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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12387
TENNECO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0515284
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
500 NORTH FIELD DRIVE, LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-5000
TENNECO AUTOMOTIVE INC.
(Former name, Former Address and Former Fiscal Year, if changed since Last
Report)
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 [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, par value $0.01 per share: 44,125,241 shares as of October
31, 2005.
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TABLE OF CONTENTS
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).................. 4
Tenneco Inc. and Consolidated Subsidiaries--
Report of Independent Registered Public Accounting
Firm................................................ 4
Statements of Income................................. 5
Balance Sheets....................................... 6
Statements of Cash Flows............................. 7
Statements of Changes in Shareholders' Equity........ 8
Statements of Comprehensive Income (Loss)............ 9
Notes to Consolidated Financial Statements........... 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 30
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 57
Item 4. Controls and Procedures........................... 57
PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................. *
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds............................................... 58
Item 3. Defaults Upon Senior Securities................... *
Item 4. Submission of Matters to a Vote of Security
Holders................................................ *
Item 5. Other Information................................. *
Item 6. Exhibits.......................................... 58
---------------
* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements
regarding, among other things, our prospects and business strategies. The words
"may," "will," "believes," "should," "could," "plans," "expects," "anticipate,"
"intends," "estimates," and similar expressions (and variations thereof),
identify these forward-looking statements. Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, these expectations may not prove to be correct. Because
these forward-looking statements are also subject to risks and uncertainties,
actual results may differ materially from the expectations expressed in the
forward-looking statements. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-looking
statements include:
- changes in automotive manufacturers' production rates and their actual
and forecasted requirements for our products, including the overall
highly competitive nature of the automotive parts industry, and our
resultant inability to realize the sales represented by our awarded book
of business which is based on anticipated pricing for the applicable
program over its life, and is subject to increases or decreases due to
changes in customer requirements, customer and consumer preferences, and
the number of vehicles actually produced by customers;
- increases in the costs of raw materials, including our ability to
successfully reduce the impact of any such cost increases through
materials substitutions, cost reduction initiatives and other methods;
2
- the cyclical nature of the global vehicular industry, including the
performance of the global aftermarket sector;
- changes in consumer demand, prices and our ability to have our products
included on top selling vehicles, including longer product lives of
automobile parts, any shift in consumer preferences to smaller vehicles
in light of higher fuel costs and other factors impacting the cyclicality
of automotive production and sales of automobiles which include our
products, and the potential negative impact on our revenues and margins
from such products;
- our continued success in cost reduction and cash management programs and
our ability to execute restructuring and other cost reduction plans and
to realize anticipated benefits from these plans;
- general economic, business and market conditions;
- the impact of consolidation among automotive parts suppliers and
customers on our ability to compete;
- operating hazards associated with our business;
- changes in distribution channels or competitive conditions in the markets
and countries where we operate, including the impact of changes in
distribution channels for aftermarket products on our ability to increase
or maintain aftermarket sales;
- the cost and outcome of existing and any future legal proceedings, and
compliance with changes in regulations, including environmental
regulations;
- labor disruptions at our facilities or any labor or other economic
disruptions at any of our significant customers or suppliers;
- economic, exchange rate and political conditions in the foreign countries
where we operate or sell our products;
- customer acceptance of new products;
- new technologies that reduce the demand for certain of our products or
otherwise render them obsolete;
- our ability to realize our business strategy of improving operating
performance;
- capital availability or costs, including changes in interest rates,
market perceptions of the industries in which we operate or ratings of
securities;
- changes by the Financial Accounting Standards Board or the Securities and
Exchange Commission of authoritative generally accepted accounting
principles or policies;
- the impact of changes in and compliance with laws and regulations,
including environmental laws and regulations, and environmental
liabilities in excess of the amount reserved;
- terrorism, acts of war and similar events, and their resultant impact on
economic and political conditions; and
- the occurrence or non-occurrence of other circumstances beyond our
control.
3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TENNECO INC.
We have reviewed the accompanying consolidated balance sheet of Tenneco
Inc. (formerly known as Tenneco Automotive Inc.) and consolidated subsidiaries
as of September 30, 2005, and the related consolidated statements of income and
comprehensive income (loss) for the three-month and nine-month periods ended
September 30, 2005 and 2004, and of cash flows and changes in shareholders'
equity for the nine-month periods ended September 30, 2005 and 2004. These
interim financial statements are the responsibility of Tenneco Inc.'s
management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated interim financial statements for them to be
in conformity with accounting principles generally accepted in the United States
of America.
We previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Tenneco Inc. and consolidated subsidiaries as of December 31, 2004, and the
related consolidated statements of income (loss), cash flows, changes in
shareholders' equity and comprehensive income (loss) for the year then ended
(not presented herein); and in our report dated March 8, 2005 (May 10, 2005 as
to Note 4), we expressed an unqualified opinion on those consolidated financial
statements (such report includes an explanatory paragraph relating to (i) a
change in accounting for goodwill and intangible assets upon the adoption of
Statement of Financial Accounting Standards No. 142 and (ii) a change in method
of accounting for certain inventory from the last-in, first-out method ("LIFO")
to the lower of cost, determined on a first-in, first-out ("FIFO") basis, or
market method). In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2004 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Chicago, Illinois
November 2, 2005
4
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
REVENUES
Net sales and operating revenues........ $ 1,096 $ 996 $ 3,377 $ 3,142
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation
shown below)......................... 889 796 2,718 2,498
Engineering, research, and
development.......................... 22 20 64 56
Selling, general, and administrative.... 96 93 287 302
Depreciation and amortization of other
intangibles.......................... 44 42 134 131
----------- ----------- ----------- -----------
1,051 951 3,203 2,987
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Loss on sale of receivables............. (1) -- (2) (1)
Other income (loss)..................... 6 (1) 5 (1)
----------- ----------- ----------- -----------
5 (1) 3 (2)
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME
TAXES, AND MINORITY INTEREST............ 50 44 177 153
Interest expense (net of interest
capitalized)......................... 33 35 97 104
Income tax expense...................... 7 2 29 11
Minority interest....................... -- 1 1 4
----------- ----------- ----------- -----------
NET INCOME................................ $ 10 $ 6 $ 50 $ 34
=========== =========== =========== ===========
EARNINGS PER SHARE
Average shares of common stock
outstanding--
Basic................................... 43,279,086 41,693,641 42,969,663 41,314,451
Diluted................................. 45,583,668 44,322,958 45,215,418 43,997,882
Basic earnings per share of common
stock................................... $ 0.25 $ 0.15 $ 1.17 $ 0.84
Diluted earnings per share of common
stock................................... $ 0.23 $ 0.14 $ 1.11 $ 0.78
The accompanying notes to financial statements are an integral part of these
statements of income.
