Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-14789
GENTEK INC.
(Exact name of Registrant as specified in its charter)
Delaware 02-0505547
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
90 East Halsey Road 07054
Parsippany, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (973) 515-3221
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter: $330,196,120.
Applicable to issuers involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Sections 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
Yes [X] No [ ]
The number of outstanding shares of the Registrant's Common Stock as of
March 10, 2005 was 10,098,570.
Documents Incorporated by Reference:
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 6, 2005, to be filed within 120 days
after the close of the Registrant's fiscal year, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
================================================================================
PART I
Item 1. Business.
Overview
GenTek Inc. (the "Company" or "GenTek") is a holding company whose
subsidiaries manufacture industrial components and performance chemicals.
GenTek's subsidiaries operate through two primary business segments:
manufacturing and performance products. The manufacturing segment provides a
broad range of engineered components and services to three principal markets:
automotive, appliance and electronic, and industrial. The performance products
segment provides a broad range of value-added chemical products and services to
four principal markets: environmental services, pharmaceutical and personal
care, technology and chemical processing. The Company's products are frequently
highly engineered and are important components of, or provide critical
attributes to, our customers' end products or operations. The Company operates
over 60 manufacturing and production facilities located primarily in the U.S.,
Canada, Mexico and India with additional operations in Germany and the United
Kingdom. GenTek has no independent operations and, therefore, is dependent upon
cash flow from its subsidiaries to meet its obligations.
Dividends and Recapitalization
On December 27, 2004, the Company paid a special dividend of $7.00 per
common share, totaling approximately $71 million, which was funded primarily
from excess cash generated from the sale of the Company's KRONE communications
business.
On February 28, 2005, the Company's board of directors declared a special
dividend of $31.00 per common share payable on March 16, 2005 to holders of
record on March 10, 2005. Also, on February 28, 2005, GenTek closed on a secured
financing consisting of $370 million of term loans and a $60 million revolving
credit facility. The Company will use approximately $313 million of the
financing proceeds to pay the special dividend and $35 million of the proceeds
to pre-fund certain defined benefit pension obligations. The remainder of the
proceeds will be used to pay transaction fees, to refinance existing debt and
for general corporate purposes. The payment of the two special dividends and the
closing on the financing reflect the completion of the Company's
recapitalization plan. The Company believes these actions provide substantial
value to current holders of common stock and establish a more appropriate
capital structure for the Company.
Acquisition
On June 30, 2004, the Company acquired a wire harness and subassembly
manufacturing operation located in Reynosa, Mexico from Whirlpool Corporation
for $8.4 million. As part of the transaction, the Company entered into a
seven-year supply agreement to supply wire harnesses, panel assemblies, copper
tubing and related components to Whirlpool's North American appliance production
facilities. The results of operations of the facility have been included in the
Company's financial statements beginning July 1, 2004. Revenues from the supply
agreement were approximately $80 million for the six month period ending
December 31, 2004.
Discontinued Operations
On May 18, 2004, the Company sold its KRONE communications business to ADC
Telecommunications, Inc. (ADC). Accordingly, all financial information included
herein has been
-1-
reclassified to reflect the KRONE communications business as discontinued
operations. Net proceeds from the transaction of approximately $291 million were
used to repay amounts outstanding under the Company's senior term loan agreement
in full, as well as make the payment required by the contingent redemption
feature of the Company's tranche A warrants. The payment was made on June 30,
2004 and the tranche A warrants expired.
Emergence From Chapter 11 Reorganization
On October 11, 2002, GenTek and 31 of its direct and indirect subsidiaries,
including its Noma Company subsidiary (collectively, the "Debtors") filed
voluntary petitions for reorganization relief ("the Filing") under Chapter 11 of
the United States Bankruptcy Code. The protection afforded by Chapter 11 allowed
the Debtors to continue to serve their customers and preserve the value of their
businesses, while they reorganized and worked to develop and implement a
strategic plan to deleverage the Company's balance sheet and create an improved
long-term capital structure.
The Debtors' plan of reorganization (the "Plan") was confirmed on October
7, 2003 and became effective in accordance with its terms on November 10, 2003
(the "Effective Date"). The Plan provided for the treatment of all pre-petition
claims and liabilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Reorganization under Chapter 11 of the US
Bankruptcy Code" for a further discussion of the Plan.
The consolidated financial statements have been prepared in accordance with
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," and on a going concern basis, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. In connection with its emergence
from bankruptcy on November 10, 2003, the Company has adopted fresh-start
reporting in accordance with SOP 90-7. Accordingly, the Company's post-emergence
financial statements ("Successor") will not be comparable with its pre-emergence
financial statements ("Predecessor").
Products and Services by Segment
The following table sets forth the Company's sales by segment:
Years Ended December 31,
-------------------------
2004 2003(1) 2002
------ ------- ------
(In millions)
Manufacturing....................................... $514.6 $425.9 $477.1
Performance Products................................ 316.6 335.9 357.4
Corporate and other................................. 12.7 21.3 26.9
------ ------ ------
$843.9 $783.1 $861.4
====== ====== ======
- ----------
(1) This data is a non-GAAP financial measure within the meaning of Regulation
G promulgated by the Securities and Exchange Commission. Included in Item
7. Reconciliation of Non-GAAP Financial Measures 2003 is a reconciliation
of statement of operations data for the full year 2003 to the Predecessor
Company and Successor Company statements of operations for the periods
ended November 10, 2003 and December 31, 2003, respectively. Management
believes that this information is the most relevant and useful information
for making comparisons to the periods ended December 31, 2002 and 2004.
-2-
Manufacturing Segment
The manufacturing segment provides a broad range of engineered components,
wiring products and services to three principal markets: automotive, appliance
and electronic, and industrial. The Company's products for these markets are
described below:
Automotive. For the automotive market, the Company provides:
o precision-engineered components for valve-train systems, including
stamped and machined rocker and roller-rocker arms, cam follower
rollers, cam follower roller axles, antifriction bearings, mechanical
roller tappets and other hardened/machined components;
o electronic wire and cable assemblies, such as wire harnesses, ignition
cables, molded parts, electro-mechanical assemblies, engine block
heaters, battery blankets and various electrical switches, used in the
manufacture of automobiles, light and heavy duty trucks and personal
recreation vehicles such as snowmobiles and personal water crafts;
o computer-aided and mechanical vehicle and component testing services
for the transportation industry; and
o fluid transport and handling equipment for automotive service
applications.
The Company's precision-engineered stamped and machined engine components
for valve-train systems improve engine efficiency by reducing engine friction
and component mass. These components are used both in traditional overhead valve
and in the increasingly popular single and double overhead cam engines which
power cars, light trucks and sport utility vehicles. Over the last several
years, the Company has benefited from the design transition of overhead valve
engines to overhead cam engines providing a strong position with which to
participate in the industry's latest efforts to improve fuel efficiency and
power. Increased design use of additional valves per cylinder to improve
fuel/air throughput have resulted in volume growth on specific engine
applications. The majority of the Company's valve-train production is sold to
U.S. automobile manufacturers and their Tier 1 suppliers. The Company has
recently established assembly operations, on a contract basis, in Germany in
order to support its European growth.
The Company's wire and cable assembly products include a variety of
automotive electronic components for use in OEM production and the aftermarket.
The Company is a leading Tier 2 supplier of products such as wire harnesses,
ignition cables, engine block heaters, battery blankets and various electrical
and electro-mechanical switches and assemblies. The Company continues to benefit
from increasing electrical content in vehicles manufactured by OEM's.
Through its automotive testing offerings, the Company provides mechanical
testing services and computer-aided design, engineering and simulation services
for automotive structural and mechanical systems to OEMs and Tier 1 suppliers.
The Company provides a wide range of testing services for automotive components
and systems from single sub-systems, such as chassis, suspension, seats and
seating assemblies, to entire vehicles. The Company's engineering and simulation
services provide customers with finite element modeling, kinematics, and crash
and variation simulation analyses, and allow its customers to test their
automotive products for durability, stress, noise, vibration and environmental
considerations.
Automotive manufacturers generally award business to their suppliers by
individual engine line or model, often for multiple-model years. The loss of any
individual engine line or model contract would
-3-
not be material to the Company. However, an economic downturn in the automotive
industry as a whole or other events (e.g., labor disruptions) resulting in
significantly reduced operations of any of DaimlerChrysler, Ford or General
Motors could have a material adverse impact on the results of the Company's
manufacturing segment. None of these customers accounted for 10 percent or more
of the Company's revenues in 2004.
Appliance and Electronic. The Company produces custom-designed power cord
systems and wire and cable assemblies for a broad range of appliances and
electronic products including:
o household appliances, such as refrigerators, freezers, dishwashers,
washing machines, dryers, ovens, ranges and air conditioners;
o electronic office equipment, including copiers and printers; and
o various electronic products, such as medical equipment, ATM machines
and water treatment equipment.
The Company's specialized wiring expertise and high-quality wire and cable
assemblies are generally provided to larger OEM customers. A highly-competitive
environment has required the Company's customers to improve their productivity
by outsourcing to lower cost suppliers. The Company operates manufacturing
facilities in Canada, Mexico and India and also sources certain finished
products from lower cost third party manufacturers in Asia. Many of these
facilities produce wire and cable assemblies for both the appliance and
electronic market as well as the automotive market. As a result of the
acquisition of the Reynosa Mexico operation in June 2004 and the establishment
of a long-term supply agreement, Whirlpool accounted for approximately 14
percent of the Company's revenues in 2004. The Company believes the addition of
the Reynosa facility and the Company's recently established facility in India
have substantially improved the Company's competitive position in this market.
