| HAYES LEMMERZ INTERNATIONAL INC Item 1A Risk Factors |
| Industry Risks Cyclical demand in the automotive industry may adversely affect our business |
| Most of our sales are to automotive OEMs or Tier 1 suppliers |
| Therefore, our financial performance is subject to conditions in the automotive industry, which are cyclical and depend on conditions in the US and global economies generally |
| A weakening of the US and global economies or an increase in interest rates could reduce consumer spending and demand for automobiles and light trucks, leading to decreased production by our customers, which could hurt our sales and financial performance |
| Our sales are also impacted by our customers’ inventory levels and production schedules |
| Due to the present uncertainty in the economy, some of our customers have been reducing their forecasts for new vehicle production |
| Continued economic uncertainty and fluctuations in demand may have a significant negative impact on our business |
| Because we have high fixed production costs, relatively small declines in our customers’ production could significantly reduce our profitability |
| 10 _________________________________________________________________ [63]Table of Contents We depend on a small number of significant customers |
| We derived approximately 50prca of our fiscal 2005 sales from direct sales to Ford, DaimlerChrysler, and General Motors and their subsidiaries |
| In addition, some of our other sales are to Tier 1 suppliers who incorporate our components into products which they sell to these three OEMs |
| Neither we nor our Tier 1 customers may be able to maintain our current relationships with these customers or continue to supply them at current levels |
| Furthermore, these customers have had declining market share in North America in recent years, resulting in reduced demand |
| In addition, our sales are dependent on particular vehicle platforms that include our products |
| If production of those platforms were to be decreased or discontinued, our sales would be reduced |
| The loss of a significant portion of sales to Ford, DaimlerChrysler, or General Motors or their Tier 1 suppliers could have a material adverse effect on our business |
| In addition, certain of our customers have filed for bankruptcy protection in the past year and additional customers may file for bankruptcy protection in the future |
| This could result in adverse changes in these customers’ production levels, pricing, and payment terms and could limit our ability to collect receivables, which could harm our business or results of operations |
| Our customers’ cost cutting efforts and purchasing practices may adversely impact our business |
| Our customers are continually seeking to lower their costs of manufacturing |
| These cost reductions may include relocation of our customers’ operations to countries with lower production costs |
| Customers might find it less costly to manufacture themselves at relocated facilities or to rely on foreign suppliers with lower production costs, whether or not the customers’ production is relocated, either of which may have a significant negative impact on our business |
| For example, during fiscal 2004, two of our major customers discontinued early payment programs in which we participated, which negatively impacted our liquidity |
| We operate in the highly competitive automotive supply industry |
| The automotive supply industry is highly competitive, both domestically and internationally, with a large number of suppliers competing to provide products to a relatively small number of OEMs |
| Competition is based primarily on price, quality, timely delivery, and overall customer service |
| Many of our competitors are larger and have greater financial and other resources than we do |
| Further consolidation in the industry may result in fewer, larger suppliers who benefit from purchasing and distribution economies of scale |
| In addition, some of our competitors are former divisions or subsidiaries of our customers |
| We may not be able to compete successfully with these or other companies |
| In addition, there is a trend toward OEMs expanding their business relationships with a smaller number of “preferred” suppliers |
| If we are not designated a preferred supplier, we could lose sales to competitors that are preferred suppliers |
| Furthermore, the rapidly evolving nature of the automotive industry may attract new entrants, particularly in low cost countries such as China |
| We may not be able to offer our products at prices competitive with those of competitors in low-cost countries and pricing pressure created by such competitors could reduce our sales and margins |
| These factors have led to a re-sourcing of certain future business to foreign competitors in the past and may continue to do so in the future |
| In addition, any of our competitors may develop superior products, produce similar products at a lower cost than us, or adapt more quickly to new technologies or evolving customer requirements |
| As a result, our products may not be able to compete successfully |
| A number of our competitors have been forced to seek bankruptcy protection partially as a result of highly competitive market conditions in our industry |
| Financial Risks We have substantial levels of debt and debt service that will divert a significant amount of cash from our business operations |
| We have substantial levels of debt, including debt under our Amended and Restated Credit Agreement dated as of April 11, 2005 and related documents (Credit Facility), our 101/2prca senior notes due 2010 (Senior Notes) and other debt instruments |
| As of January 31, 2006, we had dlra746dtta9 million of total indebtedness and dlra42dtta5 million of cash and 11 _________________________________________________________________ [64]Table of Contents cash equivalents |
| Although the Credit Facility and the indenture governing the Senior Notes impose limits on our ability to incur additional debt, we may incur significant additional debt in the future |