5
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
(NOTE 3)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 89 $ 214
Receivables--
Customer notes and accounts, net........................ 648 458
Other................................................... 27 30
Inventories--
Finished goods.......................................... 163 167
Work in process......................................... 94 85
Raw materials........................................... 101 105
Materials and supplies.................................. 37 39
Deferred income taxes..................................... 47 70
Prepayments and other..................................... 132 124
------- -------
1,338 1,292
------- -------
Other assets:
Long-term notes receivable, net........................... 22 24
Goodwill.................................................. 195 196
Intangibles, net.......................................... 23 24
Deferred income taxes..................................... 280 304
Other..................................................... 141 145
------- -------
661 693
------- -------
Plant, property, and equipment, at cost..................... 2,413 2,451
Less--Reserves for depreciation and amortization.......... 1,362 1,317
------- -------
1,051 1,134
------- -------
$ 3,050 $ 3,119
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term
debt)................................................... $ 71 $ 19
Trade payables............................................ 716 696
Accrued taxes............................................. 30 24
Accrued interest.......................................... 33 35
Accrued liabilities....................................... 230 226
Other..................................................... 33 47
------- -------
1,113 1,047
------- -------
Long-term debt.............................................. 1,358 1,401
------- -------
Deferred income taxes....................................... 70 126
------- -------
Postretirement benefits..................................... 255 276
------- -------
Deferred credits and other liabilities...................... 81 86
------- -------
Commitments and contingencies
Minority interest......................................... 23 24
------- -------
Shareholders' equity:
Common stock.............................................. -- --
Premium on common stock and other capital surplus......... 2,774 2,764
Accumulated other comprehensive loss...................... (252) (185)
Retained earnings (accumulated deficit)................... (2,132) (2,180)
------- -------
390 399
Less--Shares held as treasury stock, at cost.............. 240 240
------- -------
150 159
------- -------
$ 3,050 $ 3,119
======= =======
The accompanying notes to financial statements are an integral part of these
balance sheets.
6
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
2005 2004
----- ----
(MILLIONS)
OPERATING ACTIVITIES
Net income.................................................. $ 50 $ 34
Adjustments to reconcile net income to cash provided (used)
by operating activities--
Depreciation and amortization of other intangibles........ 134 131
Deferred income taxes..................................... 3 (12)
Loss on sale of assets, net............................... 2 1
Changes in components of working capital (net of
acquisition)--
(Increase) decrease in receivables..................... (209) (66)
(Increase) decrease in inventories..................... (22) (22)
(Increase) decrease in prepayments and other current
assets................................................ (23) (21)
Increase (decrease) in payables........................ 52 55
Increase (decrease) in accrued taxes................... 11 5
Increase (decrease) in accrued interest................ (2) --
Increase (decrease) in other current liabilities....... 5 21
Other..................................................... (39) 9
----- ----
Net cash provided (used) by operating activities............ (38) 135
----- ----
INVESTING ACTIVITIES
Net proceeds from sale of assets............................ 4 12
Expenditures for plant, property, and equipment............. (100) (87)
Acquisition of business..................................... (11) --
Investments and other....................................... 1 --
----- ----
Net cash used by investing activities....................... (106) (75)
----- ----
FINANCING ACTIVITIES
Issuance of common shares................................... 6 6
Issuance of long-term debt.................................. 1 --
Retirement of long-term debt................................ (43) (6)
Net increase in short-term debt excluding current maturities
of long-term debt......................................... 56 1
Other....................................................... 1 1
----- ----
Net cash provided by financing activities................... 21 2
----- ----
Effect of foreign exchange rate changes on cash and cash
equivalents............................................... (2) (4)
----- ----
Increase (decrease) in cash and cash equivalents............ (125) 58
Cash and cash equivalents, January 1........................ 214 145
----- ----
Cash and cash equivalents, September 30 (Note).............. $ 89 $203
===== ====
Cash paid during the period for interest.................... $ 94 $106
Cash paid during the period for income taxes (net of
refunds).................................................. $ 16 $ 15
NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
The accompanying notes to financial statements are an integral part of these
statements of cash flows.
7
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(NOTE 3)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2005 2004
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- -------
(MILLIONS EXCEPT SHARE AMOUNTS)
COMMON STOCK
Balance January 1.................................. 44,275,594 $ -- 42,167,296 $ --
Issued pursuant to benefit plans................. 283,921 -- 452,976 --
Stock options exercised.......................... 847,798 -- 1,075,302 --
---------- ------- ---------- -------
Balance September 30............................... 45,407,313 -- 43,695,574 --
========== ==========
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance January 1.................................. 2,764 2,751
Premium on common stock issued pursuant to
benefit plans.................................... 10 9
------- -------
Balance September 30............................... 2,774 2,760
------- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance January 1.................................. (185) (241)
Other comprehensive loss......................... (67) --
------- -------
Balance September 30............................... (252) (241)
------- -------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1 (Note 3)......................... (2,180) (2,205)
Net income....................................... 50 34
Other............................................ (2) --
------- -------
Balance September 30............................... (2,132) (2,171)
------- -------
LESS--COMMON STOCK HELD AS TREASURY STOCK, AT COST
Balance January 1 and September 30................. 1,294,692 240 1,294,692 240
========== ------- ========== -------
Total....................................... $ 150 $ 108
======= =======
The accompanying notes to financial statements are an integral part
of these statements of changes in shareholders' equity.
8
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
2005 2004
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
(LOSS) (LOSS) (LOSS) (LOSS)
------------- ------------- ------------- -------------
(MILLIONS)
NET INCOME............................... $ 10 $ 6
---- ---
ACCUMULATED OTHER COMPREHENSIVE INCOME
CUMULATIVE TRANSLATION ADJUSTMENT
Balance July 1........................... $(138) $(162)
Translation of foreign currency
statements.......................... 8 8 19 19
----- -----
Balance September 30..................... (130) (143)
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance July 1 and September 30.......... (122) (98)
----- -----
Balance September 30..................... $(252) $(241)
===== ---- ===== ---
Other comprehensive income............... 8 19
---- ---
COMPREHENSIVE INCOME..................... $ 18 $25
==== ===
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
2005 2004
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
(LOSS) (LOSS) (LOSS) (LOSS)
------------- ------------- ------------- -------------
(MILLIONS)
NET INCOME............................... $ 50 $34
---- ---
ACCUMULATED OTHER COMPREHENSIVE (INCOME)
LOSS
CUMULATIVE TRANSLATION ADJUSTMENT
Balance January 1........................ $ (63) $(143)
Translation of foreign currency
statements.......................... (67) (67) -- --
----- -----
Balance September 30..................... (130) (143)
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance January 1 and September.......... (122) (98)
----- -----
Balance September 30..................... $(252) $(241)
===== ---- ===== ---
Other comprehensive income (loss)........ (67) --
---- ---
COMPREHENSIVE INCOME (LOSS).............. $(17) $34
==== ===
The accompanying notes to financial statements are an integral part
of these statements of comprehensive income (loss).