Industrial. For the industrial market, the Company manufactures:
o custom-designed wire harness and power cord systems for power tools,
motors, pumps and other industrial products; and
o wire and cable for industrial markets, the commercial and residential
construction industries and for a wide variety of end market uses by
OEMs.
The Company produces a broad product line of single and multi conductor
wire and cable, wire harnesses and power cord systems. The Company's wire
jacketing expertise includes the use of polyvinyl chloride (PVC), rubber,
thermoplastic elastomer (TPE) and cross-link compounds.
Performance Products Segment
The Company's performance products segment provides a broad range of
value-added products and services to four principal markets: environmental
services, pharmaceutical and personal care, technology and chemical processing.
The Company's products and services for these markets are described below.
Environmental Services. With a network of 35 water treatment chemical
plants located throughout the United States and Canada, the Company is the
largest North American producer of aluminum sulfate, or "alum", which is used as
a coagulant in potable water and waste water treatment applications, and a
leading supplier of ferric sulfate and other specialty flocculents
(polymer-based
-4-
materials used for settling and/or separating solids from liquids). The
Company's water treatment products and services are designed to address the
important environmental issues confronting its customers. These value-added
products and services provide cleaner drinking water, restore algae-infested
lakes, reduce damaging phosphorus runoff from agricultural operations, and
significantly reduce pollution from industrial waste water.
In the environmental market, the Company also provides sulfuric acid
regeneration services to the refining and chemical industries, and pollution
abatement and sulfur recovery services to selected refinery customers.
Refineries use sulfuric acid as a catalyst in the production of alkylate, a
gasoline blending component with favorable performance and environmental
properties. The alkylation process contaminates and dilutes the sulfuric acid,
thereby creating the need to dispose of or regenerate the contaminated acid. The
Company transports the contaminated acid back to the Company's facilities for
recycling and redelivers the fresh, recycled acid back to customers. This
"closed loop" process offers customers significant savings versus alternative
disposal methods and also benefits the environment by significantly reducing
refineries' waste streams.
Pharmaceutical and Personal Care. The Company is a leading supplier of the
active chemical ingredients used in the manufacture of antiperspirants, and also
supplies active ingredients used in prescription pharmaceuticals, nutritional
supplements, veterinary health products and other personal care products. Our
customer base includes many of the world's leading personal care companies, and
we are favorably positioned with both North American and European sourcing
capabilities.
Technology. The Company provides ultrahigh-purity electronic chemicals for
the semiconductor and disk drive industries. The Company's electronic chemicals
include ultrahigh-purity acids, caustics, solvents, etchants and formulated
photo ancillaries for use in the manufacture of semiconductor processing chips
and computer disk drives.
Chemical Processing. The Company manufactures a broad range of products
that serve as chemical intermediates in the production of such everyday products
as newspapers, tires, paints, dyes and carpets. The Company's products include:
o alum and polymer-based enhanced coagulants used in paper manufacturing
to impart water resistance;
o sodium nitrite, of which the Company is one of only two North American
producers, primarily used as a reactant in the manufacture of dyes,
pigments and rubber processing chemicals;
o sulfuric acid, which is used in the manufacture of titanium pigments,
fertilizers, synthetic fibers, steel, petroleum and paper, as well as
many other products.
Competition
Competition in the manufacturing segment's markets is based upon a number
of factors including design and engineering capabilities, quality, price and the
ability to meet customer delivery requirements. In the automotive market, the
Company competes with, among others, Eaton, INA, Timken, Yazaki and captive
OEMs. In the appliance and electronic and industrial markets, the Company
competes with Copperfield, General Cable, International Wire, Molex, Nexans and
Viasystems, among others.
Although the Company's performance products segment generally has
significant market share positions in the product areas in which it competes,
most of its end markets are highly competitive. In the
-5-
pharmaceuticals and personal care market, the Company's major competitors
include BK Giulini Corp. and Summit Research Labs as well as the captive
production facilities of certain personal care companies. The Company's
competitors in the environmental market include the refineries that perform
their own sulfuric acid regeneration, as well as DuPont, Marsulex, Peak, PVS and
Rhodia, which also have sulfuric acid regeneration facilities that are generally
located near their major customers. In addition, the Company competes with Geo
Specialty Chemicals, Kemiron Companies Inc., U.S. Aluminates and other regional
players in the water treatment market. Competitors in the technology market
include Air Products, Honeywell Electronic Materials and
Tyco/Mallinckrodt-Baker. Competitors in the chemical processing market include
BASF, Norfalco LLC, Rhodia, and U.S. Salt.
Suppliers; Availability of Raw Materials
The Company purchases a variety of raw materials for its businesses. The
primary raw materials used by the manufacturing segment are copper and steel.
The Company's performance products segment's competitive cost position is, in
part, attributable to its control of certain raw materials that serve as the
feedstocks for many of its products. Consequently, major raw material purchases
are limited primarily to sulfuric acid where it is uneconomical for the Company
to supply itself due to distribution costs, bauxite and aluminum tri-hydrate
(for the manufacture of alum), zirconium based products (for the manufacture of
antiperspirant active ingredients), sulfur (for the manufacture of sulfuric
acid), and soda ash (for the manufacture of sodium nitrite).
We purchase raw materials from a number of suppliers and, in most cases,
believe that alternative sources are available to fulfill our needs. A number of
the raw materials we purchase are subject to cyclical price movements. Over the
past twelve months, commodity prices, in general, have trended upward, in some
cases significantly. In particular, the continued tight supply in the steel
market has put substantial upward pressure on steel prices, while copper prices
have remained at cyclically high levels. In our performance products segment, we
are able to pass through all or a portion of raw material price increases, but
often on a lagged basis. While the Company has been able to pass through a
significant portion of copper raw material price increases, it has had limited
success in doing so with steel cost increases in its automotive business. The
Company continues its efforts to ensure it has sufficient access to required raw
materials at competitive prices and to pass along raw material price increases
where possible.
Sales and Distribution
The Company's manufacturing segment has approximately 50 sales, marketing
and customer service personnel. Generally, the Company markets its products
directly to its customers, but in certain industrial markets a distribution
network is used. The manufacturing segment's technical and engineering staff is
an integral part of the segment's sales and distribution effort. Since many of
the Company's products are precision-engineered and custom-designed to customer
specifications, the Company's sales force and engineers work closely with its
customers in designing, producing, testing and improving its products.
In the Company's performance products segment, the Company employs
approximately 100 sales, marketing, distribution and customer service personnel.
The sales force is divided into several specialized groups which focus on
specific products, end-users and geographic regions. This targeted approach
provides the Company with insight into emerging industry trends and creates
opportunities for product development.
-6-
Seasonality; Backlogs
The business of the manufacturing segment is generally not seasonal. Within
the performance products segment, the environmental services business has higher
volumes in the second and third quarters of the year, owing to (i) higher spring
and summer demand for sulfuric acid regeneration services from gasoline refinery
customers to meet peak summer driving season demand and (ii) higher spring and
summer demand from water treatment chemical customers to manage seasonally high
and low water conditions. The other markets that the performance products
segment serves are generally not seasonal. Due to the nature of the Company's
businesses, there are no significant backlogs.
Environmental Matters
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 U.S., 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, the Company is involved from time to time in
administrative and judicial proceedings and inquiries relating to environmental
matters. Based on information available 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 of 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
the Company to make expenditures which may be material or otherwise adversely
impact the Company's operations.
The Company maintains a program to manage its facilities' compliance with
environmental laws and regulations. Expenditures for 2004 approximated $14
million (of which approximately $4 million represented capital expenditures and
approximately $10 million related to ongoing operations and the management and
remediation of potential environmental contamination from prior operations).
Expenditures for 2003 approximated $17 million (of which approximately $4
million represented capital expenditures and approximately $13 million related
to ongoing operations and the management and remediation of potential
environmental contamination from prior operations). The Company expects
expenditures similar to 2004 levels in 2005. In addition, if environmental laws
and regulations affecting the Company's operations become more stringent, costs
for environmental compliance may increase above historical levels.
The Comprehensive Environmental Response Compensation and Liability Act of
1980 ("CERCLA") and similar statutes, have been construed as imposing joint and
several liability, under certain circumstances, on present and former owners and
operators of contaminated sites, and transporters and generators of hazardous
substances, regardless of fault. The Company's facilities have been operated for
many years by the Company or its prior owners and operators, and adverse
environmental conditions of which the Company is not aware may exist.
Modifications of existing laws and regulations and discovery of additional or
unknown environmental contamination at any of the Company's current or former
facilities could have a material adverse effect on the Company's financial
condition, cash flows and/or results of operations. In addition, the Company has
received written notice from the Environmental Protection Agency that it has
been identified as a "potentially responsible party" under CERCLA at two
third-party sites. The Company does not believe that its liability, if any, for
these sites will be material to its results of operations, cash flows or
financial condition.
-7-
At any time, the Company may be involved in proceedings with various
regulatory authorities which could require the Company to pay various fines and
penalties due to violations of environmental laws and regulations at its sites,
remediate contamination at some of these sites, comply with applicable standards
or other requirements, or incur capital expenditures to modify certain pollution
control equipment or processes at its sites. Again, although the amount of any
liability that could arise with respect to these matters cannot be accurately
predicted, the Company believes that the ultimate resolution of these matters
will have no material adverse effect on its results of operations, cash flows or
financial condition.
