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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
----------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 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
Parsippany, New Jersey 07054
(Address of principal executive offices) (Zip Code)
(973) 515-3221
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
-------- --------
Applicable to issuers involved in bankruptcy proceedings during the preceding
five years:
Indicate by checkmark 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 April
30, 2004 was 10,000,000.
================================================================================
GENTEK INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2004
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Operations - Three Months
Ended March 31, 2004 and 2003........................................................... 1
Consolidated Balance Sheets - March 31, 2004 and
December 31, 2003....................................................................... 2
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2004 and 2003........................................................... 3
Notes to the Consolidated Financial Statements.............................................. 4-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 15
Item 4. Controls and Procedures............................................................... 15
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings..................................................................... 16
Item 2. Changes in Securities and Use of Proceeds............................................. 16
Item 3. Defaults upon Senior Securities....................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................................... 16
Item 5. Other Information..................................................................... 16
Item 6. Exhibits and Reports on Form 8-K...................................................... 16-19
SIGNATURES .......................................................................................... 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GENTEK INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Successor Predecessor
Company Company
-------------- --------------
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Net revenues ................................................... $192,930 $197,048
Cost of sales .................................................. 163,261 169,332
Selling, general and administrative expense .................... 21,485 20,946
Restructuring and impairment charges ........................... 972 24,661
Pension curtailment gain ....................................... 14,840 --
-------- --------
Operating profit (loss) .................................... 22,052 (17,891)
Interest expense (contractual interest for 2003 was $17,279) ... 4,439 69
Interest income ................................................ 84 68
Reorganization items ........................................... -- 9,134
Other (income) expense, net .................................... (1,634) (1,981)
-------- --------
Income (loss) from continuing operations before income taxes 19,331 (25,045)
Income tax provision ........................................... 8,340 3,729
-------- --------
Income (loss) from continuing operations ................... 10,991 (28,774)
Income (loss) from discontinued operations (net of tax of $2,434
and $(1,697) for 2004 and 2003, respectively) ................ 3,814 (135)
-------- --------
Net income (loss) .......................................... $ 14,805 $(28,909)
======== ========
Income (loss) per common share - basic:
Income (loss) from continuing operations ....................... $ 1.10 $ (1.13)
Income (loss) from discontinued operations ..................... .38 --
-------- --------
Net income (loss) .......................................... $ 1.48 $ (1.13)
======== ========
Income (loss) per common share - assuming dilution:
Income (loss) from continuing operations ....................... $ 1.10 $ (1.13)
Income (loss) from discontinued operations ..................... .38 --
-------- --------
Net income (loss) .......................................... $ 1.48 $ (1.13)
======== ========
See the accompanying notes to the consolidated financial statements.
-1-
GENTEK INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
Successor Company
-------------------------
March 31, December 31,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 19,066 $ 26,646
Receivables, net ............................................... 116,307 104,281
Inventories .................................................... 62,863 62,455
Deferred income taxes .......................................... 18,955 18,958
Other current assets ........................................... 15,850 15,393
---------- ----------
Total current assets ......................................... 233,041 227,733
Property, plant and equipment, net ................................. 291,163 294,544
Goodwill ........................................................... 152,504 152,517
Intangible assets .................................................. 72,060 73,458
Deferred income taxes .............................................. 3,347 10,543
Assets held for sale ............................................... 281,192 281,852
Other assets ....................................................... 25,416 26,162
---------- ----------
Total assets ................................................. $1,058,723 $1,066,809
========== ==========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable ............................................... $ 33,689 $ 28,310
Accrued liabilities ............................................ 101,732 105,926
Current portion of long-term debt .............................. 338 338
---------- ----------
Total current liabilities .................................... 135,759 134,574
Long-term debt ..................................................... 263,833 250,850
Pension and postretirement obligations ............................. 124,398 157,895
Liabilities of businesses held for sale ............................ 163,516 167,246
Other liabilities .................................................. 71,184 71,427
---------- ----------
Total liabilities ............................................ 758,690 781,992
---------- ----------
Contingently redeemable warrants ................................... 6,030 6,030
---------- ----------
Equity:
Preferred Stock, $.01 par value; authorized: 10,000,000 shares;
none issued or outstanding ................................... -- --
Common Stock, no par value; authorized: 100,000,000 shares;
issued: 10,000,000 shares at March 31, 2004 and
December 31, 2003 ............................................ 268,084 268,084
Warrants ....................................................... 8,361 8,361
Accumulated other comprehensive income ......................... 1,661 1,250
Retained earnings .............................................. 15,897 1,092
---------- ----------
Total equity ................................................. 294,003 278,787
---------- ----------
Total liabilities and equity ................................. $1,058,723 $1,066,809
========== ==========
See the accompanying notes to the consolidated financial statements.