9
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) As you read the accompanying financial statements and Management's
Discussion and Analysis you should also read our Annual Report on Form 10-K/A
for the year ended December 31, 2004.
We recently changed our name from Tenneco Automotive Inc. to Tenneco Inc.
The name Tenneco better represents the expanding number of markets we serve
through our commercial and specialty vehicle businesses. Building a stronger
presence in these markets complements our core businesses of supplying ride
control, emission control and elastomer products to automotive original
equipment and aftermarket customers worldwide. Our common stock will continue to
trade on the New York Stock Exchange under the symbol TEN.
In our opinion, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly Tenneco Inc.'s financial position, results of operations, cash flows,
changes in shareholders' equity, and comprehensive income (loss) for the periods
indicated. We have prepared the unaudited interim consolidated financial
statements pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America ("GAAP") for annual financial statements.
Our consolidated financial statements include all majority-owned
subsidiaries. We carry investments in 20 percent to 50 percent owned companies
at cost plus equity in undistributed earnings and cumulative translation
adjustments from the date of acquisition since we have the ability to exert
significant influence over operating and financial policies.
We have reclassified prior year's financial statements where appropriate to
conform to 2005 presentations.
(2) In February 2005, we announced the acquisition of substantially all the
exhaust assets of Gabilan Manufacturing, Inc., a privately held company that has
developed and manufactured motorcycle exhaust systems for Harley-Davidson
motorcycles since 1978. The company also produces aftermarket muffler kits for
Harley-Davidson. We purchased Gabilan's assets for $11 million in cash and
expect the acquisition to be accretive within the first year. Gabilan generated
approximately $38 million in revenue in 2004. We began reporting Gabilan in our
results of operations for the quarter ended March 31, 2005.
(3) Effective January 1, 2005, we changed our accounting method for valuing
inventory for our U.S. based operations from the last-in, first-out ("LIFO")
method to the first-in, first-out ("FIFO") method. As a result, all U.S.
inventories are now stated at the lower of cost, determined on a FIFO basis, or
market. We elected to change to the FIFO method as we believe it is preferable
for the following reasons: 1) the change will provide better matching of revenue
and expenditures and 2) the change will achieve greater consistency in valuing
our global inventory. Additionally, we initially adopted LIFO as it provided
certain U.S. tax benefits which we no longer realize due to our U.S. net
operating losses (when applied for tax purposes, tax laws require that LIFO be
applied for GAAP as well). As a result of the change, we also expect to realize
administrative efficiencies.
In accordance with GAAP, the change in inventory accounting has been
applied by adjusting prior year's financial statements. The effect of the change
in accounting principle as of December 31, 2004, was to increase inventories by
$14 million, reduce deferred tax assets by $5 million, and increase retained
earnings by $9 million. There was no impact on consolidated net income for the
three- and nine-month periods ended September 30, 2004 from this restatement.
(4) In April 2004, we entered into three separate fixed-to-floating
interest rate swaps with two separate financial institutions. These agreements
swapped an aggregate of $150 million of fixed interest rate debt at an annual
rate of 10 1/4 percent to floating interest rate debt at an annual rate of LIBOR
plus an average spread of 5.68 percent. Each agreement requires semi-annual
settlements through July 15, 2013. The LIBOR in effect
10
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
for these swaps during the course of 2004 resulted in lower interest expense of
approximately $3 million for the year ended December 31, 2004. Based on the rate
in effect through July 15, 2005 and using the current LIBOR as determined under
these agreements of 3.82 percent (which remains in effect until January 15,
2006), these swaps are expected to reduce our 2005 annual interest expense by
approximately $2 million compared to having this debt remain fixed. These swaps
qualify as fair value hedges in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, and as such are recorded on the balance
sheet at market value with an offset to the underlying hedged item, which is
long-term debt. As of September 30, 2005, the fair value of the interest rate
swaps was a liability of approximately $4 million.
In February 2005, we amended our senior credit facility to reduce by 75
basis points the interest rate on the term loan B facility and the tranche B-1
letter of credit/revolving loan facility. In connection with the amendment, we
voluntarily prepaid $40 million in principal on the term loan B, reducing the
term loan B facility from $396 million to $356 million.
Additional provisions of the February 2005 amendment to the senior credit
facility agreement were as follows: (i) amend the definition of EBITDA to
exclude up to $60 million in restructuring-related expenses announced and taken
after February 2005, (ii) increase permitted investments to $50 million, (iii)
exclude expenses related to the issuance of stock options from the definition of
consolidated net income, (iv) permit us to redeem up to $125 million of senior
secured notes after January 1, 2008 (subject to certain conditions), (v)
increase our ability to add commitments under the revolving credit facility by
$25 million, and (vi) make other minor modifications. We incurred approximately
$1 million in fees and expenses associated with this amendment, which were
capitalized and are being amortized over the remaining term of the agreement.
Following the February 2005 voluntary prepayment of $40 million, the term
loan B facility is payable as follows: $74 million due March 31, 2010, and $94
million due each of June 30, September 30 and December 12, 2010. The revolving
credit facility requires that if any amounts are drawn, they be repaid by
December 2008. Prior to that date, funds may be borrowed, repaid and reborrowed
under the revolving credit facility without premium or penalty. Letters of
credit may be issued under the revolving credit facility.
The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by December 2010. We can borrow revolving loans from the $155 million
tranche B-1 letter of credit/revolving loan facility and use that facility to
support letters of credit. The tranche B-1 letter of credit/revolving loan
facility lenders have deposited $155 million with the administrative agent, who
has invested that amount in time deposits. We do not have an interest in any of
the funds on deposit. When we draw revolving loans under this facility, the
loans are funded from the $155 million on deposit with the administrative agent.
When we make repayments, the repayments are redeposited with the administrative
agent.
