| GEORGIA GULF CORP /DE/ Item 1A RISK FACTORS Risk Factors Our business and financial results and condition may be adversely affected by the risk factors described below, as well as the other risks discussed in this Form 10-K The chemical industry is cyclical and volatile, which affects our profitability |
| Our industry experiences alternating periods of tight supply and overcapacity |
| Our historical operating results tend to reflect the cyclical and volatile nature of the chemical industry |
| Historically, periods of tight supply have resulted in increased prices and profit margins and have been followed by periods of substantial capacity addition, resulting in oversupply and declining prices and profit margins |
| As a result of changes in demand for our products, our earnings fluctuate significantly, not only from year to year but also from quarter to quarter |
| Capacity expansions or the announcement of these expansions have generally led to a decline in the pricing of our products in the affected product line |
| We cannot assure that future growth in product demand will be sufficient to utilize any additional capacity |
| Natural gas and raw materials costs and other external factors beyond our control can cause wide fluctuations in our margins |
| The cost of our natural gas and raw materials and other costs may not correlate with changes in the prices we receive for our products, either in the direction of the price change or in absolute magnitude |
| Natural gas and raw materials costs represent a substantial part of our manufacturing costs |
| Most of the raw materials we use are commodities and the price of each can fluctuate widely for a variety of reasons, including changes in availability because of major capacity additions or significant facility operating problems |
| Other external factors beyond our control can cause volatility in raw materials prices, demand for our products, product prices, sales volumes and margins |
| These factors include general economic conditions, the level of business activity in the industries that use our products, competitors’ actions, international events and circumstances, and governmental regulation in the United States and abroad |
| These factors can also magnify the impact of economic cycles on our business |
| A number of our products are highly dependent on markets that are particularly cyclical, such as the construction, paper and pulp, and automotive markets |
| 7 ______________________________________________________________________ The cyclicality and volatility of the chemical industry affects our capacity utilization and causes fluctuations in our results of operations |
| The operating rates at our facilities will impact the comparison of period-to-period results |
| Different facilities may have differing operating rates from period to period depending on factors such as feedstock costs, transportation costs, and supply and demand for the product produced at the facility during that period |
| As a result, individual facilities may operate below or above rated capacities in any period |
| We may idle a facility for an extended period of time because an oversupply of a certain product or a lack of demand for that product makes production uneconomical |
| Facility shutdown and subsequent restart expenses may adversely affect quarterly results when these events occur |
| In addition, a temporary shutdown may become permanent, resulting in a write-down or write-off of the related assets |
| The chemical industry is highly competitive, with some of our competitors having greater financial resources than we have; competition may adversely affect our results of operations |
| The chemical industry is highly competitive |
| Many of our competitors are larger and have greater financial resources than Georgia Gulf |
| Moreover, barriers to entry, other than capital availability, are low in most product segments of our business |
| Capacity additions or technological advances by existing or future competitors also create greater competition, particularly in pricing |
| We cannot provide assurance that we will have access to the financing necessary to upgrade our facilities in response to technological advances or other competitive developments |
| Extensive environmental, health and safety laws and regulations impact our operations and assets; compliance with these regulations could adversely affect our results of operations |
| Our operations on and ownership of real property are subject to extensive environmental, health and safety regulation at both the national and local level |
| The nature of the chemical industry exposes Georgia Gulf to risks of liability under these laws and regulations due to the production, storage, transportation and sale of materials that can cause contamination or personal injury if released into the environment |
| Environmental laws may have a significant effect on the costs of transportation and storage of raw materials and finished products, as well as the costs of the storage and disposal of wastes |
| We may incur substantial costs, including fines, damages, criminal or civil sanctions, remediation costs, or experience interruptions in our operations for violations arising under these laws |
| Also, Superfund statutes may impose joint and several liability for the cost of investigations and remedial actions on any company that generated the waste, arranged for disposal of the waste, transported the waste to the disposal site, selected the disposal site, or presently or formerly owned, leased or operated the disposal site or a site otherwise contaminated by hazardous substances |
| Any or all of the responsible parties may be required to bear all of the costs of cleanup, regardless of fault, legality of the original disposal or ownership of the disposal site |
| A number of environmental liabilities have been associated with the facilities at Lake Charles, Louisiana and Mansfield, Massachusetts that we acquired or leased as part of the acquisition of the vinyls business of CONDEA Vista Company and which may be designated as Superfund sites as described in “Environmental Regulation” above |
| Any or all responsible parties, including us, may be required to bear all of the costs of cleanup regardless of fault, legality of the original disposal, or ownership of the disposal site |