-2-
GENTEK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Successor Predecessor
Company Company
-------------- --------------
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Cash flows from operating activities:
Net income (loss) from continuing operations........................... $ 10,991 $(28,774)
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization...................................... 10,145 8,498
Pension curtailment gain........................................... (14,840) --
Asset impairment charges........................................... -- 24,661
Reorganization items............................................... -- 9,134
Net loss (gain) on disposition of long-term assets................. (2,968) 55
Long-term incentive plan costs, net................................ -- 3
Increase in receivables............................................ (12,928) (2,375)
Increase in inventories............................................ (428) (426)
Decrease in deferred tax assets.................................... 6,937 181
Increase (decrease) in accounts payable............................ 5,221 (4,773)
Increase (decrease) in accrued liabilities......................... (4,304) 1,663
Increase (decrease) in other liabilities and assets, net........... (15,785) 354
-------- --------
Net cash provided by (used for) continuing operations........... (17,959) 8,201
Net cash used for discontinued operations....................... (243) (215)
-------- --------
Net cash provided by (used for) operating activities............ (18,202) 7,986
-------- --------
Net cash used for reorganization items..................................... -- (3,985)
-------- --------
Cash flows from investing activities:
Capital expenditures................................................... (5,361) (7,295)
Proceeds from sales or disposals of long-term assets................... 3,113 85
Other investing activities............................................. (45) --
-------- --------
Net cash used for investing activities.......................... (2,293) (7,210)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt........................................... 12,989 --
Repayment of long-term debt............................................ (27) (11,318)
Debt issuance costs - reorganization................................... -- (606)
-------- --------
Net cash provided by (used for) financing activities............ 12,962 (11,924)
-------- --------
Effect of exchange rate changes on cash.................................... (47) 242
-------- --------
Decrease in cash and cash equivalents...................................... (7,580) (14,891)
Cash and cash equivalents at beginning of period........................... 26,646 105,505
-------- --------
Cash and cash equivalents at end of period................................. $ 19,066 $ 90,614
======== ========
Supplemental information:
Cash paid for income taxes............................................. $ 1,335 $ 707
======== ========
Cash paid for interest................................................. $ 4,272 $ 67
======== ========
-3-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2004 are not indicative of the results that may be expected for the
year ending December 31, 2004. These statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003.
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 under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware. The Debtors' joint plan of reorganization was
confirmed on October 7, 2003 and became effective in accordance with its terms
on November 10, 2003.
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") are not comparable with its
pre-emergence financial statements ("Predecessor").
On March 25, 2004, the Company announced that it signed a definitive
agreement to sell its KRONE communications business to ADC Telecommunications,
Inc. (ADC). Accordingly, the business to be sold has been classified as
discontinued operations. Under the terms of the agreement, the Company will
receive total consideration of approximately $350 million, consisting of $294
million in cash, subject to post-closing adjustments, and the assumption by ADC
of approximately $56 million of pension and employee-related liabilities. The
transaction is expected to close during May, 2004 and is subject to customary
conditions including regulatory and other approvals. Consummation of this
transaction will trigger the contingent redemption feature of the Company's
tranche A warrants.
Note 2 - Summary of Significant Accounting Policies
Compensation cost for stock-based employee compensation plans is
recognized using the intrinsic value method. The following table illustrates the
effect on net income (loss) and net income (loss) per share if the Company had
applied the fair value based method to recognize stock-based employee
compensation.
-4-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
(unaudited)
Successor Predecessor
Company Company
-------------- --------------
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Net income (loss) as reported....................................................... $14,805 $ 28,909)
Deduct: Total stock-based employee compensation income
determined under fair value based method for all awards, net of
related tax effects.............................................................. -- 222
------- -------
Pro forma net income (loss)......................................................... $14,805 $(28,687)
======= ========
Income (loss) per share:
Basic - as reported............................................................. $ 1.48 $ (1.13)
======= ========
Basic - pro forma............................................................... $ 1.48 $ (1.12)
======= ========
Diluted - as reported........................................................... $ 1.48 $ (1.13)
======= ========
Diluted - pro forma............................................................. $ 1.48 $ (1.12)
======= ========
For purposes of this calculation, the fair value of each option grant
was estimated on the grant date using the Black-Scholes option-pricing model.
There were no grants made in 2003 or 2004.
Carrying amount of goodwill by segment is as follows:
Performance
Products Manufacturing Consolidated
-------- ------------- ------------
Balance at December 31, 2003................................ $10,603 $141,914 $152,517
Foreign currency translation................................ -- (13) (13)
------- -------- --------
Balance at March 31, 2004................................... $10,603 $141,901 $152,504
======= ======== ========
Note 3 - Reorganization Items
Reorganization items consist of the following:
Predecessor
Company
--------------
Three Months
Ended
March 31, 2003
--------------
Professional fees...................................... $6,009
Employee costs......................................... 2,528
Interest income........................................ (294)
Settlement of pre-petition liabilities................. (736)
Other.................................................. 1,627
------
$9,134
======
Note 4 - Comprehensive Income (Loss)
Total comprehensive income (loss) is comprised of net income (loss),
foreign currency translation adjustments and the change in unrealized gains and
losses on derivative financial instruments. Total comprehensive income (loss)
for the three months ended March 31, 2004 and 2003 was $15,216 and $(25,871),
respectively.