The tranche B-1 letter of credit/revolving loan facility will be reflected
as debt on our balance sheet only if we borrow money under this facility or if
we use the facility to make payments for letters of credit. We will not be
liable for any losses to or misappropriation of any (i) return due to the
administrative agent's failure to achieve the return described above or to pay
all or any portion of such return to any lender under such facility or (ii)
funds on deposit in such account by such lender (other than the obligation to
repay funds released from such accounts and provided to us as revolving loans
under such facility).
During the first nine months of 2005, we increased the amount of
commitments under our revolving credit facility from $220 million to $300
million and reduced the amount of commitments under our tranche B-1 letter of
credit/revolving loan facility from $180 million to $155 million. This reduction
of our tranche B-1 letter of credit/revolving loan facility was required under
the terms of the senior credit facility, as we had increased the amount of our
revolving credit facility commitments by more than $55 million.
11
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In October 2005, we further amended our senior credit facility increasing
the amount of commitments we may seek under the revolving credit portion of the
facility from $300 million to $350 million, along with other technical changes.
(5) Over the past several years we have adopted plans to restructure
portions of our operations. These plans were approved by the Board of Directors
and were designed to reduce operational and administrative overhead costs
throughout the business. Prior to the change in accounting required for exit or
disposal activities, we recorded charges to income related to these plans for
costs that did not benefit future activities in the period in which the plans
were finalized and approved, while actions necessary to affect these
restructuring plans occurred over future periods in accordance with established
plans.
In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. Project Genesis involved closing eight facilities, improving the
process flow and efficiency through value mapping and plant arrangement at 20
facilities, relocating production among facilities, and centralizing some
functional areas. The total of all these restructuring and other costs recorded
in the fourth quarter of 2001 was $32 million before tax, $31 million after tax,
or $0.81 per diluted common share. We eliminated 974 positions in connection
with Project Genesis. Additionally, we executed this plan more efficiently than
originally anticipated and as a result in the fourth quarter of 2002 reduced our
reserves related to this restructuring activity by $6 million, which was
recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2
million of severance reserve to the asset impairment reserve. This
reclassification became necessary, as actual asset impairments along with the
sale of our closed facilities were different than the original estimates. We
completed the remaining restructuring activities under Project Genesis as of the
end of 2004. Since Project Genesis was announced, we have undertaken a number of
related projects designed to restructure our operations, described below.
In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. This charge was primarily recorded in cost
of sales.
In October of 2003, we announced the closing of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees were
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $3 million in costs related to
this action in 2004. This action is in addition to the plant closings announced
in Project Genesis in the fourth quarter of 2001.
In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of layoffs were at middle and senior management levels. As of September 30,
2005, we have incurred $23 million in severance costs. Of this total, $7 million
was recorded in cost of sales and $16 million was recorded in selling, general
and administrative expense.
Including the above costs, we incurred $7 million in restructuring and
restructuring-related costs in the first nine months of 2005. Including the
costs incurred in 2002 through 2004 of $59 million, we have incurred a total of
$66 million for activities related to our restructuring initiatives.
Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we were allowed to exclude up to $60 million
of cash charges and expenses, before taxes, related to cost reduction
initiatives over the 2002 to 2006 time period from the calculation of the
financial covenant ratios we are required to maintain under our senior credit
agreement. In February of 2005, our senior credit facility was amended to
exclude all remaining cash charges and expenses related to restructuring
initiatives started on or
12
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
before February 21, 2005. As of September 30, 2005, we have excluded $62 million
in allowable charges relating to restructuring initiatives previously started.
Under our amended facility, we are allowed to exclude up to an additional
$60 million of cash charges and expenses, before taxes, related to restructuring
activities initiated after February 21, 2005 from the calculation of the
financial covenant ratios required under our senior credit facility. As of
September 30, 2005, we have excluded $4 million in allowable charges relating to
restructuring initiatives against the $60 million available under the terms of
the February 2005 amendment to the senior credit facility.
In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will initiate actions that will
reduce our costs through implementing the most appropriate and efficient
logistics, distribution and manufacturing footprint for the future. There can be
no assurances, however, that we will undertake additional restructuring actions.
Actions that we take, if any, will require the approval of our Board of
Directors, or its authorized committee. We plan to conduct any workforce
reductions that result in compliance with all legal and contractual requirements
including obligations to consult with workers' councils, union representatives
and others.
(6) We are subject to a variety of environmental and pollution control laws
and regulations in all jurisdictions in which we operate. We expense or
capitalize, as appropriate, expenditures for ongoing compliance with
environmental regulations that relate to current operations. We expense
expenditures that relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation. We record
liabilities when environmental assessments indicate that remedial efforts are
probable and the costs can be reasonably estimated. Estimates of the liability
are based upon currently available facts, existing technology, and presently
enacted laws and regulations taking into consideration the likely effects of
inflation and other societal and economic factors. We consider all available
evidence including prior experience in remediation of contaminated sites, other
companies' cleanup experiences and data released by the United States
Environmental Protection Agency or other organizations. These estimated
liabilities are subject to revision in future periods based on actual costs or
new information. Where future cash flows are fixed or reliably determinable, we
have discounted the liabilities. All other environmental liabilities are
recorded at their undiscounted amounts. We evaluate recoveries separately from
the liability and, when they are assured, recoveries are recorded and reported
separately from the associated liability in our financial statements.
As of September 30, 2005, we are designated as a potentially responsible
party in one Superfund site. We have estimated our share of the remediation
costs for this site to be less than $1 million in the aggregate. In addition to
the Superfund site, we may have the obligation to remediate current or former
facilities, and we estimate our share of remediation costs at these facilities
to be approximately $9 million. For the Superfund site and the current and
former facilities, we have established reserves that we believe are adequate for
these costs. Although we believe our estimates of remediation costs are
reasonable and are based on the latest available information, the cleanup costs
are estimates and are subject to revision as more information becomes available
about the extent of remediation required. At some sites, we expect that other
parties will contribute to the remediation costs. In addition, at the Superfund
site, the Comprehensive Environmental Response, Compensation and Liability Act
provides that our liability could be joint and several, meaning that we could be
required to pay in excess of our share of remediation costs. Our understanding
of the financial strength of other potentially responsible parties at the
Superfund site, and of other liable parties at our current and former
facilities, has been considered, where appropriate, in our determination of our
estimated liability.
We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund site, or as a liable party at our
current or former facilities, will not be material to our results of operations
or consolidated financial position.