Avtex Site at Front Royal, Virginia. On March 22, 1990, the Environmental
Protection Agency (the "EPA") issued to the Company a Notice of Potential
Liability pursuant to Section 107(a) of CERCLA with respect to a site located in
Front Royal, Virginia, owned at the time by Avtex Fibers Front Royal, Inc.,
("Avtex") which filed for bankruptcy. A sulfuric acid plant adjacent to the main
Avtex site was previously owned and operated by the Company. The Company
reacquired the sulfuric acid plant site through the bankruptcy in order to
control the required investigation and, if necessary, remediation. On September
30, 1998, the EPA issued an administrative order under Section 106 of CERCLA,
which requires the Company, through its predecessor, AlliedSignal Inc. (now
Honeywell Inc.) and Avtex to undertake certain removal actions at the acid
plant. On October 19, 1998, the Company delivered to the EPA written notice of
its intention to comply with that order, subject to numerous defenses. The
Company investigated potential soil and groundwater contamination and
decommissioned the site. As part of the Company's Filing, the Company entered
into an agreement with Honeywell, the previous owner and operator, whereby
Honeywell agreed to take back all environmental liability at the site, past,
present and future, and took back ownership of the site. Although the EPA
refused to formally drop the Company from the administrative order, the EPA
signed a letter acknowledging Honeywell's agreement to be responsible for all
liability at the site and agreed to seek recourse against Honeywell for such
liability and only look to the Company in the event of a default by Honeywell.
The Company believes that there is a strong likelihood that no further costs
will be incurred at this site.
Delaware Valley Facility. On September 7, 2000, the U.S. Environmental
Protection Agency issued to the Company an Initial Administrative Order (an
"IAO") pursuant to Section 3008(h) of the Resource Conservation and Recovery Act
("RCRA"), which requires that the Company conduct an environmental investigation
of the Company's Delaware Valley facility (the "Facility") and, if necessary,
propose and implement corrective measures to address any historical
environmental contamination at the Facility. Over the past four years, the
Company has been working cooperatively with the EPA and Honeywell Inc., a prior
owner of the Facility and current owner of a plant adjacent to the Facility, to
implement the actions required under the IAO. The Company conducted the first
investigatory steps required by the IAO, the evaluation of potential soil and
groundwater contamination, in both the North Plant (the area of the facility
north of US Route 18) and the South Plant (the area south of US Route 18) that
borders the Delaware River. As a result of the Filing, the Company entered into
an agreement with Honeywell dated April 30, 2004 to take back all environmental
liability at the North Plant, past, present and future, as well as future
ownership of the North Plant. In addition, Honeywell took responsibility for the
cost to address groundwater contamination at the South Plant. The Company
remains responsible only for soil contamination at the South Plant. Although the
EPA refused to formally drop the Company from the IAO, the EPA has agreed to
sign a letter acknowledging Honeywell's agreement to be responsible for all
liability at the North Plant and for groundwater contamination at the South
Plant and to seek recourse against Honeywell for those liabilities and only look
to the Company in the event of a default by Honeywell. The remaining
requirements of the IAO will be performed over the course of the next several
years. The Company closed the South Plant operations of its Delaware Valley
facility on November 10, 2003. This closure resulted in an expansion of the
investigation to be performed under the IAO. Depending on the results of that
additional investigation, additional remedial activity may be
-8-
required for soils in the South Plant. The Company has provided for the
estimated costs of $2.3 million for compliance with the IAO in its accrual for
environmental liabilities. As such, the Company believes that compliance with
the IAO will not have a material effect on its results of operations or
financial condition.
Employees/Labor Relations
At December 31, 2004, the Company had approximately 7,000 employees, of
whom approximately 1,075 were full-time salaried employees, approximately 4,010
were full-time hourly employees (represented by 11 different unions) and
approximately 1,915 were hourly employees working in nonunion facilities.
The Company's union contracts have durations which vary from two to four
years. The Company's relationships with its unions are generally good.
Executive Officers and Key Employees
Set forth below is information with respect to each of the Company's
executive officers and/or key employees.
Richard R. Russell, 62, President and Chief Executive Officer and a
Director since April 1999. Mr. Russell has also been the President and Chief
Executive Officer of GenTek Holding LLC (formerly General Chemical Corporation)
since 1986.
Mark J. Connor, 38, Vice President - Corporate Development and Investor
Relations since November 2003. From October 2000 to November 2003, Mr. Connor
served as Assistant Treasurer. From 1998 through October 2000, Mr. Connor served
as Assistant Treasurer of The Warnaco Group, Inc.
John Cowen, 54, Vice President and General Manager - Noma Industrial since
October 2004. From 2001 to 2004, Mr. Cowen was self-employed as a management
consultant. From 1986 to 2001, Mr. Cowen held several executive management
positions with Noma including roles in finance, sales & marketing, and general
management.
George G. Gilbert, 56, Vice President and General Manager - Valve Train
Group since 2001. From 1997 to 2001, Mr. Gilbert held the position of Vice
President Technical Services/Strategic Development, for Simpson Industries.
Matthew R. Friel, 38, Executive Vice President Finance and Corporate
Development since August 2004. Mr. Friel was formerly the Vice President and
Chief Financial Officer since September 2001. Mr. Friel also served as Treasurer
from September 2001 to October 2003. From September 1997 to September 2002, Mr.
Friel served as Managing Director of Latona Associates Inc. ("Latona
Associates"). Latona Associates provided GenTek with certain administrative
functions and corporate support services from 1995 until 2004.
Michael J. Murphy, 54, Vice President and General Manager - Noma Harness
Group since August 2004. From 2001 to 2004 Mr. Murphy served as the Vice
President Sales & Marketing for Noma. Prior to working for Noma, Mr. Murphy
served as the Vice President of Sales (1998-2001) for Dialight Corporation.
-9-
Robert D. Novo, 47, Vice President of Human Resources and Environmental
Health and Safety since August 2004. Mr. Novo served as the Vice President of
Human Resources from July 2003 to August 2004. Prior to July 2003, Mr. Novo held
various senior level human resource positions with Honeywell International since
1995.
Kevin J. O'Connor, 54, Vice President and Controller since April 1999. Mr.
O'Connor has also served as Controller of GenTek Holding LLC (formerly General
Chemical Corporation) since 1986.
Scott Sillars, 50, Vice President and Treasurer since October 2003. Mr.
Sillars served as Acting Treasurer from 2002 to October 2003 . From 1998 through
2002, Mr. Sillars served as an Independent Consultant in general management and
corporate finance.
Thomas B. Testa, 43, Vice President and General Manager - Performance
Products Group since August 2004. From April 2002 to August 2004, Mr. Testa
served as Vice President - Operations for the Performance Products Group. He
previously served as General Manager of the Electronic Chemicals business group
from October 1997 to April 2002.
Matthew M. Walsh, 38, Vice President and Chief Financial Officer since
August 2004. Mr. Walsh was formerly the Vice President and Operations Controller
since December 2000. Mr. Walsh served as Vice President and Treasurer from
January 2000 through December 2000.
Corporate Governance and Internet Address
We emphasize the importance of professional business conduct and ethics
through our corporate governance initiatives. Our board of directors has adopted
a code of business conduct and ethics that applies to all employees, directors
and officers, including the Company's principal executive officer, principal
financial officer and principal accounting officer. Our board of directors
consists of a majority of independent directors.
Our internet address is www.gentek-global.com. We make available, free of
charge through a link on our site, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to such
reports, if any, as filed with the SEC as soon as reasonably practicable after
such filing. Our site also contains our code of business conduct and ethics and
the charters of the audit committee, corporate governance and nominating
committee and compensation committee of our board of directors. Our principal
executive offices are located at 90 East Halsey Road, Parsippany, New Jersey
07054, and our telephone number is (973) 515-3221.
Risk Factors
The following is a discussion of certain factors that currently impact or
may impact our business, operating results and/or financial condition. An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below before deciding to invest in our
common stock. In assessing these risks, you should also refer to the other
information in this Annual Report on Form 10-K, including our 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.
-10-
Risks Related to Our Company
We entered into new credit facilities in 2005 which will significantly increase
GenTek's leverage. The Company's ability to make payments on its debt will be
contingent GenTek's future operating performance which will depend on a number
of factors that are outside of our control.
On February 28, 2005, GenTek closed on a secured financing consisting of
$370 million of term loans and a $60 million revolving credit facility (the
"Credit Facilities"). The term loans include a $235 million first lien loan due
in March 2011 with an interest rate of LIBOR plus 2.75% or base rate plus 1.75%,
subject to a rate reduction of 0.25% if such term loan is rated B1 or better by
Moody's Investor Services, Inc. and a $135 million second lien loan due March
2012 with an interest rate of LIBOR plus 5.75% or base rate plus 4.75%. The $60
million revolving credit facility matures in March 2010 and carries an interest
rate of LIBOR plus 2.75% or base rate plus 1.75%, subject to rate reductions
under a pricing grid if Company's leverage ratio decreases. The Company will use
approximately $313 million of the financing proceeds to pay a special dividend
and $35 million of the proceeds to pre-fund certain defined benefit pension
obligations. The remainder of the proceeds will be used to pay transaction fees,
to refinance existing debt and for general corporate purposes.
Our debt service obligations with respect to the Credit Facilities are
estimated to be approximately $28 million to $32 million in 2005, including
approximately $2 million of principal repayments, if such debt were outstanding
for the entire year. 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.
Our ability to make principal and interest payments on our bank debt is
contingent on the our future operating performance, which will depend on a
number of factors, many of which are outside of our control. The degree to which
GenTek is leveraged could have other important negative consequences, including
the following:
o we must dedicate a substantial portion of our cash flows from
operations to the payment of our indebtedness, reducing the funds
available for future working capital requirements, capital
expenditures, acquisitions or other general corporate requirements;
o a significant portion of our 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;
o we may be more vulnerable to a downturn in the industries in which we
operate or a downturn in the economy in general;
o we may be limited in our flexibility to plan for, or react to, changes
in our businesses and the industries in which we operate;
o we may be placed at a competitive disadvantage compared to our
competitors that have less debt;
o we may be limited in our ability to react to unforeseen increases in
certain costs and obligations arising in our businesses, including
environmental, pension and tax liabilities;
o we may determine it to be necessary to dispose of certain assets or
one or more of our businesses to reduce our debt; and
o our ability to borrow additional funds may be limited.