| Although CONDEA Vista retained substantially all financial responsibility for environmental liabilities that relate to the facilities we acquired from them and which arose before the closing of the acquisition of the vinyls business of CONDEA Vista in November 1999, we cannot assure you that CONDEA Vista will be able to satisfy its obligations in this regard, particularly in light of the long period of time in which environmental liabilities may arise under the environmental laws |
| If CONDEA Vista fails to fulfill their obligation regarding environmental liabilities, then we could be held responsible |
| 8 ______________________________________________________________________ Our policy is to accrue costs relating to environmental matters when it is probable that these costs will be required and can be reasonably estimated |
| However, estimated costs for future environmental compliance and remediation may be too low or we may not be able to quantify the potential costs |
| We expect to be continually subjected to increasingly stringent environmental and health and safety laws and regulations |
| It is exceedingly difficult to predict the future interpretation and development of these laws and regulations or their impact on our future earnings and operations |
| We anticipate continued compliance will require increased capital expenditures and increased operating costs |
| Any increase in these costs could adversely affect our financial performance |
| Hazards associated with chemical manufacturing may occur, which would adversely affect our results of operations |
| Hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes may occur in Georgia Gulf’s operations |
| These hazards could lead to an interruption or suspension of operations and have an adverse effect on the productivity and profitability of a particular manufacturing facility or on Georgia Gulf as a whole |
| These hazards include: · pipeline and storage tank leaks and ruptures; · explosions and fires; · inclement weather and natural disasters; · mechanical failure; · unscheduled downtime; · labor difficulties; · transportation interruptions; · remediation complications; · terrorist acts; and · chemical spills and other discharges or releases of toxic or hazardous substances or gases |
| These hazards may cause personal injury and loss of life, severe damage to or destruction of property and equipment, and environmental damage: any of these could lead to claims under the environmental laws |
| Additionally, individuals could seek damages for alleged personal injury or property damage due to exposure to chemicals at our facilities or to chemicals otherwise owned, controlled or manufactured by Georgia Gulf |
| Georgia Gulf is also subject to present and future claims with respect to workplace exposure, workers’ compensation and other matters |
| Although we maintain property, business interruption and casualty insurance of the types and in the amounts that we believe are customary for the industry, we are not fully insured against all potential hazards incident to our business |
| We rely heavily on third party transportation, which subjects us to risks that we cannot control; these risks may adversely affect our operations |
| We rely heavily on railroads and shipping companies to transport raw materials to our manufacturing facilities and to ship finished product to our customers |
| Rail and shipping operations are subject to various hazards, including extreme weather conditions, work stoppages and operating hazards |
| If we are delayed or unable to ship finished product or unable to obtain raw materials as a result of the railroads’ or shipping companies’ failure to operate properly, or if there were significant changes in the cost of these services, we may not be able to arrange efficient alternatives and timely means to obtain raw materials or ship our goods, which could result in an adverse effect on our revenues and costs of operations |
| 9 ______________________________________________________________________ Our indebtedness could limit our business and operations |
| At December 31, 2005, we had approximately dlra278dtta6 million of indebtedness outstanding and dlra141dtta0 million of financing from the sale of our trade receivables under our asset securitization program |
| Our level of indebtedness could have important consequences to our operations, including: · we may have difficulty borrowing money in the future for working capital, capital expenditures, acquisitions or other purposes; · we will need to use a portion of our available cash for debt service, which will reduce the amount of money available to finance our operations and other business activities; · some of our debt, including the debt under our senior credit facility, has variable rates of interest, which exposes us to the risk of increased interest rates; and · we may have a higher level of debt than some of our competitors, which could put us at a competitive disadvantage; make us more vulnerable to economic downturns and adverse developments in our business; and reduce our flexibility in responding to changing business and economic conditions |
| We expect to obtain the money to pay our expenses and to pay principal and interest on our debt from our operating cash flow and from additional loans under our revolving credit facility |
| Our ability to meet these requirements will depend on our future financial performance |
| We cannot be sure that our cash flow will be sufficient to allow us to pay principal and interest on our debt as well as meet our other obligations |
| If we do not have enough money to do so, we may be required to refinance all or part of our debt, sell assets or borrow more money |
| We cannot assure you that we will be able to do so on commercially reasonable terms, if at all |
| In addition, the terms of our existing or future debt agreements, including our senior credit facility and the indenture related to our 7dtta125 percent notes, may restrict us from pursuing any of these alternatives |
| We may encounter difficulties in integrating the assets of businesses we acquire, which may adversely affect our results of operations |
| We cannot be sure that we will be able to integrate successfully any acquisitions into our operations without substantial costs, delays or other problems |
| The integration of any business we acquire may be disruptive to our business and may result in a significant diversion of management attention and operational resources |
| Additionally, we may suffer a loss of key employees, customers or suppliers, loss of revenues, increases in costs or other difficulties |
| Our participation in joint ventures exposes us to risks of shared control |