13
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, and other product liability related matters), taxes,
employment matters, and commercial or contractual disputes, sometimes related to
acquisitions or divestitures. For example, one of our Chinese joint ventures is
currently under investigation by local customs officials related to whether the
joint venture applied the proper tariff code to certain of its imports. We
vigorously defend ourselves against all of these claims. In future periods, we
could be subjected to cash costs or non-cash charges to earnings if any of these
matters is resolved on unfavorable terms. However, although the ultimate outcome
of any legal matter cannot be predicted with certainty, based on present
information, including our assessment of the merits of the particular claim, we
do not expect that these legal proceedings or claims will have any material
adverse impact on our future consolidated financial position or results of
operations. In addition, we are subject to a number of lawsuits initiated by a
significant number of claimants alleging health problems as a result of exposure
to asbestos. Many of these cases involve significant numbers of individual
claimants. However, only a small percentage of these claimants allege that they
were automobile mechanics who were allegedly exposed to our former muffler
products and a significant number appear to involve workers in other industries
or otherwise do not include sufficient information to determine whether there is
any basis for a claim against us. We believe, based on scientific and other
evidence, it is unlikely that mechanics were exposed to asbestos by our former
muffler products and that, in any event, they would not be at increased risk of
asbestos-related disease based on their work with these products. Further, many
of these cases involve numerous defendants, with the number of each in some
cases exceeding 200 defendants from a variety of industries. Additionally, the
plaintiffs either do not specify any, or specify the jurisdictional minimum,
dollar amount for damages. As major asbestos manufacturers continue to go out of
business, we may experience an increased number of these claims. We vigorously
defend ourselves against these claims as part of our ordinary course of
business. In future periods, we could be subject to cash costs or non-cash
charges to earnings if any of these matters is resolved unfavorably to us. To
date, with respect to claims that have proceeded sufficiently through the
judicial process, we have regularly achieved favorable resolution in the form of
a dismissal of the claim or a judgment in our favor. Accordingly, we presently
believe that these asbestos-related claims will not have a material adverse
impact on our future financial condition, results of operations or cash flows.
We provide warranties on some of our products. The warranty terms vary but
range from one year up to limited lifetime warranties on some of our premium
aftermarket products. Provisions for estimated expenses related to product
warranty are made at the time products are sold or when specific warranty issues
are identified on OE products. These estimates are established using historical
information about the nature, frequency, and average cost of warranty claims. We
actively study trends of warranty claims and take action to improve product
quality and minimize warranty claims. We believe that the warranty reserve is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve. The reserve is included in
short-term liabilities on the balance sheet.
14
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Below is a table that shows the activity in the warranty accrual accounts:
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
2005 2004
---- ----
(MILLIONS)
Beginning balance........................................... $19 $18
Accruals related to product warranties...................... 10 4
Reductions for payments made................................ (9) (4)
--- ---
Ending balance.............................................. $20 $18
=== ===
(7) In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs--An Amendment of Accounting Research
Bulletin No. 43, Chapter 4." This statement requires idle facility expenses,
excessive spoilage, double freight and rehandling costs to be recognized as
current period charges regardless of whether they meet the criterion of "so
abnormal." SFAS No. 151 is effective for fiscal years beginning after June 15,
2005. The adoption of SFAS No. 151 did not have a material impact on our
financial position or results of operations.
In December 2004, the FASB revised SFAS No. 123, "Share-Based Payment"
which supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." This revised statement establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. The revised SFAS No. 123 is effective for
interim reporting periods that begin at the beginning of the next fiscal year
January 1, 2006. We estimate that the impact on our net income for the full year
2004 would not have exceeded approximately $2 million or $0.05 per diluted share
had we adopted the revised SFAS No. 123.
In December 2004, the FASB issued FASB Staff Position, ("FSP") No. 109-1.
FSP No. 109-1 provides guidance on the application of FASB Statement No. 109,
"Accounting for Income Taxes," to the provision within The American Jobs
Creation Act of 2004 ("The Act") that provides a tax deduction on qualified
production activities. The purpose behind this special deduction is to provide a
tax incentive to companies that maintain or expand U.S. manufacturing
activities. FSP No. 109-1 was effective upon issuance. The adoption of FSP 109-1
did not have any impact on our consolidated financial statements.
In December 2004, the FASB issued FSP No. 109-2. FSP No. 109-2 addresses
the question on the impact of a company's APB No. 23 Accounting for Income
Taxes--Special Areas representation under The Act, which provides for a special
one-time 85 percent dividend deduction on dividends from foreign subsidiaries.
FSP No. 109-2 was effective upon issuance. The issuance of FSP No. 109-2 does
not change how we apply APB No. 23, and therefore, did not have any impact on
our consolidated financial statements.
In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. 46 (revised December
2003)." The statement addresses whether a reporting enterprise should consider
whether it holds an implicit variable interest in a variable interest entity
("VIE") or potential VIE when specific conditions exist. The guidance should be
applied in the first reporting period beginning after March 3, 2005. The
adoption of FSP No. FIN 46(R)-5 does not have an impact on our consolidated
financial statements.
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations." This interpretation clarifies that the term
conditional asset retirement obligation as used in FASB No. 143, "Accounting for
Assets Retirement Obligation," refers to a legal obligation to perform an
15
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. This interpretation is effective no later than the end of fiscal years
ending after December 15, 2005. The adoption of FIN No. 47 is not expected to
have a material impact on our financial position or results of operation.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Corrections," which supersedes APB No. 20, "Accounting Changes" and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements." This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 is not expected to have a material impact on our
financial position or results of operation.
In June 2005, the FASB issued FSP No. 143-1, "Accounting for Electronic
Equipment Waste Obligations." This statement addresses the accounting for
obligations associated with Directive 2005/96/EC on Waste Electrical and
Electronic Equipment adopted by the European Union. The Directive distinguishes
between "new" and "historical" waste. The guidance should be applied the later
of the first reporting period ending after June 8, 2005, or the date of the
adoption of the law by the applicable EU-member country. The adoption of FSP No.
143-1 is not expected to have a material impact on our financial position or
results of operations.
In October 2005, the FASB issued FSP No. 123(R)-2, "Practical Accommodation
to the Application of Grant Date as Defined in FASB Statement No. 123(R)." The
statement provides guidance on the application of grant date as defined in FASB
Statement No. 123 (revised 2004), Share-Based Payment. The guidance should be
applied upon initial adoption of SFAS No. 123(R). The adoption of FSP No.
123(R)-2 is not expected to have a material impact on our financial position or
results of operation.