-11-
We can provide no assurance that our businesses will generate sufficient
cash flow from operations or that future borrowings will be available in amounts
sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. Moreover, we may need to refinance all or a portion of our indebtedness
on or before maturity. In such a case, we cannot make assurances that we will be
able to refinance any of our indebtedness on commercially reasonable terms or at
all. If we are unable to make scheduled debt payments or comply with the other
provisions of our debt instruments, our 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.
We are subject to restrictive debt covenants pursuant to our indebtedness. These
covenants may restrict our ability to finance our business and, if we do not
comply with the covenants or otherwise default under them, we may not have the
funds necessary to pay all amounts that could become due and the lenders could
foreclose on substantially all of our assets.
The Credit Facilities, among other things, significantly restricts and, in
some cases, effectively eliminates our ability and the ability of most of our
subsidiaries to:
o incur additional debt;
o create or incur liens;
o pay dividends or make other equity distributions;
o purchase or redeem share capital;
o make investments;
o sell assets;
o issue or sell share capital of certain subsidiaries;
o engage in transactions with affiliates;
o issue or become liable on a guarantee;
o voluntarily prepay, repurchase or redeem debt;
o create or acquire new subsidiaries; and
o effect a merger or consolidation of, or sell all or substantially all
of our assets.
In addition, under the Credit Facilities, we and our subsidiaries must
comply with certain financial covenants. In the event we were 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 our assets. The material financial covenants with which we
must comply include total leverage, total interest coverage, and maximum capital
expenditures.
The covenants contained in our Credit Facilities and any credit agreement
governing future debt may significantly restrict our future operations.
Furthermore, upon the occurrence of any event of default under our Credit
Facilities or the agreements governing any other debt of our 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,
we cannot assure you that our assets and the assets of our subsidiaries would be
sufficient to repay those amounts in full.
We are also subject to interest rate risk due to our indebtedness at
variable interest rates. Our Credit Facilities bear interest at variable rates
based on a base rate or LIBOR plus an applicable margin. We cannot assure you
that shifts in interest rates will not have a material adverse effect on us.
-12-
We may be required to prepay our indebtedness prior to its stated maturity,
which may limit our ability to pursue business opportunities.
Pursuant to the terms of our Credit Facilities, in certain instances we are
required to prepay outstanding indebtedness prior to its stated maturity date,
even if we are 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 our ability to utilize this excess cash flow to pursue business
opportunities.
Our business is capital intensive. We cannot assure you that we will have
sufficient liquidity to fund our working capital and capital expenditures and to
meet our obligations under existing debt instruments.
Our business is capital intensive and we cannot be certain that we will
achieve sufficient cash flow in the future. Failure to maintain profitability
and generate sufficient cash flow could diminish our ability to sustain
operations, meet financial covenants, obtain additional required funds and make
required payments on any indebtedness we have incurred or may incur in the
future. If we do not comply with the covenants in our Credit Facilities or
otherwise default under them, we may not have access to borrowings under our $60
million revolving credit facility or the funds necessary to pay amounts that
become due.
Although we believe that our current levels of cash and cash equivalents,
along with available borrowings on our revolving credit facility, will be
sufficient for our cash requirements during the next twelve months, it is
possible that these sources of cash will be insufficient, resulting in our
having to raise additional funds for liquidity. There can be no assurance we
will have access to additional funding should the need arise.
The industries in which we operate are highly competitive. This competition may
prevent us from raising prices at the same pace as our costs increase, making it
difficult for us to maintain existing business and win new business.
We face significant competition in most of our businesses. Certain of our
competitors have large market shares and substantially greater financial and
technical resources than we do. We may be required to reduce prices if our
competitors reduce prices, or as a result of any other downward pressure on
prices for our products and services, which could have an adverse effect on us.
In each of our business segments, we operate in competitive markets. Our
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,
our 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 our
performance products segment does business are highly competitive, with
competitors typically segregated by end market. Competition in the performance
products segment's markets is based on a number of factors, including price,
freight economics, product quality and technical support. Due to the level of
competition faced by our performance products segment, our customers have
regularly requested price decreases and maintaining
-13-
or raising prices has been difficult over the past several years and will likely
continue to be so in the near future. If we are unable to compete successfully,
our financial condition and results of operations could be adversely affected.
We may experience increased costs and production delays if suppliers fail to
deliver materials to us or if prices increase for raw materials and other goods
and services that we purchase from third parties.
We purchase raw materials from a number of domestic and foreign suppliers.
Although we believe that the raw materials we require will be available in
sufficient supply on a competitive basis for the foreseeable future, continued
increases in the cost of raw materials, including energy and other inputs used
to make our products, could affect future sales volumes, prices and margins for
our products. If a supplier should cease to deliver goods or services to us, we
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 our ability to obtain key raw materials in a timely fashion, or
at all.
Our revenues are dependent on the continued operation of our manufacturing
facilities, and breakdowns or other problems in their operation could adversely
affect our results of operations.
Our revenues are dependent on the continued operation of our 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 our
facilities could have a material adverse effect on our results of operations or
financial condition. Certain facilities within each of our business segments
account for a significant share of our profits. Disruption to operations at one
of these facilities could have a material adverse impact on segment financial
performance and our overall financial condition. In addition, in certain
circumstances we could also be materially affected by a disruption or closure of
a customer's plant or facility to which we supply our products.
We are subject to risks relating to our foreign operations.
We have significant manufacturing activities outside of the U.S., primarily
located in Mexico, Canada and India. These international operations subject us
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 our costs or have other negative
effects on us.
Material changes in pension and other post-retirement benefit costs may occur in
the future. In addition, investment returns on pension assets may be lower than
assumed, which could result in larger cash funding requirements for our pension
plans, which could have an adverse impact on us.
We maintain several defined benefit pension plans covering certain
employees in Canada, Ireland and the United States. We record pension and
post-retirement benefit costs in amounts developed from actuarial valuations.
Inherent in these valuations are key assumptions including the discount rate 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
-14-
experience and the assumptions used, and changes in the benefit plans. Amounts
we pay are also dependent upon interest rates. Due to current interest rates and
investment returns, some of our plans are underfunded. We are required to
rectify this underfunding in accordance with federal guidelines. After giving
effect to the pension pre-funding of $35 million planned in March 2005, we are
expected 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, we may have substantially larger cash funding
requirements for our pension plans, which may have a material adverse impact on
our liquidity. In addition, changes in federal laws relating to the funding of
pension plans may have a material adverse impact on our liquidity. For a further
discussion of our defined benefit pension plans, see "Management's Discussion
and Analysis - Financial Condition, Liquidity and Capital Resources."
Our principal businesses are subject to government regulation, including
environmental regulation, and changes in current regulations may adversely
affect us.
Our 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 our activities and those
of our competitors could have a material adverse effect on us.
For example, our 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 U.S., Canada, Mexico, India and other countries. We believe that we are
in substantial compliance with such laws and regulations. However, as a result
of our operations, from time to time we are involved in administrative and
judicial proceedings and inquiries relating to environmental matters. Based on
information available to us at this time with respect to potential liability
involving these facilities, we believe that any such liability will not have a
material adverse effect on our 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 us to make expenditures which
may be material or may otherwise adversely impact our operations.
The production of chemicals is associated with a variety of hazards which could
create significant liabilities or cause our facilities to suspend their
operations.
Our 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 our results of operations
or financial condition.
Our facilities have been operated for many years by us or prior owners and
operators, and adverse environmental conditions of which we are not aware may
exist. The discovery of additional or unknown environmental contamination at any
of our current or former facilities, could have a material adverse effect on our
financial condition, cash flows and/or results of operations.
Efforts to comply with the Sarbanes-Oxley Act will continue to entail
significant expenditure; non-compliance with the Sarbanes-Oxley Act may
adversely affect us.
The Sarbanes-Oxley Act of 2002, as well as the rules subsequently
implemented by the
-15-
Securities and Exchange Commission, have required, and may require in the
future, changes to certain of our accounting and corporate governance practices,
including the requirement that we issue a report on our internal controls as
required by Section 404 of the Sarbanes-Oxley Act. We expect these new rules and
regulations to continue to increase our accounting, legal, insurance and other
costs, and to make certain business activities more difficult, time consuming
and/or costly. In the event that we are unable to achieve and/or maintain
compliance with the Sarbanes-Oxley Act and related rules, this may have a
material adverse effect on us. These rules and regulations could also make it
more difficult for us to attract and retain qualified members of our board of
directors, particularly to serve on our audit committee, as well as qualified
executive officers.
The seasonal nature of the environmental services business could increase our
costs or have other negative effects.
Within our performance products segment, the environmental services
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 our environmental services business could increase
our costs, negatively impact our manufacturing efficiency, or have other
negative effects on our operations or financial performance.
We may not be able to obtain insurance at our historical rates and our insurance
coverage may not cover all claims and losses.
We maintain insurance coverage on our properties, machines, supplies and
other elements integral to our 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, we may not be
able to secure insurance at a similar cost to what we 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.
We are 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 our business.
Our business is dependent on certain critical systems, which support
various aspects of our operations, from our computer network to our 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 our business. While we
believe that we maintain reasonable disaster recovery programs, there can be no
assurance that, despite these efforts, any disaster recovery, security and
service continuity protection measures we 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 our operations.
Our insurance policies may not adequately compensate us for any losses that may
occur due to any failures or interruptions in our computer systems.
-16-
We are a holding company that is dependent upon cash flow from our subsidiaries
to meet our financial obligations; our ability to access that cash flow may be
limited in some circumstances.
