of its niche market, a position that Weinberg preferred. They bought Friction Products, which they tucked into a corporation they formed: The Hawk Group of Companies, Inc. Hawk was drawn from their initials: "HA" from Harbert, "W" for Weinberg, plus "K" from Krantz, the man who had brought the partners together. At the same time, they bought a second business, Logan Metal Co., an Akron, Ohio, metal-stamping company. Harbert ran Hawk, while Weinberg scouted for complementary acquisitions in order to fulfill his dream of building a large manufacturing concern. A key tool to grow the business that Hawk employed from the outset was the issuance of stock options to middle management, in effect creating a entrepreneurial spirit in the company.

Over the next five years, Hawk grew "slow and steady"—in the words of Weinberg—with little equity and a modest amount of debt. The only expansion during this period was realized by internal means. Hawk Brake was established in Medina to produce high-performance, polymer-based brake materials. It was not until June 1994 that Hawk completed its third acquisition, buying Heisel Inc., located in Campbellsburg, Indiana. The company made parts from metal powders for use in the fluid power and hydraulics industries. With Heisel in the fold, Hawk topped the $100 million mark in annual revenues in 1994. An even more significant acquisition took place a year later, when in June 1995 Hawk paid $60 million in cash to MLC Corp. for S.K. Wellman Ltd., a deal that held the potential to double Hawk's annual sales overnight. The addition of Well-man was beneficial on a number of levels. Although Friction Products manufactured similar items, Wellman primarily served the industrial market while Friction Products concentrated on the aircraft industry. But because the manufacturing operations were the same, the two companies could trade off on capacity if needed. Both companies also had strong research and development efforts, which when integrated promised to generate even greater levels of innovation. Moreover, Wellman brought with it a European and Asian market presence that Friction Products lacked and could leverage to pursue overseas sales. One of Wellman's four plants, in fact, was located in Italy. The other three were located in Ohio, Tennessee, and Ontario. In order to pull off the Wellman acquisition, Hawk relied on Weinberg's financial experience to refinance the Hawk slate of companies. Part of this effort included reincorporating in Delaware and formally bringing in the subsidiaries under an umbrella company. This move also set up Hawk to eventually make an initial public offering (IPO) of stock. A further step in this direction came in October 1996 when the company adopted its current name, Hawk Corporation.

Before going public, however, Hawk completed two more acquisitions. The first, the $12.1 million cash and stock purchase of Hutchinson Foundry Products company, closed in January 1997. Alton, Illinois-based Hutchinson was a rotor manufacturer. To fund the acquisition as well as to pay down debt, Hawk, prior to completing the deal, made a $100 million private bond offering and also secured a $25 million revolving line of credit through a subsidiary of one of the lead underwriters of the offering. In August 1997, Hawk completed its second acquisition of the year, paying $16.4 million in cash for Sinterley, Inc., a manufacturer of powder metal parts and powder metal products located in Solon Mills, Illinois.

Completing the IPO in May 1998

Hawk announced in November 1997 its intention to make an IPO of common stock. It planned to use part of the proceeds to redeem $30 million in 12 percent senior subordinated notes issued in 1995, and spend another $1.75 million to redeem 1,733 of more than 6,000 preferred shares outstanding. Management planned to reserve the balance of the funds for capital expenditures and future acquisitions. The offering was scheduled for January 1998, the same month that the Monica Lewinsky scandal rocked the Clinton administration and the entire nation. The uncertainty of the final outcome of the scandal, in turn, rattled the stock market. Hawk's IPO was postponed, in the hope that conditions would improve. The company tried again in May, following a grueling two-week road show that took company officials across the United States and to Europe to meet with prospective investors. The offering, lead-managed by Schroder & Co. along with co-managers Lehman Brothers and McDonald & Co. Securities Inc., was completed on May 12, 1998. Shares sold at $17. Had Hawk gone through with the IPO four months earlier, the stock would have likely been priced at $13 or $14. In the end the company netted $87.3 million. Now that Hawk was a public company, Weinberg and Harbert widened the level of management eligible for stock options. A month after its offering, Hawk completed another acquisition, paying $9.1 million in cash and other considerations for Clearfield Powdered Metals, Inc. Based in Clearfield, Pennsylvania, the company manufactured precision powder metal parts including bearings, bushings, sleeves, and washers, and structural parts such as cams, collars, and gears.

