使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good morning, ladies and gentlemen. Welcome to the Hawk Corporation announce its second-quarter results conference call. Today's call is being recorded.
I would like to turn the conference over to Mr. Ronald Weinberg. Please go ahead, sir.
Ronald Weinberg - Chairman and CEO
Thank you, and good morning, everyone, and thanks for joining us today. The purpose of this call is to discuss our 2010 second-quarter and six-month year-to-date results. Conducting the call today are myself, Ron Weinberg; and with me is Chris DiSantis, President and COO; Joe Levanduski, Senior VP and CFO; and Tom Gilbride, Vice President of Finance.
As you know, we released our earnings today for the second quarter that ended June 30. During the call today, we'll review the financials and give you an operating report on the business. And then as usual, after that, we'll be glad to entertain questions.
I would like to remind you the statements made during this conference call, which are not historical facts, may be considered forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. For further information concerning issues that could materially affect financial performance related to forward-looking statements, please refer to our quarterly earnings releases and period filings with the SEC.
I'm going to make a few comments first and then turn this over to Chris.
We were pleased with the quarter, and as you would expect, we think it came out very well. I think it's an interesting combination of the global economy, particularly in the sectors that we deal with, especially in our mining and infrastructure construction, have been very strong. And in addition, there's another phenomenon that we're pleased to note that we really were talking about throughout '09, and that's that we had won some new business, significant NBAs, we call them; yet, given the downturn in '09, we really hadn't seen them, but we knew they would show up. And that is what's happening.
So we're seeing a combination of a global economy and then a combination of our competitive results, which we're very pleased are showing up.
There will undoubtedly be a question which I'll answer in advance, and that is about the announced project we have to review our strategic alternatives. We don't really have anything to announce that's new, but it's ongoing, and we just want to let everyone know we're aware of it and working on it.
Our guidance remains unchanged. We'll be discussing that further with you when Chris and Joe talk in just a minute.
So with that as a prelude, I will turn this over to Chris DiSantis, who will cover the operations.
Chris DiSantis - President and COO
Thank you, Ron. Let me start by going through our revenue numbers and then I'll provide some color on the markets.
Net sales in the second quarter of 2010 were $61.7 million, up $22.6 million or 57.8% from the same period in 2009. The way that that breaks down is volume represented 63 points of that growth and was offset by an unfavorable foreign exchange impact of 3.1 points, and also an unfavorable price impact, primarily due to surcharge adjustments of 2.1 points.
On to the market comparatives. The mining and construction businesses, which represents almost half of our total sales, increased dramatically by 126.2% compared to the second quarter of 2009 as a result of a few things -- taking substantial marketshare in 2008/2009 from competitors; winning new programs; and from right now, seeing particularly strong demand from customers like Caterpillar.
The long-term market outlook for these segments remains very positive. There are even some economists that are calling for a long-term super cycle for the next 20 years caused, in part, by trends in urban population growth in developing countries.
In Aircraft and Defense, this segment was down 7.1% in sales compared to second-quarter of last year. This was due to a major inventory adjustment by the US military, which is expected to continue for the next six to 12 months. No share was lost as far as military is concerned. This was offset, however, by an increase in our aircraft sales, which came through a combination of both better market conditions as well as launching some new products in the aftermarket.
Our Agriculture segment saw sales increase 58.2% versus the second quarter of last year. This is primarily from our Italian facility as a result of higher demand from the larger European-based OEMs, who, in turn, are continuing to see very nice equipment demands in the BRIC countries.
In heavy truck, sales are up nicely, 48.2% versus the second quarter of '09. This is due to increased freight volumes being shipped with existing vehicles. It's also a result of the impact of new truck builds here in North America, which is improving.
Our direct aftermarket business sold under the Velvet Touch and HAWK Performance brands; saw sales increase 16.7% versus same-period last year. This segment we expect is going to continue to benefit in the future from strategies that include things like launching a more expensive rotor line; offering faster delivery and shorter lead-time on industrial products; and building an entirely new power sports aftermarket business.