We are a holding company with no independent operations or significant
operating assets other than our investments in, and advances to, our
subsidiaries. We depend upon the receipt of sufficient funds from our
subsidiaries through our centralized cash management system from our domestic
subsidiaries and through dividends, loans or other distributions from our
foreign subsidiaries to meet our financial obligations. In addition, the terms
of our and our subsidiaries' existing indebtedness under the Credit Facilities,
and the laws of the jurisdictions under which we and our subsidiaries are
organized, limit the payment of dividends, loan repayments and other
distributions by our subsidiaries to us under some circumstances. Any
indebtedness that we, or our subsidiaries, may incur in the future may contain
similar restrictions. Further, certain of our subsidiaries have their own
indebtedness for which they are responsible which may limit their ability to
distribute cash to us.
Risks Related to Our Common Stock
The market price of our common stock is subject to volatility as well as trends
in our industries.
The market price of our common stock could be subject to wide fluctuations
in response to numerous factors, many of which are beyond our control. These
factors include, among other things, actual or anticipated variations in our
operating results and cash flow, the nature and content of our earnings releases
and our competitors' earnings releases, announcements of technological
innovations that impact our products, customers, competitors or markets, changes
in financial estimates by securities analysts, business conditions in our
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 in our industries, governmental legislation
or regulation, as well as general economic and market conditions, such as
recessions. Since the issuance of our common stock on the Effective Date, the
price of our common stock has been somewhat volatile and remains subject to
volatility. In addition, after giving effect to payment of the $31.00 per share
special dividend payable on March 16, 2005, the market capitalization and share
price of our common stock is expected to be reduced by the value of the
dividend, and the reduced market capitalization and lower share price may
subject our common stock to further volatility.
Trends in the industries in which we compete are likely to have a
corresponding impact on the price of our common stock. Specifically, an economic
downturn in the automotive industry as a whole or other events (e.g., labor
disruptions) resulting in significantly reduced operations at any of
DaimlerChrysler, Ford or General Motors, or at certain of our manufacturing
plants, could have a material adverse impact on the results of our manufacturing
segment. In addition, in the appliance and electronic and industrial markets,
risks include softening of appliance demand, loss of market share by our major
customers, continued price pressure from major customers and continued
competition from lower-cost Asian sources. For our performance products
business, continued weakness in the pulp and paper, electronics or chemical
processing industries could have an adverse effect on our results of operations.
Sales of large amounts of our common stock, or the perception that large sales
could occur, may cause volatility in our stock price.
On the Effective Date, we issued an aggregate of 10,000,000 shares of our
common stock to former holders of our debt securities and other claimants. These
shares represented all of our outstanding common stock as of the Effective Date
and may be sold at any time, subject to compliance with
-17-
applicable law, including the Securities Act, and certain provisions of our
certificate of incorporation, bylaws and the Registration Rights Agreement. 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.
We may not be able to maintain our listing on the NASDAQ National Market.
Since November 23, 2004, our common stock has traded on the NASDAQ National
Market, which requires that we maintain compliance with certain listing
requirements. These requirements include maintaining a minimum level of market
value of our common stock, minimum number of shareholders and minimum level of
stockholders' equity. There is no guarantee that we will remain in compliance
with such requirements in the future. A failure to do so may result in our
de-listing from the NASDAQ National Market, which could adversely effect the
price, liquidity and market for our common stock.
We may in the future seek to raise funds through equity offerings, the exercise
of our Tranche B and Tranche C warrants could create substantial dilution, or
there may be other events which would have a dilutive effect on our common
stock.
In the future we may determine to raise capital through offerings of our
common stock, securities convertible into our common stock, or rights to acquire
such securities or our common stock. In any such case, the result would
ultimately be dilutive to our common stock by increasing the number of shares
outstanding.
In addition, if options or warrants to purchase our common stock are
exercised, or other equity interests are granted under our management and
directors incentive plan or under other plans adopted in the future, such equity
interests will also have a dilutive effect on our common stock. Additional
shares of our common stock and additional warrants may be issued pursuant to the
Plan to certain claimants, subject to the resolution of certain claims.
In accordance with the terms of our Tranche B and Tranche C warrant
agreements, the $7.00 per share dividend paid to holders of common stock on
December 27, 2004 resulted in an increase of the number of common shares for
which the warrants are exercisable and a reduction of the exercise price of each
tranche of warrants. The $31.00 per share dividend declared on February 28, 2005
and payable on March 16, 2005, is expected to result in a further, substantial
increase of the number of common shares for which the warrants are exercisable
and a substantial reduction in the exercise price of each tranche of warrants.
In addition, similar equitable adjustments have been and will be made to options
granted under our management and directors incentive plan. These adjustments to
the warrants and options may have a material dilutive effect on our common
stock.
In the event that the holders of California Tort Claims (as defined in the
Plan) prevail on their asserted claims against us and our insurance does not
cover such claims, stock and warrants would be issued to holders of such claims
and dilution of any outstanding shares of our common stock would occur. Although
we believe we have meritorious defenses to the California Tort Claims and, if
our insurance covers this liability, that we have sufficient insurance coverage
to satisfy any liquidated amounts relating to such claims, there can be no
assurance this will be the case. Under the Plan, holders of California Tort
Claims, to the extent they are determined to hold allowable claims not covered
by insurance, will receive additional shares of our common stock and warrants
beyond those reserved for general unsecured creditors, in an amount that will
provide the same percentage recovery as received by general unsecured creditors.
-18-
We cannot predict the effect any such dilution may have on the price of our
common stock.
Certain transfer restrictions on our common stock imposed by our charter may
inhibit market activity in our common stock.
Our common stock is subject to certain transfer restrictions imposed by our
charter. These restrictions generally prohibit the following transfers of our
equity securities without the prior written consent of our board of directors,
which consent can be withheld only if our board of directors, in its sole
discretion, determines that the transfer creates a material risk of limiting
certain tax benefits: (i) transfers to a person (including any group of persons
making a coordinated acquisition) who beneficially owns, or would beneficially
own after the transfer, more than 4.75 percent of the total value of our
outstanding equity securities, to the extent that the transfer would increase
such person's beneficial ownership above 4.75 percent of the total value of our
outstanding equity securities and (ii) transfers by a person (or group of
persons having made a coordinated acquisition) who beneficially owns more than
4.75 percent of the total value of our outstanding equity securities. The
restrictions are not applicable to transfers pursuant to a tender offer to
purchase 100 percent of our common stock for cash or marketable securities so
long as such tender offer results in the tender of at least 50 percent of our
common stock then outstanding. While all transactions described above require
that prior notice be given to our board of directors, the restrictions begin
only at such time that 25 percent of the our common stock has been transferred,
for tax purposes (which generally takes into consideration only transfers to or
from shareholders who beneficially own 5 percent of the value of our common
stock), and will remain in effect until the earlier of: (i) November 11, 2005 or
(ii) such date as the board of directors determines, in its sole discretion,
that such restrictions are no longer necessary to protect tax benefits. These
transfer restrictions may inhibit market activity in our common stock.
Item 2. Properties.
The Company operates over 60 manufacturing and production facilities
located in the United States, Canada, Mexico and India. The Company's
headquarters are located in Parsippany, New Jersey.
Set forth below are the locations and uses of the Company's major
properties:
Location Use
- -------- ---
Manufacturing Segment
Southfield, Michigan(1)........... Offices
Troy, Michigan(1)................. Production Facility and Offices
Westland, Michigan(1)............. Production Facility and R&D Center
Weaverville, North Carolina(2).... Production Facility
Upper Sandusky, Ohio(1)........... Production Facility
Toledo, Ohio...................... Production Facility
Defiance, Ohio(2)................. Production Facility
Perrysburg, Ohio(2)............... Production Facility and Offices
Mineral Wells, Texas.............. Production Facility
Imuris, Mexico.................... Production Facility
Juarez, Mexico(1)................. Production Facility
Reynosa, Mexico(1)................ Production Facility
Concord, Ontario.................. Production Facility
Guelph, Ontario(1)................ Production Facility
-19-
Scarborough, Ontario.............. Production Facility
Stouffville, Ontario.............. Production Facility
Tillsonburg, Ontario(1)........... Production Facility
Waterdown, Ontario................ Production Facility
Gandhinagar, India................ Production Facility
Performance Products Segment
Hollister, California(2).......... Production Facility and Offices
Pittsburg, California(2).......... Production Facility
Richmond, California(2)........... Production Facility
Augusta, Georgia.................. Production Facility
East St. Louis, Illinois.......... Production Facility
Berkeley Heights, New Jersey(2)... Production Facility, Offices and Warehouse
Newark, New Jersey(2)............. Production Facility
Solvay, New York.................. Production Facility
Celina, Texas..................... Production Facility
Midlothian, Texas................. Production Facility
Anacortes, Washington............. Production Facility
Thorold, Ontario.................. Production Facility
Valleyfield, Quebec............... Production Facility
Offices
Parsippany, New Jersey(1)......... Headquarters
- ----------
(1) Leased.
(2) Mortgaged as security under the Company's debt facilities.
Item 3. Legal Proceedings.
The Company is involved in claims, litigation, administrative proceedings
and investigations of various types, including the Richmond litigation discussed
below, and certain environmental proceedings previously discussed. See "Item 1.
Business - Environmental Matters" above. Although the amount of any liability
that could arise with respect to these actions cannot be accurately predicted,
the opinion of management based upon currently-available information is that any
such liability not covered by insurance will have no material adverse effect on
the Company's results of operations, cash flows or financial condition.
Richmond Litigation. Prior to October 2002, lawyers claiming to represent
more than 47,000 persons filed approximately 24 lawsuits in several counties in
California state court (Alameda, Contra Costa, San Francisco superior courts),
making claims against General Chemical Corporation and, in some cases, a third
party arising out of May 1, 2001 and/or November 29, 2001 releases of sulfur
dioxide and/or sulfur trioxide from the Company's Richmond, California sulfuric
acid facility. These claims were addressed in the Plan as California Tort
Claims.
