| GENTEK INC Item 1A Risk Factors |
| The following is a discussion of certain factors that currently impact or may impact the Company’s business, operating results and/or financial condition |
| An investment in the Company’s common stock involves a high degree of risk |
| You should carefully consider the risks described below before deciding to invest in its common stock |
| In assessing these risks, you should also refer to the other information in this Annual Report on Form 10-K, including the Company’s financial statements and the related notes |
| Various statements in this Annual Report on Form 10-K, including some of the following risk factors, constitute forward-looking statements |
| Risks Related to the Company’s Capital Structure The Company entered into new credit facilities in 2005 which significantly increased GenTek’s leverage |
| The Company’s ability to make payments on its debt will be contingent on GenTek’s future operating performance which will depend on a number of factors that are outside of its control |
| On February 28, 2005, GenTek closed on a secured financing consisting of dlra370 million of term loans and a dlra60 million revolving credit facility (the “Credit Facilities”) |
| The term loans include a dlra235 million first lien loan due in February 2011 with an interest rate of LIBOR plus 2dtta75 percent or base rate plus 1dtta75 percent, subject to a rate reduction of 0dtta25 percent if such term loan is rated B1 or better by Moody’s Investor Services, Inc |
| and a dlra135 million second lien loan due February 2012 with an interest rate of LIBOR plus 5dtta75 percent or base rate plus 4dtta75 percent |
| The dlra60 million revolving credit facility matures in February 2010 and carries an interest rate of LIBOR plus 2dtta75 percent or base rate plus 1dtta75 percent, subject to rate reductions under a pricing grid if the Company’s leverage ratio decreases |
| The Company used approximately dlra311 million, which is net of dlra2 million of dividends remaining to be paid, of the financing proceeds to pay a special dividend and dlra35 million of the proceeds to pre-fund certain defined benefit pension obligations |
| The remainder of the proceeds were used to pay transaction fees, to refinance existing debt and for general corporate purposes |
| The Company’s debt service obligations with respect to the Credit Facilities are estimated to be approximately dlra32 million to dlra33 million in 2006, including approximately dlra2 million of principal repayments |
| This debt service may have an adverse impact on the Company’s earnings and cash flow, which could in turn negatively impact GenTek’s stock price |
| The Company’s ability to make principal and interest payments on its bank debt is contingent on its future operating performance, which will depend on a number of factors, many of which are outside of its control |
| The degree to which GenTek is leveraged could have other important negative consequences, including the following: • the Company must dedicate a substantial portion of its cash flows from operations to the payment of its indebtedness, reducing the funds available for future working capital requirements, capital expenditures, acquisitions or other general corporate requirements; • a significant portion of its borrowings are, and will continue to be, at variable rates of interest, which may result in higher interest expense in the event of increases in interest rates; -11- _________________________________________________________________ • the Company may be more vulnerable to a downturn in the industries in which it operates or a downturn in the economy in general; • the Company may be limited in its flexibility to plan for, or react to, changes in its businesses and the industries in which it operates; • the Company may be placed at a competitive disadvantage compared to its competitors that have less debt; • the Company may be limited in its ability to react to unforeseen increases in certain costs and obligations arising in its businesses, including environmental, pension and tax liabilities; • the Company may determine it to be necessary to dispose of certain assets or one or more of its businesses to reduce its debt; and • the Company’s ability to borrow additional funds may be limited |
| The Company can provide no assurance that its businesses will generate sufficient cash flow from operations or that future borrowings will be available in amounts sufficient to enable the Company to pay its indebtedness or to fund its other liquidity needs |
| Moreover, the Company may need to refinance all or a portion of its indebtedness on or before maturity |
| In such a case, the Company cannot make assurances that it will be able to refinance any of its indebtedness on commercially reasonable terms or at all |
| If the Company is unable to make scheduled debt payments or comply with the other provisions of its debt instruments, the Company’s various lenders may be permitted under certain circumstances to accelerate the maturity of the indebtedness owed to them and exercise other remedies provided for in those instruments and under applicable law |
| The Company is subject to restrictive debt covenants pursuant to its indebtedness |
| These covenants may restrict its ability to finance its business and, if the Company does not comply with the covenants or otherwise default under them, the Company may not have the funds necessary to pay all amounts that could become due and the lenders could foreclose on substantially all of its assets |