We expect this year or early in 2011, our first major [Arbin] composite sales are going to be reported in this segment, most likely in drag racing, brake pads and clutch applications, where we're starting to see great technical success, which is validated that the technology works.
In Alternative Energy, we see sales in this dynamic segment up almost 3 times versus the second-quarter of '09, as volumes continue to increase with UTC Power. And also our level of value-added dollars that we provide per fuel cell is also up substantially versus 2009, as we're performing more operations for them than we ever have before. We're particularly excited by this market, given the progress that our customers made in making the units cost-competitive, and also the continued consumer and government support behind clean energy technologies.
With respect to our foreign businesses, we've seen sales increase to 30.8% of our total in the second quarter of 2010. This compares to 24.6% in the same period last year. At our Italian operation, we see sales up 111.8% in euros versus the second quarter of '09, and sales at our Chinese operation in RMB are up 164.1% versus the same period last year. Also, one thing I want to point out that was, remember, in 2009, that these two facilities were the ones most severely impacted by the global recession versus our domestic entities, which have a far more diverse revenue base.
In the last earnings call, I told you that we did an excellent job in 2009 in closing on new business and increasing the number of products that the Company has in its portfolio of solutions that it offers to customers. And I think you can now see that realized in the numbers. The large improvement that you see in the economics of the Company is driven by the fact that we did remain very aggressive in selling in 2009, despite the downturn. And we did continue to make the smart investments in R&D to give the Company the competitive edge that it needs.
Regarding India, I can tell you that we have determined the location will be in Chennai, a strategic selection for us that works both logistically with supply chain partners, as well as it works with respect to the customers that we're going to be serving, in terms of where they are. The facility is being built for the purpose of fulfilling in-country demand for friction products. It is not being built as a low-cost manufacturing point that's going to be exporting product around the world. We expect a land purchase will be made before year-end and that we will construct a facility in 2011, which will be completely operational in 2012.
I'm also very pleased to report that since the beginning of this year, we have brought on an additional 250 employees into the Company. And we still have open positions that we're trying to fill. This brings us to near all-time high employment levels. Basically, what's going on is that the demand for our products continues to surge, and we see that as sustainable going forward, certainly through the balance of this year.
With that, I'll now turn it over to our CFO, Joe Levanduski, to talk more about the financial results. Joe?
Joe Levanduski - SVP and CFO
Thanks, Chris. With the strength of our sales initiatives and top-line growth, as discussed by Chris, as a segueway to my portion of the presentation, I'd like to start by looking at our gross profit that we reported for the quarter.
Gross profit increased to $20.4 million or approximately 33% of net sales compared to $8.4 million or roughly 21.5% in the second quarter of 2009. The Company benefited from higher sales volumes and a continuation of our lean initiatives throughout our global operations.
Building, technical, and administrative expenses increased by $2 million quarter-to-quarter represented 14.6% of sales for the quarter ending June 30, 2010 compared to 17.9% in the second quarter of 2009. Higher incentive compensation expense, which is the variable component of our compensation structure, accounted for nearly all of the increase, driven by the improved profitability levels in the second quarter of 2010.
That resulted in operating income of approximately $11.2 million for the second quarter of the 2010 year, an increase of approximately $10 million or 833% from the prior-year period. As a percent of net sales, our operating margin represented approximately 18.2%, so a very nice pull-through. For the six-month period, our income from operations was approximately $19.5 million, up 242% from the comparable prior-year period.
In the second quarter, our effective tax rate was approximately 36.5%. It was negatively impacted by an adjustment at one of our foreign locations by approximately $193,000. This was a one-time correction. We do not anticipate further adjustments related to this matter. And had this adjustment not been necessary, our effective tax rate for the quarter would have been approximately 34.3%, which is still in line with our full-year guidance of approximately 35% effective tax rate for the 2010 year.
As a result of the above items, the Company reported net income of $5.5 million for the second quarter or $0.68 per diluted share. And for the six-month period, our earnings per share is approximately $1.13 per diluted share compared to $0.11 per diluted share in the six-month ending June 30, 2009.