(8) We sell an interest in some of our U.S. trade accounts receivable to
two third parties. Receivables become eligible for the program on a daily basis,
at which time the receivables are sold to the third parties, net of a factoring
discount, through a wholly-owned subsidiary. Under this agreement, as well as
individual agreements with third parties in Europe, we have sold accounts
receivable of $146 million and $148 million at September 30, 2005 and 2004,
respectively. We recognized a loss of approximately $2 million and $1 million
for the nine months ended September 30, 2005 and 2004, respectively, on these
sales of trade accounts, representing the discount from book values at which
these receivables were sold to the third parties. The discount rate varies based
on funding cost incurred by the third parties, and it averaged four percent
during the time period in 2005 when we sold receivables. We retained ownership
of the remaining interest in the pool of receivables not sold to the third
parties. The retained interest represents a credit enhancement for the program.
We value the retained interest based upon the amount we expect to collect from
our customers, which approximates book value.
16
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(9) We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees." As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," and amended by SFAS No. 148, "Accounting for
Stock-based Compensation--Transition and Disclosure, an amendment of FASB
Statement No. 123," we follow the disclosure only requirements of SFAS No. 123.
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of SFAS No. 123:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- ----------------
2005 2004 2005 2004
----- ----- ----- -----
(MILLIONS EXCEPT SHARE
AND PER SHARE AMOUNTS)
Net income.................................................. $ 10 $ 6 $ 50 $ 34
Add: Stock-based employee compensation expense included in
net income, net of income tax............................. 1 2 4 10
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards, net of
income tax................................................ (2) (2) (6) (11)
----- ----- ----- -----
Pro forma net income........................................ $ 9 $ 6 $ 48 $ 33
===== ===== ===== =====
Earnings per share:
Basic--as reported.......................................... $0.25 $0.15 $1.17 $0.84
Basic--pro forma............................................ $0.23 $0.14 $1.13 $0.82
Diluted--as reported........................................ $0.23 $0.14 $1.11 $0.78
Diluted--pro forma.......................................... $0.22 $0.13 $1.07 $0.09
The fair value of each option granted during the first nine months of 2005
and 2004 is estimated on the date of grant using the Black-Scholes option
pricing model using the following weighted-average assumptions for grants in the
first nine months of 2005 and 2004, respectively: (i) risk-free interest rates
of 4.0 percent and 4.1 percent; (ii) expected lives of 7 years and 10 years;
(iii) expected volatility of 43.0 percent and 43.6 percent; and (iv) no dividend
yield.
17
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(10) Earnings per share of common stock outstanding were computed as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
Basic earnings per share--
Net income............................. $ 10 $ 6 $ 50 $ 34
=========== =========== =========== ===========
Average shares of common stock
outstanding......................... 43,279,086 41,693,641 42,969,663 41,314,451
=========== =========== =========== ===========
Earnings per average share of common
stock............................... $ 0.25 $ 0.15 $ 1.17 $ 0.84
=========== =========== =========== ===========
Diluted earnings per share--
Net income............................. $ 10 $ 6 $ 50 $ 34
=========== =========== =========== ===========
Average shares of common stock
outstanding......................... 43,279,086 41,693,641 42,969,663 41,314,451
Effect of dilutive securities:
Restricted stock.................... 425,395 257,920 356,337 266,296
Stock options....................... 1,879,187 2,371,397 1,889,418 2,417,135
----------- ----------- ----------- -----------
Average shares of common stock
outstanding including dilutive
shares.............................. 45,583,668 44,322,958 45,215,418 43,997,882
=========== =========== =========== ===========
Earnings per average share of common
stock............................... $ 0.23 $ 0.14 $ 1.11 $ 0.78
=========== =========== =========== ===========
Options to purchase 1,239,391 and 751,239 shares of common stock were
outstanding at September 30, 2005 and 2004, respectively, but were not included
in the computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common shares on such dates.
(11) Net periodic pension costs (income) and postretirement benefit costs
(income) consist of the following components:
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------
2005 2004 2005 2004
-------------- -------------- ---- ----
PENSION POSTRETIREMENT
-------------------------------- --------------
US FOREIGN US FOREIGN US US
--- ------- --- ------- ---- ----
(MILLIONS)
Service cost--benefits earned during the year........ $ 3 $ 1 $ 3 $ 2 $ 1 $ 1
Interest cost........................................ 5 3 4 3 2 2
Expected return on plan assets....................... (4) (4) (2) (5) -- --
Net amortization:
Actuarial loss..................................... 1 1 -- 1 2 1
Prior service cost................................. 1 1 1 -- (2) (2)
--- --- --- --- --- ---
Net pension and postretirement costs................. $ 6 $ 2 $ 6 $ 1 $ 3 $ 2
=== === === === === ===
18
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------------------
2005 2004 2005 2004
------------------ --------------- ---- ----
PENSION POSTRETIREMENT
------------------------------------- --------------
US FOREIGN US FOREIGN US US
------- ------- ---- ------- ---- ----
(MILLIONS)
Service cost--benefits earned during the year..... $ 11 $ 5 $ 11 $ 4 $ 2 $ 2
Interest cost..................................... 14 10 12 10 6 6
Expected return on plan assets.................... (12) (11) (10) (12) -- --
Net amortization:
Actuarial loss.................................. 3 2 2 2 5 4
Prior service cost.............................. 2 1 2 1 (5) (6)
---- ---- ---- ---- --- ---
Net pension and postretirement costs.............. $ 18 $ 7 $ 17 $ 5 $ 8 $ 6
==== ==== ==== ==== === ===
For the nine months ended September 30, 2005, we made pension contributions
of approximately $37 million for our domestic pension plans and $8 million for
our foreign pension plans. Based on current actuarial estimates, we believe we
will be required to make approximately $4 million to $9 million in worldwide
contributions for the remainder of 2005.
We made postretirement benefit contributions of approximately $8 million
during the first nine months of 2005. Based on current actuarial estimates, we
believe we will be required to make approximately $1 million in contributions
for the remainder of 2005.
(12) We occasionally provide guarantees that could require us to make
future payments in the event that the third party primary obligor does not make
its required payments. We have not recorded a liability for any of these
guarantees. The only third party guarantee we have made is the performance of
lease obligations by a former affiliate. Our maximum liability under this
guarantee was approximately $1 million at both September 30, 2005 and 2004,
respectively. We have no recourse in the event of default by the former
affiliate. However, we have not been required to make any payments under this
guarantee.
Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our existing and future material
domestic wholly-owned subsidiaries fully and unconditionally guarantee our
senior credit facility, our senior secured notes and our senior subordinated
notes on a joint and several basis. The arrangement for the senior credit
facility is also secured by first-priority liens on substantially all our
domestic assets and pledges of 66 percent of the stock of certain first-tier
foreign subsidiaries. The arrangement for the $475 million senior secured notes
is also secured by second-priority liens on substantially all our domestic
assets, excluding some of the stock of our domestic subsidiaries. No assets or
capital stock of our direct or indirect foreign subsidiaries secure these notes.
You should also read Note 14 where we present the Supplemental Guarantor
Condensed Consolidating Financial Statements.
We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities, travel and procurement card programs, and
cash management requirements for some of our subsidiaries totaling $27 million.
We have also issued $19 million in letters of credit to support some of our
subsidiaries' insurance arrangements. In addition, we have issued $3 million in
guarantees through letters of credit to guarantee other obligations of
subsidiaries primarily related to environmental remediation activities.
(13) In October 2004 and July 2005, we announced changes in the structure
of our organization which changed our reportable segments. The European segment
now includes South American and Indian operations. The Asia Pacific segment
includes our other Asian and Australian operations. While this will
19
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
have no impact on our consolidated results, it will change our segment results.
You should note that we have reclassified prior year's segment data where
appropriate to conform to 2005 presentations.
We are a global manufacturer with three geographic reportable segments: (1)
North America, (2) Europe, South America and India, and (3) Asia Pacific. Each
segment manufactures and distributes ride control and emission control products
primarily for the automotive industry. We have not aggregated individual
operating segments within these reportable segments. We evaluate segment
performance based primarily on income before interest expense, income taxes, and
minority interest. Products are transferred between segments and geographic
areas on a basis intended to reflect as nearly as possible the "market value" of
the products.
The following table summarizes certain Tenneco segment information:
SEGMENT
------------------------------------------------------------
EUROPE,
SOUTH
NORTH AMERICA & ASIA RECLASS &
AMERICA INDIA PACIFIC ELIMS CONSOLIDATED
------- --------- ------- --------- ------------
(MILLIONS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
Revenues from external customers.............. $ 502 $ 500 $ 94 $ -- $1,096
Intersegment revenues......................... 1 12 3 (16) --
Income before interest, income taxes, and
minority interest........................... 37 9 4 -- 50
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
Revenues from external customers.............. $ 465 $ 444 $ 87 $ -- $ 996
Intersegment revenues......................... 2 11 4 (17) --
Income before interest, income taxes, and
minority interest........................... 31 10 3 -- 44
AT SEPTEMBER 30, 2005, AND FOR THE NINE MONTHS
THEN ENDED
Revenues from external customers.............. $1,543 $1,564 $270 $ -- $3,377
Intersegment revenues......................... 4 42 9 (55) --
Income before interest, income taxes, and
minority interest........................... 126 41 10 -- 177
Total assets.................................. 1,361 1,387 259 43 3,050
AT SEPTEMBER 30, 2004, AND FOR THE NINE MONTHS
THEN ENDED
Revenues from external customers.............. $1,491 $1,374 $277 $ -- $3,142
Intersegment revenues......................... 5 37 13 (55) --
Income before interest, income taxes, and
minority interest........................... 111 26 16 -- 153
Total assets (Note 3)......................... 1,253 1,331 239 180 3,003
20
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(14) Supplemental guarantor condensed financial statements are presented
below:
Basis of Presentation
Subject to limited exceptions, all of our existing and future material
domestic wholly owned subsidiaries (which are referred to as the Guarantor
Subsidiaries) fully and unconditionally guarantee our senior subordinated notes
due 2014 and our senior secured notes due 2013 on a joint and several basis. We
have not presented separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries because management has determined
that such information is not material to the holders of the notes. Therefore,
the Guarantor Subsidiaries are combined in the presentation below.
These condensed consolidating financial statements are presented on the
equity method. Under this method, our investments are recorded at cost and
adjusted for our ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
You should read the condensed consolidating financial statements of the
Guarantor Subsidiaries in connection with our consolidated financial statements
and related notes of which this note is an integral part.
Distributions
There are no significant restrictions on the ability of the Guarantor
Subsidiaries to make distributions to us.
21
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
----------------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ --------------- --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External...................... $497 $599 $ -- $ -- $1,096
Affiliated companies.......... 19 121 -- (140) --
---- ---- ---- ----- ------
516 720 -- (140) 1,096
---- ---- ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)..... 419 610 -- (140) 889
Engineering, research, and
development................... 8 14 -- -- 22
Selling, general, and
administrative................ 47 49 -- -- 96
Depreciation and amortization of
other intangibles............. 17 27 -- -- 44
---- ---- ---- ----- ------
491 700 -- (140) 1,051
---- ---- ---- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables...... -- (1) -- -- (1)
Other income (expense)........... 12 (7) -- 1 6
---- ---- ---- ----- ------
12 (8) -- 1 5
---- ---- ---- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES........................ 37 12 -- 1 50
Interest expense--
External (net of interest
capitalized)................ (1) 1 33 -- 33
Affiliated companies (net of
interest income)............ 31 (2) (29) -- --
Income tax expense (benefit)..... 14 (10) (2) 5 7
Minority interest................ -- -- -- -- --
---- ---- ---- ----- ------
(7) 23 (2) (4) 10
Equity in net income (loss) from
affiliated companies.......... 28 -- 12 (40) --
---- ---- ---- ----- ------
NET INCOME (LOSS).................. $ 21 $ 23 $ 10 $ (44) $ 10
==== ==== ==== ===== ======
22
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ --------------- --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External...................... $448 $548 $ -- $ -- $996
Affiliated companies.......... 14 87 -- (101) --
---- ---- ---- ----- ----
462 635 -- (101) 996
---- ---- ---- ----- ----
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)..... 364 533 -- (101) 796
Engineering, research, and
development................... 10 10 -- -- 20