| We own a 50 percent interest in a manufacturing joint venture, the remainder of which is controlled by PPG Industries, Inc, which also supplies chlorine to the facility operated by the joint venture |
| We may enter into additional joint ventures in the future |
| The nature of a joint venture requires us to share control with unaffiliated third parties |
| If our joint venture partners do not fulfill their obligations, the affected joint venture may not be able to operate according to its business plan |
| In that case, our operations may be adversely affected or we may be required to increase our level of commitment to the joint venture |
| Also, differences in views among joint venture participants may result in delayed decisions or failure to agree on major issues |
| Any differences in our views or problems with respect to the operations of our joint ventures could have a material adverse effect on our business, financial condition, results of operations or cash flows |
| 10 ______________________________________________________________________ We rely on outside suppliers for specified feedstocks and services |
| In connection with our acquisition of the vinyls business of CONDEA Vista Company, we entered into agreements with CONDEA Vista to provide specified feedstocks for the Lake Charles facility |
| Moreover, this facility is dependent upon CONDEA Vista’s infrastructure for services such as wastewater and ground water treatment, site remediation, and fire water supply |
| Any failure of CONDEA Vista to perform those agreements could adversely affect the operation of the affected facilities and our results of operations |
| The agreements relating to these feedstocks and services had initial terms of one to ten years |
| Although most of these agreements provide for automatic renewal, they may be terminated after specified notice periods |
| If we were required to obtain an alternate source for these feedstocks or services, we may not be able to obtain pricing on as favorable terms |
| Additionally, we may be forced to pay additional transportation costs or to invest in capital projects for pipelines or alternate facilities to accommodate railcar or other delivery or to replace other services |
| We also obtain a significant portion of our other raw materials from a few key suppliers |
| If any of these suppliers is unable to meet its obligations under present supply agreements, we may be forced to pay higher prices to obtain the necessary raw materials |
| Any interruption of supply or any price increase of raw materials could have an adverse effect on our business and results of operations |
| Sales made in international markets expose us to risks that may adversely affect our operations or financial condition |
| During 2005, 15 percent of our revenues were generated in international markets |
| Substantially all of our international sales are made in US dollars and, as a result, any change in the value of the US dollar relative to foreign currencies will affect the price of our products in international markets |
| Our international sales are also subject to other risks, including differing and changing legal and regulatory requirements in local jurisdictions; export duties and import quotas; domestic and foreign customs and tariffs or other trade barriers; potentially adverse tax consequences, including withholding taxes or taxes on other remittances; and foreign exchange restrictions |
| We cannot provide any assurance that these factors will not have an adverse effect on our financial condition or results of operations |
| Our senior credit facility and the indenture for our 7dtta125 percent senior notes impose significant operating and financial restrictions, which may prevent us from capitalizing on business opportunities and taking some actions |
| The terms of our senior credit facility and our indenture impose significant operating and financial restrictions on us |
| These restrictions will limit our ability to: · incur additional indebtedness and liens; · make capital expenditures; · make investments and sell assets, including the stock of subsidiaries; · make payments of dividends and other distributions; · purchase Georgia Gulf stock; · use the proceeds of the sale of specified assets; · engage in business activities unrelated to our current business; · enter into transactions with affiliates; or · consolidate, merge or sell all or substantially all of our assets |
| 11 ______________________________________________________________________ In addition, our senior credit facility and 7dtta125 percent senior notes require us to maintain specified financial ratios |
| We cannot assure you that these covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities |
| A breach of any of these covenants could result in a default in respect of the related indebtedness |
| If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be due and payable immediately and proceed against any collateral securing that indebtedness |
| Also, any acceleration of indebtedness under our senior credit facility will constitute a default under some of our other indebtedness |
| Forward-Looking Statements This Form 10-K and other communications to stockholders may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 |
| These statements relate to, among other things, our outlook for future periods, supply and demand, pricing trends and market forces within the chemical industry, cost reduction strategies and their results, planned capital expenditures, long-term objectives of management and other statements of expectations concerning matters that are not historical facts |
| Predictions of future results contain a measure of uncertainty |
| Actual results could differ materially due to various factors |
| Factors that could change forward-looking statements are, among others, those contained in the “Risk Factors” section above as well as changes in the general economy, changes in demand for our products or increases in overall industry capacity that could affect production volumes and/or pricing, changes and/or cyclicality in the industries to which our products are sold, availability and pricing of raw materials, technological changes affecting production, difficulty in plant operations and product transportation, governmental and environmental regulations and other unforeseen circumstances |
| A number of these factors are discussed in this Form 10-K and in our other periodic filings with the Securities and Exchange Commission |