| The Credit Facilities, among other things, significantly restricts and, in some cases, effectively eliminates the Company’s ability and the ability of most of its subsidiaries to: • incur additional debt; • create or incur liens; • pay dividends or make other equity distributions to the Company’s shareholders; • purchase or redeem share capital; • make investments; • sell assets; • issue or sell share capital of certain subsidiaries; • engage in transactions with affiliates; • issue or become liable on a guarantee; • voluntarily prepay, repurchase or redeem debt; • create or acquire new subsidiaries; and • effect a merger or consolidation of, or sell all or substantially all of its assets |
| In addition, under the Credit Facilities, the Company and its subsidiaries must comply with certain financial covenants |
| In the event the Company was to fail to meet any of such covenants and were unable to cure such breach or otherwise renegotiate such covenants, the lenders under those facilities would have significant rights to deny future access to liquidity and/or seize control of substantially all of its assets |
| The material financial covenants with which the Company must comply include total leverage, total interest coverage, and maximum capital expenditures |
| -12- _________________________________________________________________ The covenants contained in the Company’s Credit Facilities and any credit agreement governing future debt may significantly restrict its future operations |
| Furthermore, upon the occurrence of any event of default under its Credit Facilities or the agreements governing any other debt of its subsidiaries, the lenders could elect to declare all amounts outstanding under such Credit Facilities or agreements, together with accrued interest, to be immediately due and payable |
| If those lenders were to accelerate the payment of those amounts, the Company cannot assure you that its assets and the assets of its subsidiaries would be sufficient to repay those amounts in full |
| The Company is also subject to interest rate risk due to its indebtedness at variable interest rates |
| Its Credit Facilities bear interest at variable rates based on a base rate or LIBOR plus an applicable margin |
| The Company cannot assure you that shifts in interest rates will not have a material adverse effect on it |
| The Company may be required to prepay its indebtedness prior to its stated maturity, which may limit its ability to pursue business opportunities |
| Pursuant to the terms of the Company’s Credit Facilities, in certain instances it is required to prepay outstanding indebtedness prior to its stated maturity date, even if it is otherwise in compliance with the covenants contained in the Credit Facilities |
| Specifically, a portion of excess cash flow, as defined in the Credit Facilities, and certain non-recurring cash inflows such as proceeds from asset sales, insurance recoveries, and equity offerings must be used to pay down indebtedness and may not be reborrowed |
| These prepayment provisions may limit the Company’s ability to utilize this excess cash flow to pursue business opportunities |
| The Company’s business is capital intensive |
| It cannot assure you that it will have sufficient liquidity to fund its working capital and capital expenditures and to meet its obligations under existing debt instruments |
| The Company’s business is capital intensive and it cannot be certain that it will achieve sufficient cash flow in the future |
| Failure to maintain profitability and generate sufficient cash flow could diminish its ability to sustain operations, meet financial covenants, obtain additional required funds and make required payments on any indebtedness it may have incurred or may incur in the future |
| If the Company does not comply with the covenants in its Credit Facilities or otherwise default under them, it may not have access to borrowings under its dlra60 million revolving credit facility or the funds necessary to pay amounts that become due |
| Although the Company believes that its current levels of cash and cash equivalents, along with available borrowings on its revolving credit facility, will be sufficient for its cash requirements during the next twelve months, it is possible that these sources of cash will be insufficient, resulting in the Company having to raise additional funds for liquidity |
| There can be no assurance the Company will have access to additional funding should the need arise |
| The Company is a holding company that is dependent upon cash flow from its subsidiaries to meet its financial obligations; its ability to access that cash flow may be limited in some circumstances |
| The Company is a holding company with no independent operations or significant operating assets other than its investments in, and advances to, its subsidiaries |
| The Company depends upon the receipt of sufficient funds from its subsidiaries through its centralized cash management system from its domestic subsidiaries and through dividends, loans or other distributions from its foreign subsidiaries to -13- _________________________________________________________________ meet its financial obligations |
| In addition, the terms of the Company and its subsidiaries’ existing indebtedness under the Credit Facilities, and the laws of the jurisdictions under which it and its subsidiaries are organized, limit the payment of dividends, loan repayments and other distributions by its subsidiaries to the Company under some circumstances |
| Any indebtedness that it, or its subsidiaries, may incur in the future may contain similar restrictions |