The first case was filed in 2001 and subsequent cases were filed from March
through July 2002. On May 1, 2002, a class action lawsuit arising out of the
same facts was also filed. The lawsuits claim various damages for alleged
injuries, including, without limitation, claims for personal injury, emotional
distress, medical monitoring, nuisance, loss of consortium and punitive damages.
The Company filed a petition for coordination to consolidate the state court
cases before a single judge. The petition for coordination has now been granted
and follow-on petitions to add additional cases to the coordinated proceedings
have been granted. The state court cases were stayed as a result of the Filing.
Approximately
-20-
73,000 proofs of claim were submitted in the bankruptcy proceedings on behalf of
the Richmond claimants, seeking damages for the May 1, 2001 and/or November 29,
2001 releases. A preliminary review of the claimant list indicated that the
claimants included most of the plaintiffs in the state court cases, plus several
thousand duplicates and some additional claimants. In addition, one class proof
of claim was submitted. A motion for class certification was filed but the
motion was later withdrawn subject to being re-filed in state court. The Company
filed a motion to lift the automatic stay and discharge injunction to allow
liquidation of the claims to proceed in California State Court. That motion was
granted upon stipulation of the parties, and the action is proceeding in
California State Court.
In June, 2004, the plaintiffs filed a Master Complaint that is intended to
supersede the prior pleadings on behalf of individual plaintiffs. The Master
Complaint seeks damages and other remedies arising out of the May 1, 2001 and
November 29, 2001 releases based upon causes of action, among others, for
negligence, Business and Professions Code Section 17200, nuisance and trespass.
The Master Complaint also names Latona Associates Inc., Matthew Friel (GenTek's
Chief Financial Officer at the time) and Paul Montrone (a former director and
shareholder of GenTek) as defendants. The class action complaint was also
amended in June 2004 to add these additional defendants. The Company has
answered the complaints. Since that time, plaintiffs have agreed to dismiss Mr.
Friel from the litigation without prejudice. Pursuant to the provisions of its
management agreements with Latona and other applicable provisions, the Company
is also providing a defense for Latona Associates Inc., Paul Montrone and
Matthew Friel in connection with the master complaint and amended class action
complaint.
The state court has entered several case management orders for the first
phase of the cases, including the requirement that plaintiffs complete
questionnaires regarding their claims by October 25, 2004 or their claims are
subject to dismissal upon motion by the Company. The Company recently filed a
motion to dismiss approximately 41,000 of the 73,000 proofs of claim for failure
to submit questionnaires. Hearings on the motion will be held on March 18, 2005,
and April 20, 2005. The parties are in active written and document discovery.
Depositions are expected to commence in the Spring of 2005 and a mediation has
been scheduled for April 26, 2005. No trial date has been set.
Any recovery by the plaintiffs in these lawsuits against GenTek will be
limited as provided in the Plan. Pursuant to the terms of the Plan, GenTek could
be required to issue new shares of common stock, cash in-lieu-of Tranche A
Warrants, and Tranche B and C Warrants in accordance with the terms of the Plan
to the extent insurance is not available to cover any allowed amount of such
claim.
Other Claims. The Company is subject to various other claims and legal
actions that arise in the ordinary course of business. Claims and legal actions
against the Debtors that existed as of the date of the Filing are subject to the
automatic stay and/or discharge injunction, and recoveries sought thereon from
assets of the Debtors were dealt with in the Chapter 11 cases pursuant to the
terms of the Plan or, where applicable, orders of the Bankruptcy Court.
Item 4. Submission of Matters to a Vote of Security Holders.
No items were submitted to a vote of security holders of the Company,
through the solicitation of proxies or otherwise, during the fourth quarter of
fiscal 2004.
-21-
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market Information
On November 10, 2003, both classes of our previously existing common stock
were cancelled in connection with our emergence from Chapter 11 protection, and
we issued new common stock. Our existing common stock has been quoted on the
NASDAQ National Market since November 23, 2004, the Over the Counter Bulletin
Board (OTCBB) from November 11, 2003 until November 22, 2004, in both cases
under the symbol "GETI".
The following table sets forth, for the period indicated, the high and low
sale prices in dollars as quoted on the NASDAQ National Market and the OTCBB, as
applicable, for our existing common stock.
High Low
------ ------
2004
First Quarter................................................. $42.00 $35.00
Second Quarter................................................ $40.95 $37.40
Third Quarter................................................. $44.00 $37.05
Fourth Quarter................................................ $51.87 $40.05
2003
November 11, 2003 through December 31, 2003................... $37.00 $34.75
The Company's previously existing common stock was traded on the Over The
Counter Bulletin Board under the symbol "GNKIQ" until November 10, 2003. There
was no established public trading market for the Company's previously existing
Class B Common Stock. The table below shows the high and low recorded sales
prices of the Company's previously existing common stock.
High Low
------ ------
2003
First Quarter................................................. $0.022 $0.010
Second Quarter................................................ $0.036 $0.008
Third Quarter................................................. $0.008 $0.003
October 1 through November 10, 2003........................... $0.007 $0.003
As of March 10, 2005, there were 2,209 stockholders of record of the
Company's common stock.
Dividends
On February 28, 2005, the Company's board of directors declared a special
dividend of $31.00 per common share payable on March 16, 2005. The Company paid
a special dividend of $7.00 per share on December 27, 2004. No dividends were
paid in 2003. We currently intend to retain our earnings for use in the
operation and expansion of our business and for debt service and, therefore, we
do not anticipate paying regular cash dividends in the foreseeable future.
Additionally, the Company's new credit facilities directly limit the ability of
the Company to pay cash dividends.
-22-
Equity Compensation Plan Information
The following table gives information about our existing Common Stock that
may be issued upon the exercise of options, warrants and rights under our 2003
Management and Directors Incentive Plan as of December 31, 2004.
- -------------------------------------------------------------------------------------------------------
Equity Compensation Plan Information
- -------------------------------------------------------------------------------------------------------
Number of Securities
Number of Securities remaining available for
to be issued upon Weighted average future issuance under
exercise of outstanding exercise price of equity compensation plans
options, warrants and outstanding options, (excluding securities
rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
- -------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 0 N/A 0
- -------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders 152,568 $31.14 748,860(1)
- -------------------------------------------------------------------------------------------------------
Total 152,568 $31.14 748,860
- -------------------------------------------------------------------------------------------------------
- ----------
(1) Available for issuance under the 2003 Management and Directors Incentive
Plan. This plan was approved by the bankruptcy court and became effective
on November 10, 2003 concurrent with the effective date of the Plan of
Reorganization.
2003 Management and Directors Incentive Plan
Pursuant to the Company's 2003 Management and Directors Incentive Plan,
employees and directors of the Company and its subsidiaries may be granted stock
options, restricted stock, stock appreciation rights, performance share awards,
dividend equivalent rights or any other stock-based awards. The compensation
committee of the Board has the authority to select participants and determine
grants of awards. The maximum number of shares with respect to which any awards
may be granted during a calendar year to any participant is 100,000. Upon a
"change in control" of the company, unless otherwise determined by the
compensation committee, each outstanding award shall automatically become fully
exercisable. The Board may, at any time, amend or discontinue the plan and the
compensation committee may, at any time, amend or cancel any outstanding award
or provide substitute awards in accordance with the plan, provided that such
action does not adversely affect the participant. The term of the Plan is 10
years.
-23-
Item 6. Selected Financial Data.
The following selected consolidated financial data of the Company have been
derived from and should be read in conjunction with the Company's Consolidated
Financial Statements. In connection with its emergence from bankruptcy on
November 10, 2003, the Company has adopted fresh-start reporting in accordance
with SOP 90-7. Accordingly, the Company's post-emergence financial statements
("Successor") will not be comparable with its pre-emergence financial statements
("Predecessor").
Successor Company Predecessor Company
--------------------------- ----------------------------------------------------
Years Ended December 31,
Year Ended Period Ended Period Ended --------------------------------------
December 31, December 31, November 10,
2004 2003 2003 2002 2001 2000
------------ ------------ ------------ --------- ---------- ----------
(In thousands, except per share data)
Statement of Operations Data:
Net revenues................................ $843,919 $ 95,420 $687,629 $ 861,465 $ 870,215 $ 939,595
Restructuring and impairment charges........ 10,848 293 24,480 -- 108,953 --
Operating profit (loss)..................... 36,297 4,856 19,704 63,536 (51,432) 105,295
Interest expense............................ 8,557 2,453 900 59,342 73,544 69,339
Income (loss) from continuing
operations(1)(2)......................... 5,611 1,936 466,090 (100,318) (89,622) 19,382
Income (loss) from discontinued operations.. 189,707 (844) 28,302 (99,206) (81,222) 30,859
Net income (loss)(1)(2)..................... $195,318 $ 1,092 $494,392 $(360,649)(3) $ (170,844) $ 50,241
Per Share:
Income (loss) from continuing operations--
basic(1)(2).............................. $ 0.56 $ 0.19 $ 18.23 $ (3.93) $ (3.52) $ 0.79
Income (loss) from continuing operations--
diluted(1)(2)............................ 0.56 0.19 18.23 (3.93) (3.52) 0.77
Net income (loss)--basic(1)(2).............. 19.53 0.11 19.34 (14.13)(3) (6.72) 2.04
Net income (loss)--diluted(1)(2)............ 19.48 0.11 19.34 (14.13)(3) (6.72) 1.99
Dividends(4)................................ 7.00 -- -- -- 0.15 0.20
Balance Sheet Data (at end of period):
Total assets................................ $753,626 $1,066,809 $ 956,985 $1,164,843 $1,350,722
Long-term debt (including current portion).. 12,536 251,188 922,683 815,557 796,676
Total equity (deficit)...................... 400,427 278,787 (510,321) (142,337) 47,658
- ----------
(1) Includes a decrease to the deferred tax asset valuation allowance of $98.5
million ($3.85 per share) in 2003, and an increase to the deferred tax
asset valuation allowance of $97.7 million ($3.83 per share) in 2002 to
record a valuation allowance for the Company's net domestic deferred tax
assets.