-5-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
(unaudited)
Note 5 - Earnings Per Share
The computation of basic earnings per share is based on the weighted
average number of common shares outstanding during the period. The computation
of diluted earnings per share assumes the foregoing and, in addition, the
exercise of all stock options and restricted units, using the treasury stock
method.
The shares outstanding used for basic and diluted earnings per common
share are reconciled as follows:
Successor Predecessor
Company Company
--------------- ---------------
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
--------------- ---------------
Basic earnings per common share:
Weighted average common shares outstanding.............................. 10,000,000 25,564,082
========== ==========
Diluted earnings per common share:
Weighted average common shares outstanding.............................. 10,000,000 25,564,082
Warrants, options and restricted units.................................. -- --
---------- ----------
Total................................................................ 10,000,000 25,564,082
========== ==========
For the three months ended March 31, 2004 and 2003, potentially
dilutive securities totaling 2,094,645 and 2,812,250, respectively, were not
included in the computation of diluted earnings per common share due to their
antidilutive effect.
Note 6 - Inventories
Successor Company
-----------------------------
March 31, December 31,
2004 2003
--------- ------------
Raw materials............................................................. $25,234 $24,195
Work in process........................................................... 8,407 8,475
Finished products......................................................... 27,614 27,140
Supplies and containers................................................... 1,608 2,645
------- -------
$62,863 $62,455
======= =======
Note 7 - Long-Term Debt
Successor Company
------------------------------
March 31, December 31,
Maturities 2004 2003
---------- ---------- ------------
Revolving credit facility - floating rates............ 2008 $ 13,000 $ --
Senior Term Notes - floating rates.................... 2008 250,000 250,000
Other debt - various.................................. 2004-2018 1,171 1,188
-------- --------
Total debt........................................ 264,171 251,188
Less: Current portion............................. 338 338
-------- --------
Net long-term debt................................ $263,833 $250,850
======== ========
-6-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
(unaudited)
Note 8 - Segment Information
On March 25, 2004 the Company signed a definitive agreement to sell its
Krone communications business. As a result of the reclassification of this
business to discontinued operations, the communications segment is no longer a
reportable segment. Industry segment information is summarized as follows:
Successor Predecessor
Company Company
-------------- --------------
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Net Revenues:
Manufacturing................................................................ $113,977 $109,047
Performance products......................................................... 75,505 81,878
Corporate and other.......................................................... 3,448 6,123
-------- --------
Consolidated............................................................. $192,930 $197,048
======== ========
Successor Predecessor
Company Company
-------------- --------------
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Operating Profit (Loss):
Manufacturing................................................................ $11,131 $ 8,903
Performance products......................................................... 11,759 (25,209)
Corporate and other.......................................................... (838) (1,585)
------- --------
Consolidated................................................................. 22,052 (17,891)
Interest expense............................................................. 4,439 69
Other (income) expense, net.................................................. (1,718) 7,085
------- --------
Consolidated income (loss) from continuing operations before
income taxes.............................................................. $19,331 $(25,045)
======= ========
Capital Expenditures Depreciation and Amortization
--------------------------------- --------------------------------
Successor Predecessor Successor Predecessor
Company Company Company Company
-------------- -------------- -------------- --------------
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2004 March 31, 2003 March 31, 2004 March 31, 2003
-------------- -------------- -------------- --------------
Manufacturing............................. $1,585 $1,592 $ 5,887 $4,501
Performance products...................... 3,611 5,390 3,990 3,552
Corporate and other....................... 165 313 268 445
------ ------ ------- ------
Consolidated.............................. $5,361 $7,295 $10,145 $8,498
====== ====== ======= ======
-7-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
(unaudited)
Identifiable Assets
Successor Company
---------------------------
March 31, December 31,
2004 2003
---------- ------------
Manufacturing (1)............................................................ $ 458,374 $ 453,828
Performance products......................................................... 294,967 299,332
Corporate and other.......................................................... 24,190 31,797
Assets held for sale......................................................... 281,192 281,852
---------- ----------
Consolidated................................................................. $1,058,723 $1,066,809
========== ==========
(1) Includes equity method investments of $19,667 and $20,387, respectively.
Note 9 - Restructuring and Impairment Charges
The Company's restructuring actions during 2003 consist of two plant
closures in its performance products segment. The Company expects to
substantially complete implementation of these restructuring actions by the
second quarter of 2004. The following tables summarize the Company's expected
costs and accruals for these restructuring actions:
Employee
Termination Facility Exit
Costs Costs
----------- -------------
Costs incurred in prior periods.................................... $ 6,985 $ 8,140
Costs incurred in current period................................... 205 767
Costs anticipated to be incurred in the future..................... 460 1,143
------- -----------
Total costs expected to be incurred................................ $ 7,650 $ 10,050
======= ===========
Accrual balance at December 31, 2003............................... $ 2,697 $ 5,651
Provisions - Restructuring charges................................. 205 767
Amounts paid....................................................... (1,155) (4,335)
------- -----------
Accrual balance at March 31, 2004.................................. $ 1,747 $ 2,083
======= ===========
The Company's restructuring programs initiated in prior years have been
completed.