| Further, certain of its subsidiaries have their own indebtedness for which they are responsible which may limit their ability to distribute cash to the Company |
| Risks Related to the Company’s Operations The industries in which the Company operates are highly competitive |
| This competition may prevent it from raising prices at the same pace as its costs increase, making it difficult for the Company to maintain existing business and win new business |
| The Company faces significant competition in most of its businesses |
| Certain of its competitors have large market shares and substantially greater financial and technical resources than it does |
| The Company may be required to reduce prices if its competitors reduce prices, or as a result of any other downward pressure on prices for its products and services, which could have an adverse effect on the Company |
| In each of its business segments, the Company operates in competitive markets |
| Its manufacturing segment competes with numerous international and North American companies, including various captive operations of automotive original equipment manufacturers (OEMs) and Tier 1 suppliers to automotive manufacturers |
| Competition in the manufacturing segment’s markets is based on a number of factors, including design and engineering capabilities, price, quality and the ability to meet customer delivery requirements |
| Due to the level of competition, its customers have regularly requested price decreases and maintaining or raising prices has been difficult over the past several years and will likely continue to be so in the near future |
| Most of the markets in which its performance chemicals segment does business are highly competitive, with competitors typically segregated by end market |
| Competition in the performance chemicals segment’s markets is based on a number of factors, including price, freight economics, product quality and technical support |
| If the Company is unable to compete successfully, its financial condition and results of operations could be adversely affected |
| The industries the Company competes in are subject to economic downturns |
| An economic downturn in the automotive industry as a whole or other events (eg, labor disruptions) resulting in significantly reduced operations at any of DaimlerChrysler, Ford or General Motors, or at certain of its manufacturing plants, could have a material adverse impact on the results of its manufacturing segment |
| In addition, in the appliance and electronic and industrial markets, risks include softening of appliance demand, loss of market share by its major customers, continued price pressure from major customers and continued competition from lower-cost Asian sources |
| For the Company’s performance chemicals business, weakness in the pulp and paper, electronics or chemical processing industries could have an adverse effect on its results of operations |
| The Company may experience increased costs and production delays if suppliers fail to deliver materials to the Company or if prices increase for raw materials and other goods and services that it purchases from third parties |
| The Company purchases raw materials from a number of domestic and foreign suppliers |
| Although it believes that the raw materials it requires will be available in sufficient supply on a -14- _________________________________________________________________ competitive basis for the foreseeable future, continued increases in the cost of raw materials, including energy and other inputs used to make the Company’s products, could affect future sales volumes, prices and margins for its products |
| If a supplier should cease to deliver goods or services to the Company, it would probably find other sources, however, such a disruption could result in added cost and manufacturing delays |
| In addition, political instability, war, terrorism and other disruptions to international transit routes control could adversely impact its ability to obtain key raw materials in a timely fashion, or at all |
| The Company’s revenues are dependent on the continued operation of its manufacturing facilities, and breakdowns or other problems in its operations could adversely affect its results of operations |
| The Company’s revenues are dependent on the continued operation of its various manufacturing facilities |
| In particular, the operation of chemical manufacturing plants involves many risks, including the breakdown, failure or substandard performance of equipment, natural disasters, acts of terrorism, power outages, the need to comply with directives of government agencies, and dependence on the ability of railroads and other shippers to transport raw materials and finished products in a timely manner |
| The occurrence of material operational problems, including but not limited to the foregoing events, at one or more of the Company’s facilities could have a material adverse effect on its results of operations or financial condition |
| Certain facilities within each of its business segments account for a significant share of its profits |
| Disruption to operations at one of these facilities could have a material adverse impact on segment financial performance and its overall financial condition |
| In addition, in certain circumstances the Company could also be materially affected by a disruption or closure of a customer’s plant or facility to which it supplies its products |
| A significant portion of the Company’s revenue and operating income from its manufacturing segment has been, and is expected to continue to be, concentrated in a small number of customers |