(2) Includes reorganization items of $416.1 million ($16.28 per share) of
income for the period ended November 10, 2003 and $11.6 million ($0.46 per
share) of expense in 2002.
(3) Includes the cumulative effect of a change in accounting principle of
$161.1 million ($6.31 per share).
(4) During 2004, the Company paid a special dividend of $7.00 per share. During
the fourth quarter of 2001, the Company suspended the payment of regular
quarterly dividends.
-24-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following section should be read in conjunction with the consolidated
financial statements and the notes indicated elsewhere in this Annual Report.
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Certain
statements, other than statements of historical facts, included in this Annual
Report may constitute forward-looking statements. Forward-looking statements are
generally identifiable by use of forward-looking terminology such as "may,"
"will," "should," "potential," "intend," "expect," "endeavor," "seek,"
"anticipate," "estimate," "overestimate," "underestimate," "believe," "could,"
"project," "predict," "continue" or other similar words or expressions. The
Company has based these forward-looking statements on its current expectations
and projections about future events. Although the Company believes that its
assumptions made in connection with the forward-looking statements are
reasonable, there can be no assurances that these assumptions and expectations
will prove to have been correct. Important factors that could cause actual
results to differ from these expectations are disclosed in this Annual Report
and include various risks, uncertainties and assumptions. Such factors include,
but are not limited to, those set forth in the section of this annual report
captioned "Business - Risk Factors".
Management's Discussion and Analysis of Financial Condition and Results of
operations contains non-GAAP financial measures within the meaning of Regulation
G promulgated by the Securities and Exchange Commission. Included in Item 7.
Reconciliation of Non-GAAP Financial Measures 2003 is a reconciliation statement
of operations data for the full year 2003 to the Predecessor Company and
Successor Company statements of operations for the periods ended November 10,
2003 and December 31, 2003, respectively. Management believes that this
information is the most relevant and useful formation for making comparisons to
the periods ended December 31, 2002 and 2004. References to the full year 2003
throughout this Discussion refer to the above-mentioned information.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Annual Report might not occur.
Dividends and Recapitalization
On December 27, 2004, the Company paid a special dividend of $7.00 per
common share, totaling approximately $71 million, which was funded primarily
from excess cash generated from the sale of the Company's KRONE communications
business.
On February 28, 2005, the Company's board of directors declared a special
dividend of $31.00 per common share payable on March 16, 2005 to holders of
record on March 10, 2005. Also, on February 28, 2005, GenTek closed on a secured
financing consisting of $370 million of term loans and a $60 million revolving
credit facility. The Company will use approximately $313 million of the
financing proceeds to pay the special dividend and $35 million of the proceeds
to pre-fund certain defined benefit pension obligations. The remainder of the
proceeds will be used to pay transaction fees, to refinance existing debt and
for general corporate purposes. In connection with the closing of the new
financing, the Company will record a charge of approximately $3 million to
write-off deferred financing costs of its existing debt facility during the
first quarter of 2005. The payment of the two special dividends and the closing
on the financing reflect the completion of the Company's recapitalization plan.
The Company believes these actions provide substantial value to current holders
of common stock and establish a more appropriate capital structure for the
Company.
-25-
Acquisition
On June 30, 2004, the Company acquired a wire harness and subassembly
manufacturing operation located in Reynosa, Mexico from Whirlpool Corporation
for $8.4 million. As part of the transaction, the Company entered into a seven
year supply agreement to supply wire harnesses, panel assemblies, copper tubing
and related components to Whirlpool's North American appliance production
facilities. The results of operations of the facility have been included in the
financial statements beginning July 1, 2004. The pro forma impact of the
acquisition on financial position, net income and earnings per share is not
material. Revenues from the supply agreement were approximately $80 million for
the six month period ending December 31, 2004.
Honeywell Settlement Agreement
On April 30, 2004, the Company and Honeywell International Inc.
("Honeywell") entered into a settlement agreement relating to the Company's
proposed rejection in the Company's bankruptcy proceeding of certain executory
contracts dealing with environmental issues at sites formerly owned by
Honeywell's predecessor, along with certain other claims made by Honeywell. The
settlement agreement provides, among other things, that the Company will
transfer ownership of two sites to Honeywell in exchange for Honeywell assuming
all environmental liabilities at these sites, along with any groundwater
contamination at another site. In addition, Honeywell agreed to share with the
Company the costs of certain environmental remediation at two other sites that
will continue to be owned by GenTek. The impact of the settlement agreement was
to record a receivable of $6 million, record a recovery asset of approximately
$3 million offset by the approximately $2 million book value of sites to be
transferred to Honeywell, resulting in a net credit to income of $7 million. In
addition, the Company recorded employee termination and facility exit costs of
$3 million relating to one of the sites to be transferred to Honeywell.
Discontinued Operations
On May 18, 2004, the Company sold its KRONE communications business to ADC
Telecommunications, Inc. (ADC). Accordingly, all financial information included
herein has been reclassified to reflect the KRONE communications business as
discontinued operations. Net proceeds from the transaction of approximately $291
million were used to repay the Company's then-outstanding Senior Term Loan
Agreement in full, and the related loan agreement was terminated. Consummation
of this transaction triggered the contingent redemption feature of the Company's
tranche A warrants. The Company made the required payment of $8.4 million ($7.13
per warrant) on June 30, 2004, and the tranche A warrants expired.
Reorganization under Chapter 11 of the U.S. Bankruptcy Code
On October 11, 2002, GenTek and 31 of its direct and indirect subsidiaries,
including its Noma Company subsidiary (collectively, the "Debtors"), filed
voluntary petitions for reorganization relief (the "Filing") under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). The Debtors' cases were jointly
administered as Case No. 02-12986 (MFW).
The Debtors filed for relief under Chapter 11 as a result of the Company's
inability to obtain an amendment to its pre-petition senior credit facility. The
protection afforded by Chapter 11 allowed the Debtors to continue to serve their
customers and preserve the value of their businesses, while they
-26-
reorganized and worked to develop and implement a strategic plan to deleverage
the Company's balance sheet and create an improved long-term capital structure.
On October 7, 2003, the Bankruptcy Court entered an order confirming the
Debtor's plan of reorganization (the "Plan"). The Plan became effective in
accordance with its terms on November 10, 2003 (the "Effective Date").
Pursuant to the provisions of the Plan, in full satisfaction of their
allowable claims: (i) the holders of existing secured claims under the Company's
pre-petition credit facility (excluding the tranche in which Noma Company is a
borrower to the extent such holders were secured by Noma) initially received
approximately 81 percent of the common stock of the reorganized Company (the
"Reorganized Company"), $60 million in cash (reduced by certain payments) and
$216.5 million principal amount of senior term notes issued by the Reorganized
Company; (ii) holders of existing secured claims under the term loan facility to
Noma Company under the Company's pre-petition credit facility received
approximately 13 percent of the common stock of the Reorganized Company and
$33.5 million principal amount of Senior Term Loan Agreement issued by the
Reorganized Company; (iii) holders of general unsecured claims and trade vendor
claims who elected to receive equity in the Reorganized Company on account of
their claims received a pro rata distribution of up to approximately 2 percent,
in the aggregate, of the common stock of the Reorganized Company and warrants to
purchase additional shares of the common stock of the Reorganized Company; (iv)
holders of general unsecured claims and trade vendor claims that elected not to
receive equity of the Reorganized Company received an amount in cash equal to
the lesser of (A) 6 percent of each such holder's allowed claim or (B) each such
holder's pro rata share of $5 million; (v) holders of unsecured claims relating
to the Company's existing bonds received approximately 4 percent of the common
stock of the Reorganized Company and warrants to purchase additional shares of
the common stock of the Reorganized Company; (vi) upon the liquidation of their
disputed claims, holders of California Tort Claims (as defined in the Plan), to
the extent they are determined to hold allowable claims, will receive the same
treatment of any uninsured portion of their claims (excluding any portion of
such claims attributable to noncompensatory damages) as they would have received
had such claims been classified as general unsecured claims (except that such
holders will not be entitled to elect cash instead of equity); (vii) holders of
Pennsylvania Tort Claims (as defined in the Plan) received, through their class
representative, an aggregate distribution of $120,000 in cash, a note in the
principal amount of $675,000, and a payment from the Debtors' insurer; and
(viii) holders of claims described in subsections (i), (iii), (iv), (v) and
(vi) above will be entitled to receive a portion of any amounts recovered by a
preference claim litigation trust created pursuant to the Plan. In addition to
the foregoing, pursuant to the Plan administrative expense claims, priority
claims, convenience claims, a secured claim of the Company against Noma Company
in the amount of approximately $5.7 million and certain other secured claims,
were paid in full. Furthermore, the Plan provided for the cancellation of all
then outstanding shares of common stock of the Company without any distribution
to be made to the holders of such shares.
The consolidated financial statements have been prepared in accordance with
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," and on a going concern basis, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. In connection with its emergence
from bankruptcy on November 10, 2003, the Company has adopted fresh-start
reporting in accordance
-27-
with SOP 90-7. Accordingly, the Company's post-emergence financial statements
("Successor") will not be comparable with its pre-emergence financial statements
("Predecessor").