Note 10 - Pension and Other Postretirement Benefits
Other Postretirement
Pension Benefits Benefits
------------------ --------------------
Three Months Ended Three Months Ended
March 31, March 31,
------------------ --------------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost........................................................... $ 1,375 $ 1,161 $ 364 $ 314
Interest cost.......................................................... 3,501 2,988 1,091 941
Expected return on plan assets......................................... (2,755) (2,859) -- --
Amortization of net:
Prior service cost................................................. -- 77 -- (196)
Loss............................................................... -- 161 -- 11
------- ------- ------ ------
Net periodic benefit cost.............................................. $ 2,121 $ 1,528 $1,455 $1,070
======= ======= ====== ======
-8-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(Dollars in thousands, except per share data)
(unaudited)
During the first quarter of 2004, the Company notified its employees
that benefit accruals in defined benefit pension plans covering domestic
salaried and certain hourly employees would be frozen effective April 1, 2004.
This action resulted in a curtailment gain of $14,840. In addition, during the
first quarter of 2003, the Company closed a facility which resulted in a
curtailment gain for a pension plan of $81, which was recorded as a component of
reorganization items, net.
During the first quarter of 2004, the Company contributed $17,827 to
its domestic pension plan trusts and expects to make additional contributions of
approximately $4,000 during the remainder of 2004.
Note 11 - Discontinued Operations
On March 25, 2004, the Company signed a definitive agreement to sell
its Krone communications business for $294 million in cash, subject to
post-closing adjustments for certain cash and debt balances as of the closing
date. As of March 31, 2004, Krone's cash balances were $33,174 and debt balances
were $7,951. The transaction is expected to close during May, 2004 and
is subject to customary conditions including regulatory and other approvals. The
carrying amount as of March 31, 2004 of the major classes of assets and
liabilities included in the transaction are as follows:
Current assets................................ $155,620
Property, plant and equipment................. 61,312
Other assets.................................. 64,260
Current liabilities........................... 74,876
Non-current liabilities....................... 88,640
The businesses included in discontinued operations had revenues of
$83,896 and $67,711 and pretax profit (loss) of $6,248 and $(1,832) for the
three months ended March 31, 2004 and 2003, respectively. The businesses were
formerly reported as part of the communications segment, which is no longer a
reportable segment as a result of the reclassification of this business to
discontinued operations. If and when this transaction is completed, the Company
expects to record a material gain, although the amount of this gain cannot
currently be precisely determined.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include those discussed in the section entitled,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward-Looking Statements" contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
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 under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware. The Debtors' joint plan of reorganization was
confirmed on October 7, 2003 and became effective in accordance with its terms
on November 10, 2003.
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") are not comparable with its
pre-emergence financial statements ("Predecessor").
On March 25, 2004, the Company announced that it signed a definitive
agreement to sell its KRONE communications business to ADC Telecommunications,
Inc. (ADC). Accordingly, the business to be sold has been classified as
discontinued operations. Under the terms of the agreement, the Company will
receive total consideration of approximately $350 million, consisting of $294
million in cash, subject to post-closing adjustments, and the assumption by ADC
of approximately $56 million of pension and employee-related liabilities. The
transaction is expected to close during May, 2004 and is subject to customary
conditions including regulatory and other approvals. Consummation of this
transaction will trigger the contingent redemption feature of the Company's
tranche A warrants.
Results of Operations
The following table sets forth certain line items from our Consolidated
Statements of Operations for the three months ended March 31, 2004 and 2003 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.
Successor Predecessor
Company Company
------------------ ------------------
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
------------------ ------------------
(In millions)
Net revenues................................................. $192.9 100% $197.0 100%
Cost of sales................................................ 163.2 85 169.3 86
Selling, general and administrative expense.................. 21.5 11 20.9 11
Restructuring and impairment charges......................... 0.9 -- 24.7 12
-10-
Pension curtailment gain..................................... 14.8 7 -- --
------ ---- ------ ----
Operating profit (loss).................................. 22.1 11 (17.9) (9)
Interest expense............................................. 4.5 2 .1 --
Interest income.............................................. -- -- -- --
Reorganization items......................................... -- -- 9.1 5
Other (income), net.......................................... (1.7) (1) (2.0) (1)
Income tax provision (benefit)............................... 8.3 4 3.7 2
------ ---- ------ ----
Income (loss) from continuing operations................. 11.0 6 (28.8) (15)
Income from discontinued operations.......................... 3.8 2 (0.1) --
------ ---- ------ ----
Net Income............................................... $ 14.8 8% $(28.9) (15)%
====== ==== ====== ====
Net revenues were $193 million for the three month period ended March
31, 2004 compared with $197 million for the prior year. This decrease was due to
lower sales in the performance products segment and corporate and other,
partially offset by higher sales in the manufacturing segment. The decrease in
revenues in the performance products segment is due to lower sales in the
Company's sulfuric acid and fine chemical product lines of $3 million and $4
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. The decrease in revenues in corporate and other is
principally due to lower sales of the Company's printing plate product line of
$3 million. The increase in revenues in the manufacturing segment is the result
of higher sales in the industrial and automotive markets, of $6 million and $2
million, respectively, partially offset by lower sales in the appliance and
electronics market of $4 million. The increase in revenues in the industrial
market is principally due to the impact of the pass through of higher raw
material prices for copper to our customers as well as the impact of exchange
rate fluctuations. The decrease in revenues in the appliance and electronics
market reflect the impact of certain customers resourcing business away from the
Company primarily to competitors in the Far East.