Turning to the balance sheet, the Company's cash and investment position of $60.7 million reflects the Company's actions taken during the year to opportunistically take advantage of our existing share and senior note buyback programs. Significant activities during the six-month period include $20 million of cash consumption to repurchase some of our senior notes; $1.5 million for a bond consent fee; and approximately $7.2 million used to repurchase common stock.
These three actions combined for a $28.7 million usage of cash and contributed to the $22.4 million reduction in cash and investments from our December 31 levels. The positive delta after accounting for these three items demonstrates the Company's ability to generate strong cash flow from our operations.
Our accounts receivable and inventory levels increased, as one would expect in light of the increased sales and production volumes to support our customer demand. Our reported total property plant equipment as of June 30, 2010 actually shows a decline from our December 31, 2009 levels, but it is more reflective of the euro exchange rate difference between the two periods. The spot rate at December 31, 2009 for the euro was approximately $1.43 and it was $1.22 as of June 30, 2010.
Investments in the six-month period totaled approximately $4.8 million of capital investments, and we have reaffirmed our full-year guidance in this area of the capital investment range of approximately $7 million to $9 million.
In our current liability section, our accounts payable of approximately $29 million at June 30, 2010 compares to $16.9 million at December 31, 2009 as a reflective of the support for higher inventory levels to address our increasing customer demand. Accrued compensation increased to $10.6 million from $7.3 million at year-end, driven by a higher incentive compensation being accrued for the year in response to our improved profitability levels and also higher levels of employment, as Chris mentioned.
Our long-term debt was $56.5 million as of June 30 versus $77.1 million at December 31, 2009. The June 30 numbers is net of an unamortized consent payment and reflects our repurchase of $20 million of senior notes in the second quarter of this year. The December 31, 2009 number reflects the Company's repurchase of approximately $10 million of senior notes in the fourth quarter of 2009.
Total shareholder equity improved in relation to our operational results, but was offset by the impact of our common stock repurchase program and a change driven by the euro exchange rate. Total shareholder equity as of June 30 was $75.3 million versus $77.5 million as of December 31, 2009. And while we don't speculate on the exchange rate, this trend has reversed in the third quarter, and the change impacting equity is purely a translation impact and not transactional in nature.
Finally, from our guidance perspective, we are reaffirming our guidance ranges for revenue and operating income for the full-year 2010 as reported in our prior release dated June 23 -- revenues of approximately $225 million to $230 million for the year, which represents a 30.5% to 34.6% increase over 2009 revenues of $172.4 million; and operating income range of approximately $32 million to $35 million, a 91.6% to 109.6% increase over our 2009 operating income levels of $16.7 million.
With that, I will turn the presentation over to Ron Weinberg.
Ronald Weinberg - Chairman and CEO
Okay. Thanks, Joe. At this point, we'll open the call to questions. So, if any of you would like to ask them, tee them up.
Operator
(Operator Instructions). Eli Lustgarten, Longbow.
Eli Lustgarten - Analyst
Good morning, everyone. Nice to see the whole team back together.
Unidentified Company Representative
(laughter) (multiple speakers) We were never gone.
Eli Lustgarten - Analyst
At least publicly. (laughter) And looking at -- these numbers are outstanding (inaudible) and I guess the main question, the first one is, what's going on that is making the second half as slow as you're indicating?
You didn't change guidance, your $19.5 million [EBIT] in the first half of the year. When you took [32] to [35], it's a pretty sharp decline in the second half of the year when we're looking at most markets not really changing profile. So I'm just trying to understand what are the dynamics both internally in the Company and maybe by -- and market segment that's causing a second half that is materially different -- it almost looks like the first quarter almost [previewed once].
Ronald Weinberg - Chairman and CEO
Yes. The reason for that, Eli, it's two or three things. And honestly, some of this will sound familiar to you because it's sort of our usual pattern, but as you know, we go into the second quarter and there are two things -- or the second half, rather.