Overview
We are a holding company whose subsidiaries manufacture industrial
components and performance chemicals. We operate through two primary business
segments: manufacturing and performance products. Our products are frequently
highly engineered and are important components of, or provide critical
attributes to, our customers' end products or operations. We operate over 60
manufacturing and production facilities located primarily in the U.S., Canada,
Mexico and India. GenTek has no independent operations and, therefore, is
dependent upon cash flow from its subsidiaries to meet its obligations.
Manufacturing
The manufacturing segment provides a broad range of engineered components
and services to three principal markets: automotive, appliance and electronic,
and industrial. During the last two years the Company's sales and operating
profits have been adversely impacted by our major customers' efforts to reduce
their costs. Pricing pressure by the "Big Three" (Ford, Chrysler and General
Motors) North American auto manufacturers and Tier 1 suppliers has resulted in
lower selling prices and lower volumes as our major customers have resourced
business to competitors in the Far East or to their own in house facilities.
Sales to the automotive market, which accounted for approximately 50 percent of
the manufacturing segment's revenue in 2004, have declined approximately 13
percent over the last two years, due in large part to the pricing and resourcing
issues discussed above. The Company expects that sales in this market will
remain essentially unchanged in 2005. Sales related to the appliance and
electronics market have also been negatively impacted by similar pricing
pressures and lower volumes. Sales to the appliance and electronics market,
which accounted for approximately 30 percent of the manufacturing segment's
revenues in 2004, however, have increased by approximately 50 percent over the
last two years primarily due to the impact of the acquisition of a wire harness
sub assembly manufacturing facility in Reynosa, Mexico from Whirlpool
Corporation on June 30, 2004. As part of this transaction, the Company entered
into a seven-year supply agreement to supply wire harnesses, panel assemblies,
copper tubing and related components to Whirlpool's North American appliance
production facilities. The gross profit margins generated on the revenues from
this supply agreement are significantly lower than the gross profit margins
generated on the other revenues in this market. Over the next several years the
Company intends to improve gross profit margins on this incremental revenue and
on other products as well by moving the production of the related products to
its new manufacturing facility in India and by consolidating a portion of its
production from other manufacturing facilities to the facility in Reynosa. The
Company anticipates that sales in the appliance and electronics market will
increase by approximately 50 percent in 2005 due to the full year impact of the
acquisition made in 2004. In response to these competitive pressures from
offshore suppliers in the automotive and appliance and electronics markets, the
manufacturing segment has taken aggressive action to improve its cost position.
We have closed certain facilities, reduced headcount and other operating
expenses, and outsourced production of certain less complex components to lower
cost, third party manufacturers in Asia. In addition, as part of our continuing
efforts to improve our competitive cost position, we have established our own
wire harnesss production facility in India, which commenced production of
prototypes during the fourth quarter of 2004 and commercial quantities during
the first quarter of 2005. Sales to the industrial market, which account for
approximately 20 percent of the manufacturing segment's revenues, have increased
28 percent over the two year period principally due to the impact of the pass
through of
-28-
higher raw material prices for copper as well as the favorable impact of
exchange rate fluctuations. The Company expects that sales in this market will
remain essentially unchanged in 2005.
Due to our dependence on the North American automotive market, production
levels of the automotive OEMs, especially the Big Three, influence the
manufacturing segment's sales and profitability. The North American automobile
and light truck "build rate" is one commonly used indicator of such production
levels. More specifically, though, the production levels of the individual
engine programs that we supply impact our sales and profitability in the
automotive market. Our revenues in this market are also influenced, to a lesser
degree, by the North American "class 8" heavy truck build rate. In the appliance
and electronic market, shipments of household appliances are one indicator of
overall industry production levels.
Profitability in our manufacturing segment can be influenced by a number of
factors, including: production levels at our individual manufacturing
facilities, as well as the volume and consistency of production levels at our
customers' manufacturing facilities; demands from our customers to reduce the
prices of our products; the prices we pay for key raw materials such as steel;
and transportation costs.
Performance Products
The performance products segment provides a broad range of value-added
chemical products and services to four principal markets: environmental
services, pharmaceutical and personal care, technology and chemical processing.
Sales to the environmental services and chemical processing markets, which
account for approximately 65 percent of the performance products segment's
revenues, have declined approximately 13 percent over the last two years. This
decrease is principally due to the shutdown of the South Plant of the Company's
Delaware Valley Works and restructuring of the North American sulfur derivatives
business. The Company anticipates that sales to the environmental services and
chemical processing markets will improve modestly in 2005. Sales to the
pharmaceutical and personal care market, which account for approximately 20
percent of the performance products segment's revenue, declined by approximately
10 percent over the last two years. The sales decline for 2003 was 13 percent as
a result of the Company's sale of its antacid product line. Sales for 2004 were
up 4 percent over the 2003 level. The Company anticipates sales to this market
in the year 2005 will be approximately 5 percent lower than the 2004 level.
Sales to the technology market, which account for approximately 13 percent of
the performance products segment's revenues, have declined by approximately 4
percent during the two year period. The Company anticipates that sales into this
market will grow by approximately 10 percent in 2005 due mainly to the emerging
recovery in the North American microelectronics industry. The profitability of
our performance products segment has also been negatively impacted in recent
years by cyclically high raw material prices. While we believe that some of this
price pressure will subside in future periods, we cannot be certain of the
timing or magnitude of any such price decreases.
In the environmental services market, our revenues are derived principally
from the sale of sulfuric acid regeneration services to large oil refineries on
the West Coast of the United States and from the sale of water treatment
chemicals to municipalities. In the chemical processing market, our revenues are
principally derived from the sale of water treatment chemicals, sulfuric acid
and sodium nitrite which are used in the manufacture of paper, dyes, pigments,
fertilizers as well as many other products. In the pharmaceutical and personal
care market, GenTek's revenues and profitability are driven by sales of active
ingredients to manufacturers of antiperspirants, with such manufacturers'
production levels influenced by antiperspirant market share trends and new
product introductions. Our sales in the technology market are influenced by
North American production levels of semiconductor devices.
-29-
Profitability in our performance products segment can be influenced by a
number of factors, including: competitive market conditions; production levels
at our individual manufacturing facilities; energy costs, including the prices
of natural gas and electricity; the prices we pay for our key raw materials,
including sulfur, bauxite, aluminum tri-hydrate and zirconium-based products;
and transportation costs.
Corporate and Other
As a result of the reclassification of the KRONE communications business to
discontinued operations, the communications segment is no longer a reportable
segment. Accordingly, included in corporate and other is the results of the
Company's printing plate product lines along with corporate administrative
expenses. As a result of the increased leverage, we anticipate that interest
expense will substantially increase in 2005.
Results of Operations
The following table sets forth certain line items from our Consolidated
Statements of Operations for the three years ended December 31, 2004 and the
corresponding percentage of net revenues for the relevant periods presented as a
percentage of revenue for the periods indicated. As previously discussed, the
Company emerged from Chapter 11 and adopted fresh start accounting on November
10, 2003. As a result of the application of fresh start accounting, the
Successor Company's financial statements are not comparable with the Predecessor
Company's financial statements.
Years Ended December 31,
---------------------------------------------
2004 2003 2002
------------ ------------- --------------
(In millions)
Net revenues .................................. $843.9 100% $ 783.1 100% $ 861.5 100%
Cost of sales ................................. 726.9 85 644.9 83 701.1 82
Selling, general and administrative expense ... 84.7 10 88.8 11 96.9 11
Restructuring and impairment charges .......... 10.8 2 24.8 3 -- --
Pension curtailment gain ...................... 14.8 2 -- -- -- --
------ --- ------- --- ------- ---
Operating profit (loss) ..................... 36.3 5 24.6 3 63.5 7
Interest expense .............................. 8.6 1 3.4 -- 59.3 7
Interest income ............................... 0.8 -- 0.4 -- 1.4 --
Reorganization items .......................... -- -- (416.1) (53) 11.6 1
Other (income), net ........................... 8.9 1 (7.1) (1) (1.5) --
Income tax provision (benefit) ................ 14.0 2 (23.2) (3) 95.8 11
------ --- ------- --- ------- ---
Income (loss) from continuing operations
before cumulative effect of a change
in accounting principle .................. $ 5.6 1% $ 468.0 60% $(100.3) (12)%
====== === ======= === ======= ===
2004 Compared with 2003
Net revenues were $844 million for the year 2004 compared with $783 million
for the prior year. This increase was due to higher sales in the manufacturing
segment of $89 million, partially offset by lower sales in the performance
products segment and corporate and other of $19 million and $9 million,
-30-
respectively. The increase in the manufacturing segment is principally the
result of higher sales to the appliance and electronic and industrial markets of
$71 million and $18 million, respectively. The increase in revenues in the
appliance and electronics market is principally due to the acquisition of a wire
harness and subassembly manufacturing facility from Whirlpool Corporation on
June 30, 2004, partially offset by lower sales to a major customer as a result
of them resourcing their supply to a Far East competitor. As part of this
acquistion, the Company entered into a seven-year supply agreement to supply
wire harnesses, panel assemblies, copper tubing and related components to
Whirlpool's North American appliance production facilities. Revenues related to
this supply agreement were approximately $80 million for the six-month period
ended December 31, 2004. The increase in revenues in the industrial market is
primarily due to the impact of the pass through of higher raw material prices
for copper as well as the favorable impact of exchange rate fluctuations. The
decrease in the performance products segment is due to lower sales in the
Company's sulfuric acid and fine chemical product lines of $17 million and $15
million, respectively, reflecting the shutdown of the South Plant of the
Company's Delaware Valley Works and restructuring of the North American sulfur
derivatives business. This decrease was partially offset by higher sales of $7
million for the Company's water chemical product line, due principally to the