Gross profit was $30 million for the three month period ended March 31,
2004 as compared with $28 million for the prior year. This increase is
principally due to higher gross profit in the performance products segment of $3
million, partially offset by lower gross profit in corporate and other of $1
million. The increase in performance products is principally due to a $2 million
loss contract accrual recorded during the first quarter of 2003 and the plant
cost savings net of lost revenue of $2 million due to the closure of the South
Plant of the Delaware Valley Works partially offset by an increase in
maintenance spending of $1 million due to the timing of plant maintenance and
turnarounds. In the manufacturing segment, increased depreciation and
amortization expense of $1 million as a result of the impact of fresh start
accounting offset the favorable impact of the higher sales level and higher
production levels at one of the Company's roller bearing plants as a result of
insourcing parts previously purchased from an outside supplier. The launch of
this product occurred in the second quarter of 2003 resulting in the year over
year improvement in gross profit. The lower gross profit in the corporate and
other reflects the impact of the abovementioned lower sales volume.
Selling, general and administrative expense was $21 million for the
three month period ended March 31, 2004, which is comparable to the prior year
level.
Restructuring and impairment charges were $1 million for the three
month period ended March 31, 2004 as compared with $25 million being recorded
during the first quarter of 2003 to reduce the carrying value of the fixed
assets at the South Plant of the Company's Delaware Valley Works to estimated
fair value, which was determined based upon a number of factors including an
independent appraisal.
-11-
During the first quarter of 2004, the Company notified its employees
that benefit accruals in defined benefit pension plans covering domestic
salaried and certain hourly employees would be frozen effective April 1, 2004.
As a result, a curtailment gain of approximately $15 million was recognized
during the first quarter of 2004.
Operating income was $22 million for the three month period ended March
31, 2004 as compared with an operating loss of $18 million for the prior year.
This improvement was principally due to the restructuring and impairment charges
recorded during the first quarter of 2003 and the abovementioned pension
curtailment gain and higher gross profit.
Interest expense was $4 million for the three month period ended March
31, 2004 as compared to $0.1 million for the prior year. Interest expense for
the first quarter of 2004 consisted of interest expense on the Company's new
Senior Term Notes and Revolving Credit Facility. During the first quarter of
2003 no interest expense was recorded on the Company's pre-petition senior
credit facility and 11% Senior Subordinated Notes. The Company made adequate
protection payments to its senior creditors prior to its emergence from
bankruptcy which have been treated for accounting purposes as reductions in
principal.
There were no reorganization items for the three month period ended
March 31, 2004 as compared with $9 million of reorganization items for the first
quarter of 2003. Reorganization items for the first quarter of 2003 include
expenses associated with the Company's reorganization under Chapter 11 and
include professional fees and employee retention costs.
Included in other (income)/expense, net for the three month period
ended March 31, 2004 is a gain of $3 million from the sale of the Company's
minority interest in its joint venture with Esseco S.P.A.
Income from discontinued operations was $4 million for the three month
period ended March 31, 2004 as compared with a loss of $0.1 million for the
prior year. This increase is due to higher net income for the communications
business, principally due to higher sales volumes, the positive effects of
completed cost reduction and restructuring initiatives and the impact of
exchange rate fluctuations on the reported results of the business.
Results of Operations by Segment
Successor Predecessor
Company Company
-------------- --------------
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Net Revenues: (In millions)
- ------------ -------------
Manufacturing.............................................. $ 114.0 $ 109.0
Performance products....................................... 75.5 81.9
Corporate and other........................................ 3.4 6.1
-------- --------
Total.................................................. $ 192.9 $ 197.0
======== ========
-12
Successor Predecessor
Company Company
-------------- --------------
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Operating Profit (Loss):
- -----------------------
Manufacturing............................................. $ 11.1 $ 8.9
Performance products...................................... 11.8(1) (25.2)(1)
Corporate and other....................................... (0.8) (1.6)
-------- -------
Total................................................. $ 22.1 $ (17.9)
======== =======
(1) Includes restructuring and impairment charges of $1.0 million and $24.7
million for the three month periods ended March 31, 2004 and 2003,
respectively.