Company Perspectives:

HAWK Corporation is looking forward to continued success within its current industries, and is excited about the realm of possibilities for future expansion into additional markets.

In the years prior to its IPO, Hawk had grown at a rapid clip, but starting in 1999, its first full year as a public company, it began to face some serious challenges that were the result of factors beyond management's control. Asian economies softened, while markets such as agriculture, mining, and construction experienced rough years. All of these factors hurt Hawk's business. Nevertheless, the company posted record results at the end of 1999, with revenues improving to $187.4 million. On the other hand, net income of $6.3 million was a 30.8 percent decrease over the previous year. Much of the gain in sales was due to a pair of acquisitions. In March 1999 Hawk purchased Allegheny Powder Metallurgy, Inc. for $14.5 million plus other considerations. The Falls Creek, Pennsylvania-based business sold its products mainly to the lawn and garden and automotive markets. A second acquisition was completed in October 1999, the $4.85 million purchase of Quarter Master Industries, Inc., makers of clutches and driveline components for high performance racing cars on both the NASCAR and Indy Racing League circuit. During 1999 Hawk also took steps to grow its business in new directions. Later in the year it opened a plant in Monterrey, Mexico, to produce aluminum die-cast rotors for the motor industry. The company also initiated plans to build a manufacturing plant in China. Another development of note in 1999 was the appointment of former congressman and football player Jack Kemp to the board of directors.

Despite challenging economic conditions, Hawk continued to record improved levels of revenues in 2000, up 7.8 percent to $202.3 million. Net income, however, continued to soften, falling to $5.8 million. Some of this drop was due to the start-up costs related to the recent opening of manufacturing facilities in China and Mexico. Management continued to look for strategic acquisitions, completing two deals during the course of the year. In November it closed on the purchase of Tex Racing Enterprises, Inc., a North Carolina company that manufactured transmissions and drive trains for racing cars. A month later, Hawk paid $480,000 in cash for Net Shape Technologies LLC, which specialized in the relatively new metal injection molding process to produce steel parts that did not require machining. As a result, significant savings could be realized, compared with components made in foundries or machine shops. Hawk had been looking to become involved in this technology for several years and after reviewing a number of companies involved in it concluded that Net Shape possessed the best business plan management had seen. Because of Hawk's diverse number of companies, management in 2000 restructured the company into four business groups, each headed by a president responsible for its financial results.

Economic conditions in 2001 deteriorated enough that Hawk saw its sales decline to $184.4 million and the company posted a loss of $4.3 million. In the first several months of the year the commercial and general aviation markets were troubled, and the situation would only worsen following the terrorist attacks of September 11, 2001. There was also softening in the construction industry and agricultural market. Hawk was forced to cut costs, including the termination of 12 percent of its domestic workforce, some 150 jobs. Another challenging year followed, with Hawk recording a further loss of $18.2 million. Nevertheless, some aspects of the company managed to grow, such as the Wellman Products Group, which benefited from the introduction of new products, and Hawk Racing Group, which also thrived despite difficult economic conditions. In the early months of 2003 Hawk posted better than expected results, mostly due to sales realized through product innovation. But for the company to regain its earlier pattern of growth, and to entertain further acquisitions, it had to rely on the worldwide economy to show significant improvements.

Key Dates:

1989:: The company is formed.
1995:: S.K. Wellman is acquired.
1996:: The company assumes its current name.
1998:: The company goes public.
1999:: Allegheny Powder Metallurgy, Inc. and Quarter Master Industries, Inc. are acquired.
2000:: Tex Racing Enterprises, Inc. and Net Shape Technologies LLC are acquired; the company is restructured into four business groups.
2001:: Sales decline and the company posts a loss of $4.3 million; the domestic workforce is cut by 12 percent.