And there are two things that we do always encounter. Sometimes they will be seasonal inventory holdbacks on the part of customers right at the end of the year. Then we have the seasonally affected shipping days -- Q3 is sometimes holidays and vacation times in Europe, that kind of thing. So we're always cautious about it. And the final thing is we do tend to roll into the last half with a degree of caution and we're doing the same thing this year.
That's our guidance. We're not going to say it's going to be better, but we always do hope and a lot of times we deliver.
Eli Lustgarten - Analyst
I mean [at the start] you had 8.2 million in the first quarter and then I guess 11.2 million in the second, it looks like, in [EBITDA]. And in order to get to the top of your guidance, it has to be equal -- be below even the first quarter. I mean, that's sort of the mathematics that you get in there. So is it just built-in seasonality and conservatism more than anything else that I should look at?
Ronald Weinberg - Chairman and CEO
That's right. Yes, there's no -- there's nothing really hidden there that we're frightened out; we're just -- we're typically cautious. And then there are those seasonal factors.
Eli Lustgarten - Analyst
And then as you're looking at businesses, are you seeing any change in the markets from the second quarter? Do you get any feel for how much is -- I don't think it's called inventory rebuilding, but supply chain rebalancing has taken place. I mean, you're looking -- do you get any sense for business conditions and volumes as we look at -- is there anything -- any business changes at all?
Ronald Weinberg - Chairman and CEO
No, they remain strong across all the end markets. The only exception to that is what I talked about with respect to military, but that's an inventory adjustment on behalf of the government with respect to a handful of part numbers. It's not as if we lost share.
Eli Lustgarten - Analyst
And otherwise everything is pretty much the same. It looks like most of your markets accelerated in the second quarter versus the first quarter in demand. Is that continuing as we got through July? Or is that we've leveled off at these current levels? Or you've got some sense what's going on?
Ronald Weinberg - Chairman and CEO
I don't know that I would comment on continued acceleration. Your first question was, have we seen a deceleration? And the answer to that is no. But I'm not sure I would sign on to a continued acceleration. You may see some in certain areas, but I think it's going along nicely.
Eli Lustgarten - Analyst
And you also indicated pricing, you had negative pricing in the quarter, mostly material surcharge adjustment. Are overall prices holding in that we see the end of material pricing adjustments? Or is that still occurring? Or what's going on pricing-wise across the market?
Ronald Weinberg - Chairman and CEO
I think I could say that you've seen the worst of the pricing adjustments as we expect to make them. There is a lag with respect to how we pass on steel surcharges and those kinds of things to customers. That's why you saw the timing of that in the first half of this year. But no, we expect -- I think I can say we expect stability in pricing going forward.
Eli Lustgarten - Analyst
And how many shares are actually outstanding? You bought back 7.2 million, that's a couple hundred thousand shares at least, depending what your average price was. You got any idea on that -- what does it take your average shares fully diluted outstanding? Does it go under 8 million at this point?
Joe Levanduski - SVP and CFO
Yes, our average basic shares are roughly 7.8 million.
Eli Lustgarten - Analyst
7.8 million and that's what we use going forward at this point?
Joe Levanduski - SVP and CFO
Yes, that would be safe.
Ronald Weinberg - Chairman and CEO
That's not fully diluted -- that's basic.
Joe Levanduski - SVP and CFO
(multiple speakers) That's basic.
Eli Lustgarten - Analyst
That's basic -- 7.8 million is basic? I mean (multiple speakers) --
Joe Levanduski - SVP and CFO
That's the actual shares outstanding.
Eli Lustgarten - Analyst
I'm sorry?
Joe Levanduski - SVP and CFO
It's actual shares outstanding as of today.
Eli Lustgarten - Analyst
Yes, and then so -- the average shares equivalent outstanding diluted were a little over 8 million in this quarter, down from almost [8 -- 1.5 of] down 100,000 shares, so we're going to go about 7.8 million, 7.9 million for that number from now on?