Manufacturing Segment
Net revenues for the manufacturing segment were $114 million for the
three month period ended March 31, 2004 as compared to $109 million for the
comparable prior year period. This increase is principally due to higher sales
to the industrial and automotive markets of $6 million and $2 million,
respectively, partially offset by lower sales to the appliance and electronics
market of $4 million. The increase in revenues in the industrial market is
principally due to the impact of the pass through of higher raw material prices
for copper to our customers as well as the impact of exchange rate fluctuations.
The increase in revenues to the automotive market is principally due to a new
engine management harness which the Company started to produce during the second
half of 2003. The decrease in revenues to the appliance and electronics market
reflect the impact of certain customers resourcing business away from the
Company, primarily to competitors in the Far East. Gross profit was $19 million
for the three month period ended March 31, 2004, which approximated the prior
year level. Increased depreciation and amortization expense of $1 million as a
result of the impact of fresh start accounting offset the favorable impact of
the higher sales level and higher production levels at one of the Company's
roller bearing plants as a result of insourcing parts previously purchased from
an outside supplier. The launch of this product occurred in the second quarter
of 2003, resulting in the year over year improvement in gross profit. Selling,
general and administrative expense was $10 million for each of the three month
periods ended March 31, 2004 and 2003. Operating income for the three month
period ended March 31, 2004 was $11 million as compared to $9 million for the
prior year period. This increase is principally due to a $2 million pension
curtailment gain as previously discussed.
Performance Products Segment
Net revenues for the performance products segment were $76 million as
compared to $82 million for the prior year period. This decrease was principally
driven by lower sales for the Company's sulfuric acid product and fine chemical
product lines of $3 million and $4 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 $1 million for the Company's water
chemical product line, due principally to higher volumes. Gross profit was $10
million for the three month period ended March 31, 2004 as compared to $8
million for the prior year period. This increase is principally due to a $2
million loss contract accrual recorded during the first quarter of 2003, and
plant cost savings net of lost revenue of $2 million due to the closure of the
South Plant of the Delaware Valley Works, partially offset by an increase in
maintenance spending of $1 million due to the timing of plant maintenance and
turnarounds. Selling, general and administrative expense was $9 million for the
three month period ended March 31, 2004, which was $1 million higher than the
prior year level. This increase was principally due to higher pension and
retiree medical costs. Restructuring and impairment charges were $1 million for
the three month period ended March 31, 2004 as compared to
-13-
a $25 million charge recorded during the comparable prior year period to reduce
the carrying value of the fixed assets at the South Plant of the Company's
Delaware Valley Works to estimated fair value, which was determined based upon a
number of factors including an independent appraisal. Operating income was $12
million for the three month period ended March 31, 2004 as compared to an
operating loss of $25 million for the prior year. This improvement is
principally due to the lower restructuring and impairment charges, a $12 million
pension curtailment gain as previously discussed and the abovementioned higher
gross profit, partially offset by higher selling, general and administrative
expense.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents were $19 million at March 31, 2004 compared
with $27 million at December 31, 2003. The decrease in cash is the result of
cash used by operating activities of $18 million, capital expenditures of $5
million, offset by borrowings of $13 million and proceeds from asset sales of
$3 million. Cash used for operating activities includes contributions made to
domestic pension plans of $17 million.
The Company had working capital of $97 million at March 31, 2004 as
compared with working capital of $93 million at December 31, 2003. This increase
in working capital principally reflects higher accounts receivable balances and
lower accrued liabilities partially offset by higher accounts payable and lower
cash.
Cash payments for employee termination costs and facility exit costs
totaled $5 million in the three months ended March 31, 2004. Management expects
that additional cash outlays of approximately $5 million for employee
termination costs and facility exit costs for the two plant closures in the
performance products segment will be substantially completed by the end of 2004.
Management intends to fund these cash outlays from existing cash balances and
cash flow generated by operations.
On November 10, 2003, GenTek, substantially all of GenTek's domestic
subsidiaries, and Noma Company (collectively, "the Borrowers") entered into a
$125 million previously defined Revolving Credit Facility which matures on
November 10, 2008. The facility includes a letter of credit sub-limit of $60
million. The facility is secured by a first priority lien on substantially all
of the assets of the Borrowers and 65 percent of the stock of first-tier foreign
subsidiaries. The facility bears interest at variable rates based on a base rate
or LIBOR plus an applicable margin. The current margins are 1.5 percent for base
rate borrowings and 2.5 percent for LIBOR borrowings. The margins are subject to
periodic adjustment based upon the financial performance of the Company.
In addition, on November 10, 2003, the Company issued $250 million
under the Senior Term Loan Credit Agreement which matures on November 10, 2008.
The debt is guaranteed by substantially all of the Company's direct and indirect
domestic subsidiaries, and is secured by second-priority liens on substantially
all of the assets of the Company and its direct and indirect domestic
subsidiaries and 65 percent of the stock of first-tier foreign subsidiaries. The
debt bears interest at variable rates based on LIBOR plus 4.5 percent, subject
to a LIBOR floor of 1.5 percent.