| The Company derives and is expected to continue to derive significant portions of its revenues and operating income from sales of products to Ford, DaimlerChrysler and Whirlpool in its manufacturing segment |
| As a result, the loss of, or reduced demand from any of these customers could adversely effect the Company’s revenues and operating income |
| The Company is subject to risks relating to its foreign operations |
| The Company has significant manufacturing activities outside of the US, primarily located in Mexico, Canada and India |
| These international operations subject it to a number of risks such as: currency exchange rate fluctuations; foreign economic conditions; trade barriers; exchange controls; national and regional labor strikes; political instability; risks of increases in duties; taxes; governmental royalties; war; and changes in laws and policies governing operations of foreign-based companies |
| The occurrence of any one or a combination of these factors may increase its costs or have other negative effects on it |
| In addition, investment returns on pension assets may be lower than assumed, which could result in larger cash funding requirements for the Company’s pension plans, which could have an adverse impact on it |
| The Company maintains several defined benefit pension plans covering certain employees in Canada and the United States |
| It records pension and post-retirement benefit costs in amounts developed from actuarial valuations |
| Inherent in these valuations are key assumptions including the discount rate -15- _________________________________________________________________ and expected long-term rate of return on plan assets |
| Material changes in pension and other post-retirement benefit costs may occur in the future due to changes in these assumptions, differences between actual experience and the assumptions used, and changes in the benefit plans |
| Amounts it pays are also dependent upon interest rates |
| Due to current interest rates and investment returns, some of its plans are underfunded |
| The Company is required to rectify this underfunding in accordance with federal guidelines |
| The Company expects to be required to make substantial cash contributions beginning in 2008 and continuing beyond such time |
| Moreover, if investment returns on pension assets are lower than assumed, it may have substantially larger cash funding requirements for its pension plans, which may have a material adverse impact on its liquidity |
| In addition, changes in federal laws relating to the funding of pension plans may have a material adverse impact on its liquidity |
| The Company’s principal businesses are subject to government regulation, including environmental regulation, and changes in current regulations may adversely affect it |
| The Company’s principal business activities are regulated and supervised by various governmental bodies |
| Changes in laws, regulations or governmental policy or the interpretations of those laws or regulations affecting its activities and those of its competitors could have a material adverse effect on it |
| For example, the Company’s various manufacturing operations, which have been conducted at a number of facilities for many years, are subject to numerous laws and regulations relating to the protection of human health and the environment in the US, Canada, Mexico, India and other countries |
| The Company believes that it is in substantial compliance with such laws and regulations |
| However, as a result of its operations, from time to time it is involved in administrative and judicial proceedings and inquiries relating to environmental matters |
| Based on information available to it at this time with respect to potential liability involving these facilities, the Company believes that any such liability will not have a material adverse effect on its financial condition, cash flows or results of operations |
| However, modifications to existing laws and regulations or the adoption of new laws and regulations in the future, particularly with respect to environmental and safety standards, could require it to make expenditures which may be material or may otherwise adversely impact its operations |
| The production of chemicals is associated with a variety of hazards which could create significant liabilities or cause the Company’s facilities to suspend its operations |
| The Company’s operations are subject to various hazards incident to the production of chemicals, including the use, handling, processing, storage and transportation of certain hazardous materials |
| These hazards, which include the risk of explosions, fires and chemical spills or releases, can cause personal injury and loss of life, severe damage to and destruction of property and equipment, environmental damage, suspension of operations and potentially subject us to lawsuits relating to personal injury and property damages |
| Any such event or circumstance could have a material adverse effect on its results of operations or financial condition |
| The Company’s facilities have been operated for many years by it or prior owners and operators, and adverse environmental conditions of which it is not aware may exist |
| The discovery of additional or unknown environmental contamination at any of its current or former facilities, could have a material adverse effect on its financial condition, cash flows and/or results of operations |
| The seasonal nature of the environmental business could increase the Company’s costs or have other negative effects |