| The degree to which we will be leveraged could have important consequences, including: • requiring a substantial portion of our cash flow from operations to be dedicated to debt service and therefore not available for our operations, capital expenditures, and future business opportunities; • increasing our vulnerability to a downturn in general economic conditions or in our business; • limiting our ability to adjust to changing market conditions, placing us at a competitive disadvantage compared to our competitors that have relatively less debt; and • limiting our ability to obtain additional financing or access additional funds under our Credit Facility for capital expenditures, working capital, or general corporate purposes |
| Restrictions and covenants in the indenture governing the Senior Notes and the Credit Facility limit our ability to take certain actions and may limit access to our revolving credit facility |
| Our Credit Facility and the indenture governing the Senior Notes and our other debt agreements contain a number of significant covenants that, among other things, will restrict our ability, and the ability of our subsidiaries, to: • declare dividends or redeem or repurchase capital stock; • prepay, redeem, or purchase debt, including the Senior Notes; • incur liens and engage in sale-leaseback transactions; • make loans and investments; • incur additional debt, including borrowings under our Credit Facility; • amend or otherwise alter certain debt documents; • make capital expenditures; • engage in mergers, acquisitions, and asset sales; • enter into transactions with affiliates; and • alter the business we conduct |
| In addition, the Credit Facility requires us to satisfy certain financial covenants and we may become subject to additional or more restrictive covenants in connection with future borrowing |
| These financial covenants may prevent us from accessing the Revolving Credit Facility and may limit our liquidity |
| Our ability to comply with these covenants may be affected by events beyond our control |
| If we are unable to comply with the covenants under any of our debt instruments, there would be a default which could result in acceleration of our debt and potentially our bankruptcy |
| Additionally, a default resulting from our failure to comply with such covenants or the applicable borrowing conditions would preclude us from borrowing additional funds |
| Compliance with the covenants could cause us to conduct our business, or to forgo opportunities, in such a manner as to materially harm our business |
| We may not generate sufficient cash flow to fund required capital expenditures and for that and other reasons we may need additional financing in the future, which we may be unable to obtain |
| Our business requires us to make significant capital expenditures to acquire equipment needed to produce products for new customer programs, maintain existing equipment, and implement technologies to reduce production costs in response to customer pricing pressure |
| We may not generate sufficient cash flow from operations to fund our capital expenditure requirements |
| In that event, we may need to obtain additional financing or take other steps to reduce expenses or generate cash |
| In addition, lower sales or unanticipated expenses could give rise to additional financing requirements |
| We may be unable to obtain financing on favorable terms, or at all |
| If adequate funds are not available on acceptable terms, we may be required to make significant reductions in expenses and capital expenditures, which could significantly restrict our operations and limit our ability to enhance our products, fund capital investments, respond to competitive pressures, or take advantage of business opportunities |
| 12 _________________________________________________________________ [65]Table of Contents We may suffer future asset impairments and other restructuring charges, including write downs of goodwill or intangible assets |
| We record asset impairment losses when we determine that our estimates of the future undiscounted cash flows from an operation will not be sufficient to recover the carrying value of that facility’s building, fixed assets, and production tooling |
| During fiscal 2005 we recorded total asset impairment losses and other restructuring charges of dlra203dtta3 million and we may incur significant similar losses and charges with respect to other facilities in the future |
| In connection with our emergence from Chapter 11 and the application of fresh start accounting, we recorded significant increases in goodwill and intangible assets |
| We are required to evaluate annually whether our goodwill and other intangible assets have been impaired |
| As a result of this evaluation, we recorded a goodwill impairment charge for fiscal 2005 of dlra185dtta5 million |
| Any future write-off of a significant portion of goodwill or intangible assets would have an adverse effect on our financial condition and results of operations |
| Our exposure to variable interest rates and foreign currency fluctuations may negatively affect our results |
| A portion of our debt, including our borrowings under the Credit Facility, bears interest at variable rates |
| Any increase in the interest rates will increase our expenses and reduce funds available for our operations and future business opportunities |
| Increases in interest rates will also increase the risks resulting from our significant debt levels |
| Due to the increase in our operations outside the United States, we have experienced increased foreign currency exchange gains and losses in the ordinary course of our business |
| Fluctuations in exchange rates may have a material impact on our financial condition as cash flows generated in other currencies will be used, in part, to service our dollar-denominated debt |
| This fluctuation could result in an increase in our overall leverage and could result in less cash flow available for our operations, capital expenditures, and repayment of our obligations |
| In addition, fluctuations in foreign currency exchange rates may affect the value of our foreign assets as reported in US dollars, and may adversely affect reported earnings and, accordingly, the comparability of period-to-period results of operations |