The above debt facilities contain debt covenants which impose certain
restrictions on the Company's ability to, among other things, incur additional
debt, pay dividends, make investments or sell assets. Additionally, certain
asset sale proceeds must be used to repay indebtedness and, beginning in 2005,
the Senior Term Loan Credit Agreement provides that the majority of any "excess
cash flow" generated in the prior year be used to prepay the senior term debt.
-14-
Upon completion of the sale of the Krone communications business, the
Company plans to use the net proceeds of the transaction, after transaction
fees, taxes, a distribution to holders of the Company's tranche A warrants and
other required payments, to re-pay the Company's senior term notes.
Management believes that the Company's cash flow from operations and
availability under its revolving credit facility will be sufficient to cover
future debt service requirements, capital expenditures, and working capital
requirements during 2004.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's cash flows and earnings are subject to fluctuations
resulting from changes in interest rates, foreign currency exchange rates and
commodity prices and the Company selectively uses financial instruments to
manage these risks. The Company's objective in managing its exposure to changes
in interest rates, foreign currency exchange rates and commodity prices is to
reduce volatility on earnings and cash flow associated with such changes. The
Company has not entered, and does not intend to enter, into financial
instruments for speculation or trading purposes.
The Company measures the market risk related to its holding of
financial instruments based on changes in interest rates, foreign currency rates
and commodity prices using a sensitivity analysis. The sensitivity analysis
measures the potential loss in fair values, cash flows and earnings based on a
hypothetical 10 percent change in interest rates, foreign currency exchange
rates and commodity prices. The Company used current market rates on its debt
and derivative portfolio to perform the sensitivity analysis. Such analysis
indicates that a hypothetical 10 percent change in interest rates, foreign
currency exchange rates or commodity prices would not have a material impact on
the fair values, cash flows or earnings of the Company.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective at the reasonable assurance level in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
-15-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
NONE
Item 2. Changes in Securities and Use of Proceeds.
NONE
Item 3. Defaults Upon Senior Securities.
NONE
Item 4. Submission of Matters to a Vote of Security Holders.
NONE
Item 5. Other Information.
NONE
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
2.1 Joint Plan of Reorganization Under Chapter 11, Title 11,
United States Code of GenTek Inc., et al., and Noma
Company, Debtors, dated August 28, 2003, as filed with the
United States Bankruptcy Court for the District of
Delaware on August 28, 2003 (incorporated by reference to
Exhibit 2.1 of the Registrant's Form 8-K, filed with the
Commission on October 21, 2003).
2.2 First Modification to Joint Plan of Reorganization Under
Chapter 11, Title 11, United States Code of GenTek Inc.,
et al., and Noma Company, Debtors, dated October 3, 2003
as filed with the United States Bankruptcy Court for the
District of Delaware on October 3, 2003 (incorporated by
reference to Exhibit 2.2 of the Registrant's Form 8-K,
filed with the Commission on October 21, 2003).
2.3 Order confirming Joint Plan of Reorganization Under
Chapter 11, Title 11, United States Code of GenTek Inc.,
et al., and Noma Company, Debtors, as Modified, as entered
by the United States Bankruptcy Court for the District of
Delaware on October 7, 2003 (incorporated by reference to
Exhibit 2.3 of the Registrant's Form 8-K, filed with the
Commission on October 21, 2003).
3.1 Second Amended and Restated Certificate of Incorporation
of GenTek Inc., effective as of November 7, 2003
(incorporated by reference to the Registrant's Form 8-A to
amend its Form 10, dated November 10, 2003, as filed with
the Securities and Exchange Commission).
-16-
3.2 Amended and Restated By-Laws of GenTek Inc., effective as
of November 10, 2003 (incorporated by reference to the
Registrant's Form 8-A to amend its Form 10, dated November
10, 2003, as filed with the Securities and Exchange
Commission).
4.1 GenTek Inc. Tranche A Warrant Agreement, dated as of
November 10, 2003 (incorporated by reference to the
Registrant's Form 8-A to amend its Form 10, dated November
10, 2003, as filed with the Securities and Exchange
Commission).
4.2 GenTek Inc. Tranche B Warrant Agreement, dated as of
November 10, 2003 (incorporated by reference to the
Registrant's Form 8-A to amend its Form 10, dated November
10, 2003, as filed with the Securities and Exchange
Commission).
4.3 GenTek Inc. Tranche C Warrant Agreement, dated as of
November 10, 2003 (incorporated by reference to the
Registrant's Form 8-A to amend its Form 10, dated November
10, 2003, as filed with the Securities and Exchange
Commission).
10.1 Form of Registration Rights Agreement by and among the
Company and the holders named therein dated as of November
10, 2003 (incorporated by reference to the Registrant's
Form 8-A to amend its Form 10, dated November 10, 2003, as
filed with the Securities and Exchange Commission).