Joe Levanduski - SVP and CFO
The fully diluted?
Ronald Weinberg - Chairman and CEO
No, he's asking if the average [basically] will stay at 7.8 million, 7.9 million.
Eli Lustgarten - Analyst
[It'd be] 7.8 million, 7.9 million, something like that?
Ronald Weinberg - Chairman and CEO
(multiple speakers) We're not buying now, so --.
Joe Levanduski - SVP and CFO
Yes, we've kind of paused the program, if you will, to the strategic alternative exercise that we're doing.
Eli Lustgarten - Analyst
So, but, I mean I'm just saying the shares will go down some more in the next quarter from where they are now -- on a reported basis?
Ronald Weinberg - Chairman and CEO
What you're saying is the average is going to keep going down. (multiple speakers)
Joe Levanduski - SVP and CFO
No, not on a basic side; on the fully diluted, it will.
Eli Lustgarten - Analyst
Yes, alright. Thank you.
Operator
Zahid Siddique, Gabelli & Co.
Zahid Siddique - Analyst
Good morning and congratulations on a good quarter. (multiple speakers) And Joe, welcome back as well. A couple of questions. The first one is on competition. I'm trying to find out who are the competitors to Hawk. And I wanted to hear from you, who do you view as your competitor or competitors?
Ronald Weinberg - Chairman and CEO
It varies by segment. We have a broad array of Friction Products; in different segments, we have different competitors. I'll give you a couple of examples and then ask Chris or Joe to fill in. But, for example, in Europe, [MEBA] is a competitor of ours. There's a company domestically, Carlisle, who is a competitor of ours. The former Raytech, which is now called Friction Holdings, is a competitor of ours. A company called Dynex that's a competitor. And there's probably a few others. I think I've touched on a lot of the majors.
Chris DiSantis - President and COO
There's others like Harbinger. If you're looking at our Performance Racing business, Performance Friction would be a competitor; or Borg-Warner is a competitor. So, everyone kind of has a different niche, though. They're not straight up competitors in every segment, if you know what I mean.
Zahid Siddique - Analyst
Sure. And any of the larger companies, for example, Eaton or maybe Honeywell, do they have any presence -- anyone else? The -- kind of the diversified industrial names?
Chris DiSantis - President and COO
Yes, I mean, Honeywell has a division that's a competitor of ours. But I don't -- so much a competitor.
Ronald Weinberg - Chairman and CEO
The larger industrial companies are not, if you're thinking of, like an Eaton, they're a customer. A very good customer.
You know, typically friction is a very highly specialized niche. And as we talk about it to the financial community a lot, there is a lot of technology, of know-how, of proprietary processes that go into this. And it just typically doesn't move a large industrial to do this unless they have a major entry into it.
Zahid Siddique - Analyst
Okay, that's helpful. Then on your Defense segment, just about a year ago, that was about 30% of your revenues. Today, it's down to 15%. Is that just from the military part of defense customer? Or is there something else going on in there as well?
Chris DiSantis - President and COO
Yes, it's a combined segment kind of like the way we reported mining and construction; so it's aircraft and defense. And the aircraft business is actually doing fine. It's the defense business, primarily, with a handful of parts that we supply to the government.
The US government has some -- how do I characterize this? -- very lumpy requirements with respect to how they order components. So they can order regularly or they can order a couple of years supply and then not order for awhile. And basically, they're in a high inventory position right now, so we haven't lost any share. As a matter of fact, a lot of the parts we provide are under long-term contracts. It's just a question of the demand not being there, you know, so.
Zahid Siddique - Analyst
Okay. And last question is on your carbon composite technology. Last time I think you had mentioned that you were testing some of the technology. Where are you in terms of making it commercial?
Ronald Weinberg - Chairman and CEO
We've had limited -- I would say we've had high technical success so far, which is an absolute precursor and necessary condition to have commercial success. It's a business which we expect to be a material part, you know what I mean, of revenue in 2011 and 2012. This year, we've got a lot of successful [pass-through], we've gotten a lot of small orders. But it's not, you know what I mean, economically meaningful enough yet to report out in terms of the overall results. But it's something that we're very excited about in the future.