| -16- _________________________________________________________________ Within its performance chemicals segment, the environmental business has higher volumes in the second and third quarters of the year, owing to higher spring and summer demand for sulfuric acid regeneration services from gasoline refinery customers to meet peak summer driving season demand and higher spring and summer demand from water treatment chemical customers to manage seasonally high and low water conditions |
| The degree of seasonal peaks and declines in the volumes of its environmental business could increase its costs, negatively impact its manufacturing efficiency, or have other negative effects on its operations or financial performance |
| The Company may not be able to obtain insurance at its historical rates and its insurance coverage may not cover all claims and losses |
| The Company maintains insurance coverage on its properties, machines, supplies and other elements integral to its business and against certain third party litigation, environmental matters and similar events |
| Due to recent changes in market conditions in the insurance industry and other factors, the Company may not be able to secure insurance at a similar cost to what it may have previously paid, if at all |
| In addition, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, that may be uninsurable or not economically insurable |
| Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, also may make insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed |
| The Company is dependent upon many critical systems and processes, many of which are dependent upon hardware that is concentrated in a limited number of locations |
| If a catastrophe were to occur at one or more of those locations, it could have a material adverse effect on its business |
| The business is dependent on certain critical systems, which support various aspects of its operations, from its computer network to its billing and customer service systems |
| The hardware supporting a large number of such systems is housed in a small number of locations |
| If one or more of these locations were to be subject to fire, natural disaster, terrorism, power loss, or other catastrophe, it could have a material adverse effect on its business |
| While the Company believes that it maintains reasonable disaster recovery programs, there can be no assurance that, despite these efforts, any disaster recovery, security and service continuity protection measures it may have or may take in the future will be sufficient |
| In addition, computer viruses, electronic break-ins or other similar disruptive technological problems could also adversely affect its operations |
| The Company’s insurance policies may not adequately compensate it for any losses that may occur due to any failures or interruptions in its computer systems |
| Risks Related to The Company’s Common Stock The market price of the Company’s common stock is subject to volatility |
| The market price of the Company’s common stock could be subject to wide fluctuations in response to numerous factors, many of which are beyond its control |
| These factors include, among other things, actual or anticipated variations in its operating results and cash flow, the nature and content of its earnings releases and its competitors’ earnings releases, announcements of technological innovations that impact its products, customers, competitors or markets, changes in financial estimates by securities analysts, business conditions in its markets and the general state of the securities markets and the market for similar stocks, changes in capital markets that affect the perceived availability of capital to companies -17- _________________________________________________________________ in its industries, governmental legislation or regulation, as well as general economic and market conditions, such as recessions |
| Sales of large amounts of the Company’s common stock, or the perception that large sales could occur, may cause volatility in its stock price |
| In connection with GenTek’s emergence from bankruptcy protection on November 10, 2003, the Company issued an aggregate of 10cmam000cmam000 shares of its common stock to former holders of its debt securities and other claimants |
| This relatively small float of shares available for purchase/sale may result in share price volatility in cases where an investor seeks, or is perceived to be seeking, to acquire or divest a large block of shares in the public market |
| The exercise of the Company’s Tranche B and Tranche C warrants could create substantial dilution, or there may be other events which would have a dilutive effect on its common stock |
| The Company currently has options and warrants outstanding covering the purchase of approximately 3 million shares of common stock |
| If options or warrants to purchase the Company’s common stock are exercised, or other equity interests are granted under its management and directors incentive plan or under other plans adopted in the future, such equity interests will have a dilutive effect on its common stock |
| Additional shares of its common stock and additional warrants may be issued pursuant to the plan of reorganization to certain claimants, subject to the resolution of certain claims |
| See “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Reorganization under Chapter 11 of the US Bankruptcy Code |
| ” The Company cannot predict the effect any such dilution may have on the price of its common stock |