10.2 Credit Agreement among GenTek Inc., Noma Company and the
domestic subsidiaries of GenTek Inc. from time to time
party hereto and Bank of America, N.A. as the Agent, and
Banc of America Securities LLC as sole Syndication Agent,
Book Runner and Lead Arranger, dated as of November 10,
2003 (incorporated by reference to the Registrant's Form
10-Q dated September 30, 2003, as filed with the
Securities and Exchange Commission).
10.3 Security Agreement among GenTek Inc. and certain of its
subsidiaries and Bank of America, N.A. in its capacity as
agent for the financial institutions from time to time
party to the Credit Agreement, dated as of November 10,
2003 (incorporated by reference to the Registrant's Form
10-Q dated September 30, 2003, as filed with the
Securities and Exchange Commission).
10.4 Pledge Agreement among GenTek Inc. and certain of its
subsidiaries and Bank of America, N.A. in its capacity as
agent for the financial institutions from time to time
party to the Credit Agreement, dated as of November 10,
2003 (incorporated by reference to the Registrant's Form
10-Q dated September 30, 2003, as filed with the
Securities and Exchange Commission).
10.5 Intercreditor Agreement among Bank of America, N.A., as
Senior Agent, BNY Asset Solutions LLC, as Junior Agent,
GenTek Inc. and each subsidiary of GenTek party hereto,
dated as of November 10, 2003 (incorporated by reference
to the Registrant's Form 10-Q dated September 30, 2003, as
filed with the Securities and Exchange Commission).
10.6 Senior Term Loan and Guarantee Agreement among GenTek
Inc., as Borrower, The Subsidiaries of GenTek Inc. Parties
Hereto, as Guarantors, The Several Lenders from Time to
Time Parties Hereto, and BNY Asset Solutions LLC, as
Administrative Agent, dated as of November 10, 2003
(incorporated by reference to the Registrant's
-17-
Form 10-Q dated September 30, 2003, as filed with the
Securities and Exchange Commission).
10.7 Security Agreement among GenTek Inc. and certain of its
subsidiaries and BNY Asset Solutions LLC in its capacity
as administrative agent for the financial institutions
from time to time party to the Loan Agreement, dated as of
November 10, 2003 (incorporated by reference to the
Registrant's Form 10-Q dated September 30, 2003, as filed
with the Securities and Exchange Commission).
10.8 Pledge Agreement among GenTek Inc. and certain of its
subsidiaries and BNY Asset Solutions LLC in its capacity
as administrative agent for the financial institutions
from time to time party to the Loan Agreement, dated as of
November 10, 2003 (incorporated by reference to the
Registrant's Form 10-Q dated September 30, 2003, as filed
with the Securities and Exchange Commission).
10.9 GenTek Inc. 2003 Management and Directors Incentive Plan
(incorporated by reference to the Registrant's Form 10-Q
dated September 30, 2003, as filed with the Securities and
Exchange Commission).
10.10 GenTek Key Employee Retention Plan (incorporated by
reference to Exhibit 10.14 to the Registrant's Form 10-K/A
dated April 30, 2003, as filed with the Securities and
Exchange Commission).
10.11 Form of Indemnification Agreement (incorporated by
reference to the Registrant's Form 10-K dated December 31,
2003, as filed with the Securities and Exchange
Commission).
10.12 GenTek Performance Plan (incorporated by reference to the
Exhibit 10.3 to the Registrant's Amendment No. 2 to Form
10, dated April 8, 1999, as filed with the Securities and
Exchange Commission).
10.13 Tax Sharing Agreement between GenTek Inc. and the General
Chemical Group Inc. (incorporated by reference to the
Exhibit 10.6 to the Registrant's Amendment No. 2 to Form
10, dated April 8, 1999, as filed with the Securities and
Exchange Commission).
10.14 Share Purchase Agreement by and among ADC
Telecommunications Inc., Krone International Holding Inc.,
Krone Digital Communications Inc., GenTek Holding
Corporation, and GenTek Inc., dated March 25, 2004.
31.1 GenTek Certification of Chief Executive Officer pursuant
to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002.
-18-
(b) Reports on Form 8-K:
Form 8-K filed with the Securities and Exchange Commission dated
February 6, 2004, with respect to a press release announcing the
Company's filing of the registration statement required by its
registration rights agreement.
Form 8-K filed with the Securities and Exchange Commission dated
March 26, 2004, with respect to the Company's announcement that it
has signed a definitive agreement to sell its Krone communications
business to ADC Telecommunications, Inc.
Form 8-K filed with the Securities and Exchange Commission dated
March 31, 2004, with respect to the change of address of the
Company's principal executive office.
Form 8-K filed with the Securities and Exchange Commission dated
March 31, 2004, with respect to the Company's announcement of its
earnings for the fourth quarter and full fiscal year ended
December 31, 2003.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
GENTEK INC.
-----------------------------------------------
Registrant
Date May 12, 2004 /s/ Richard R. Russell
------------- -----------------------------------------------
Richard R. Russell
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date May 12, 2004 /s/ Matthew R. Friel
------------- -----------------------------------------------
Matthew R. Friel
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-20-
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................... 'SS'