| Changes in currency exchange rates may affect the relative prices at which we and foreign competitors sell products in the same market |
| In addition, changes in the value of the relevant currencies may affect the cost of certain items required in our operations |
| Although we attempt to hedge against fluctuations in interest rates or exchange rates, such fluctuations may have a material adverse effect on our financial condition or results of operations, or cause significant fluctuations in quarterly and annual results |
| We currently maintain trade credit with our key suppliers and utilize such credit to purchase significant amounts of raw material and other supplies with payment terms |
| As conditions in the automotive supply industry have become less favorable, key suppliers have been seeking to shorten trade credit terms or to require cash in advance for payment |
| If a significant number of our key suppliers were to shorten or eliminate our trade credit, our inability to finance large purchases of key supplies and raw materials would increase our costs and negatively impact our liquidity and cash flow |
| Our failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and the price of our common stock |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to assess the effectiveness of our internal control over financial reporting at the end of each fiscal year, including a statement as to whether or not internal control over financial reporting is effective |
| Our assessment as of January 31, 2006 identified a material weakness in internal control over financial reporting related to income tax accounting matters |
| As a result of this material weakness, we did not detect errors in the accounting for income tax amounts in a timely manner |
| These errors were corrected and the corrections are reflected in the audited consolidated financial statements as of and for the year ended January 31, 2006 |
| 13 _________________________________________________________________ [66]Table of Contents Because of the material weakness described in the preceding paragraph, we have concluded that, as of January 31, 2006, our internal control over financial reporting was not effective based on those criteria |
| This failure and any failure in the future to achieve and maintain effective internal controls over financial reporting and otherwise comply with the requirements of Section 404 could have a material adverse effect on our business and the price of our common stock |
| Such noncompliance could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements |
| In addition, perceptions of our business among customers, suppliers, rating agencies, lenders, investors, securities analysts, and others could be adversely affected |
| The nature of our business exposes us to product liability, recall, and warranty claims and other legal proceedings |
| We are subject to litigation in the ordinary course of our business |
| The risk of product liability, recall, and warranty claims are inherent in the design, manufacture, and sale of automotive products, the failure of which could result in property damage, personal injury, or death |
| Although we currently maintain what we believe to be suitable and adequate product liability insurance, we may not be able to maintain this insurance on acceptable terms and this insurance may not provide adequate protection against potential liabilities |
| In addition, we may be required to participate in a recall involving our products |
| Furthermore, our customers can initiate a recall of our products without our agreement and offset their costs of the recall against payments due to us for other products |
| A successful product liability claim in excess of available insurance coverage or a requirement to participate in a product recall could have a material adverse effect on our business |
| In addition, we are involved in other legal proceedings, which could adversely affect our cash flows, financial condition, or results of operations |
| Our pension and other postretirement employee benefits expense could materially increase |
| Certain of our current and former employees participate in defined benefit pension plans |
| The plans are currently underfunded |
| Declines in interest rates or the market values of the securities held by the plans, or certain other changes, could materially increase the amount by which the plans are underfunded, affect the level and timing of required contributions, and significantly increase our pension expenses and reduce profitability |
| We also sponsor other postretirement employee benefit plans that cover certain current and former employees and eligible dependents |
| We fund these obligations on a pay-as-you-go basis |
| Increases in the expected cost of the benefits, particularly health care, in excess of our assumptions could increase our actuarially determined liability and related expense along with future cash outlays |
| We are being investigated by the SEC in connection with the restatement of our fiscal 1999, 2000, and fiscal quarter ended April 30, 2001 consolidated financial statements |
| In 2002 we restated our consolidated financial statements filed with the SEC for fiscal years 1999 and 2000, and related quarterly periods, and for the fiscal quarter ended April 30, 2001 |
| The SEC is conducting an investigation into the facts and circumstances giving rise to our restatement |
| We have been and intend to continue cooperating with the SEC in connection with its investigation, but we cannot predict the outcome of the investigation |
| The SEC may take actions against us that could have a negative impact on our financial condition, although the staff of the SEC has advised us that it currently does not intend to recommend that the SEC impose monetary fines or penalties against the company |
| In addition, publicity surrounding the SEC’s investigation or any enforcement action, even if ultimately resolved favorably for us, could have a material adverse impact on our business |