Zahid Siddique - Analyst
Thank you.
Operator
(Operator Instructions). Eli Lustgarten, Longbow Securities.
Eli Lustgarten - Analyst
Just one quick question, can you talk a little bit about your fuel cell alternative energy stuff? Which I guess now we're running a couple of million a quarter in sales. But can you give an idea of where you think that business is going or maybe take a three to five-year range of what kind of magnitude of revenue that might represent at some point?
Ronald Weinberg - Chairman and CEO
Well, let me give you a little background. I don't know -- we haven't tried to quantify it ourselves because it really does take a crystal ball. But as you probably know, they go into stationary fuel cells. We manufacture them for United Technologies or UTC Power. And they find their way into some very interesting applications.
There's one at the new World Trade Center -- not one, I mean a series at the new World Trade Center, so they go into large buildings. They are ideal for remote locations where power is needed and there's not a strong electric grid.
And one of the markets that they are finding is the -- call it the green supermarket market, which is putting these in retail supermarkets, particularly Whole Foods, where they want the green image; they want the security of not being down if there's a storm or a hurricane or something like that. And they get the benefits of the clean energy and they recycle these -- they produce heat, these units do, and ironically enough, supermarkets need heat -- they have so much refrigeration and freezing in them that they need heat just to keep the place warm. So there's a good use for them.
In terms of where we see it going, I think, to me, it's just absolutely inevitable that alternative energy is going to be on the rise, both in terms of actual need as fossil fuels get more expensive, and ironically enough, things like gasoline are cheaper here than they are in most parts of the world. It has to go that way. I don't see any alternative.
And at the same time, you've got governments that really want to subsidize this. There's a few that -- it's the right thing to do long-term; it's politically expedient and all the things you're well aware of and you read. And we see it. We see it in the fact that when we need to have additional capital to expand our fuel cell production capability, there are state grants that we've gotten without too much trouble, because states want to do this. Ohio itself has made alternative fuels one of its important areas of focus. So we're able to do that.
And we're seeing that kind of view from United Technologies. Don't know how to give you an exact number, but they think very expansively about it. (multiple speakers)
Eli Lustgarten - Analyst
How much capacity in place and what kind of volumes could you generate with the capacity in place? And when would you have to put something up or put some money into it, if you needed more volume?
Ronald Weinberg - Chairman and CEO
Yes, go ahead and talk.
Chris DiSantis - President and COO
Basically, the sort of -- call it the product definition that we have now and the capacity that we have in place, probably allows this to be -- call it roughly a $10 million segment of the Company before we have to add additional capacity. And the capital requirement for what an additional capacity expansion would be is really to be determined, because we would take the same approach that we took the first time around -- we would try and get state grant money to fund the additional investment. And if we did, that's obviously a very low number, or if we didn't, if we weren't successful doing that, it would be higher.
Eli Lustgarten - Analyst
So you're probably about six months or a year away from that decision based on -- I think you had 3.1% of your sales this quarter, about -- [little about to] closer to [$1 million]?
Chris DiSantis - President and COO
Yes, we expect late this year or early next year, we'd probably have to have a clear final decision about fuel cell capacity expansion. And obviously, if we do that, that tells you something.
Ronald Weinberg - Chairman and CEO
Eli, just to get an order of magnitude, assuming there were no state grant money, I mean, it's a few million, you know; it's not $10 million (multiple speakers) --.
Eli Lustgarten - Analyst
Yes, I realize that.
Ronald Weinberg - Chairman and CEO
Yes.
Eli Lustgarten - Analyst
Alright, thank you very much.
Operator
We have no further questions at this time.
Ronald Weinberg - Chairman and CEO
Okay. Well, thank you, everyone. We're pleased that you joined the call and always happy to answer your questions.
Operator
And that concludes our conference for today. We thank you for your attendance.