Selling, general, and
administrative................ 42 51 -- -- 93
Depreciation and amortization of
other intangibles............. 17 25 -- -- 42
---- ---- ---- ----- ----
433 619 -- (101) 951
---- ---- ---- ----- ----
OTHER INCOME (EXPENSE)
Loss on sale of receivables...... -- -- -- -- --
Other income (expense)........... 1 (2) -- -- (1)
---- ---- ---- ----- ----
1 (2) -- -- (1)
---- ---- ---- ----- ----
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES........................ 30 14 -- -- 44
Interest expense--
External (net of interest
capitalized)................ -- 3 32 -- 35
Affiliated companies (net of
interest income)............ 22 (2) (20) -- --
Income tax expense (benefit)..... (25) 2 (16) 41 2
Minority interest................ -- 1 -- -- 1
---- ---- ---- ----- ----
33 10 4 (41) 6
Equity in net income (loss) from
affiliated companies.......... 18 -- 2 (20) --
---- ---- ---- ----- ----
NET INCOME (LOSS).................. $ 51 $ 10 $ 6 $ (61) $ 6
==== ==== ==== ===== ====
23
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
----------------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ --------------- --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External...................... $1,552 $1,825 $ -- $ -- $3,377
Affiliated companies.......... 54 379 -- (433) --
------ ------ ---- ----- ------
1,606 2,204 -- (433) 3,377
------ ------ ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)..... 1,291 1,860 -- (433) 2,718
Engineering, research, and
development................... 32 32 -- -- 64
Selling, general, and
administrative................ 122 165 -- -- 287
Depreciation and amortization of
other intangibles............. 52 82 -- -- 134
------ ------ ---- ----- ------
1,497 2,139 -- (433) 3,203
------ ------ ---- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables...... -- (2) -- -- (2)
Other income (expense)........... 20 (12) -- (3) 5
------ ------ ---- ----- ------
20 (14) -- (3) 3
------ ------ ---- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES........................ 129 51 -- (3) 177
Interest expense--
External (net of interest
capitalized)................ (1) 3 95 -- 97
Affiliated companies (net of
interest income)............ 101 (20) (81) -- --
Income tax expense (benefit)..... 51 5 (7) (20) 29
Minority interest................ -- 1 -- -- 1
------ ------ ---- ----- ------
(22) 62 (7) 17 50
Equity in net income (loss) from
affiliated companies.......... 74 -- 57 (131) --
------ ------ ---- ----- ------
NET INCOME (LOSS).................. $ 52 $ 62 $ 50 $(114) $ 50
====== ====== ==== ===== ======
24
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ --------------- --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External...................... $1,338 $1,804 $ -- $ -- $3,142
Affiliated companies.......... 41 194 -- (235) --
------ ------ ---- ----- ------
1,379 1,998 -- (235) 3,142
------ ------ ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)..... 1,067 1,666 -- (235) 2,498
Engineering, research, and
development................... 26 30 -- -- 56
Selling, general, and
administrative................ 150 152 -- -- 302
Depreciation and amortization of
other intangibles............. 56 75 -- -- 131
------ ------ ---- ----- ------
1,299 1,923 -- (235) 2,987
------ ------ ---- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables...... -- (1) -- -- (1)
Other income (expense)........... 19 (13) -- (7) (1)
------ ------ ---- ----- ------
19 (14) -- (7) (2)
------ ------ ---- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES........................ 99 61 -- (7) 153
Interest expense--
External (net of interest
capitalized)................ -- 6 98 -- 104
Affiliated companies (net of
interest income)............ 64 (7) (57) -- --
Income tax expense (benefit)..... (59) 16 (51) 105 11
Minority interest................ -- 4 -- -- 4
------ ------ ---- ----- ------
94 42 10 (112) 34
Equity in net income (loss) from
affiliated companies.......... 56 -- 24 (80) --
------ ------ ---- ----- ------
NET INCOME (LOSS).................. $ 150 $ 42 $ 34 $(192) $ 34
====== ====== ==== ===== ======
25
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
BALANCE SHEET
SEPTEMBER 30, 2005
----------------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ --------------- --------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ 89 $ -- $ -- $ 89
Receivables, net................. 236 757 37 (355) 675
Inventories...................... 117 278 -- -- 395
Deferred income taxes............ 36 10 66 (65) 47
Prepayments and other............ 17 115 -- -- 132
------ ------ ------ -------- ------
406 1,249 103 (420) 1,338
------ ------ ------ -------- ------
Other assets:
Investment in affiliated
companies..................... 458 -- 950 (1,408) --
Notes and advances receivable
from affiliates............... 3,142 148 4,734 (8,024) --
Long-term notes receivable,
net........................... 1 21 -- -- 22
Goodwill......................... 136 59 -- -- 195
Intangibles, net................. 13 10 -- -- 23
Deferred income taxes............ 225 55 176 (176) 280
Other............................ 37 71 33 -- 141
------ ------ ------ -------- ------
4,012 364 5,893 (9,608) 661
------ ------ ------ -------- ------
Plant, property, and equipment, at
cost............................. 910 1,503 -- -- 2,413
Less--Reserves for depreciation
and amortization.............. 582 780 -- -- 1,362
------ ------ ------ -------- ------
328 723 -- -- 1,051
------ ------ ------ -------- ------
$4,746 $2,336 $5,996 $(10,028) $3,050
====== ====== ====== ======== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including
current maturities of
long-term debt)
Short-term
debt--non-affiliated........ $ -- $ 15 $ 56 $ -- $ 71
Short-term debt--affiliated... 68 182 10 (260) --
Trade payables................... 244 548 -- (76) 716
Accrued taxes.................... 79 19 -- (68) 30
Other............................ 137 144 32 (17) 296
------ ------ ------ -------- ------
528 908 98 (421) 1,113
Long-term debt--non-affiliated..... -- 13 1,345 -- 1,358
Long-term debt--affiliated......... 3,498 127 4,399 (8,024) --
Deferred income taxes.............. 207 56 -- (193) 70
Postretirement benefits and other
liabilities...................... 250 76 4 6 336
Commitments and contingencies
Minority interest.................. -- 23 -- -- 23
Shareholders' equity............... 263 1,133 150 (1,396) 150
------ ------ ------ -------- ------
$4,746 $2,336 $5,996 $(10,028) $3,050
====== ====== ====== ======== ======
26
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
BALANCE SHEET
(NOTE 3)
DECEMBER 31, 2004
----------------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ --------------- --------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents........ $ 140 $ 74 $ -- $ -- $ 214
Receivables, net................. 122 588 27 (249) 488
Inventories...................... 116 280 -- -- 396
Deferred income taxes............ 59 10 23 (22) 70
Prepayments and other............ 12 112 -- -- 124
------ ------ ------ ------- ------
449 1,064 50 (271) 1,292
------ ------ ------ ------- ------
Other assets:
Investment in affiliated
companies..................... 396 -- 980 (1,376) --
Notes and advances receivable
from affiliates............... 3,060 87 4,588 (7,735) --
Long-term notes receivable,
net........................... 2 22 -- -- 24
Goodwill......................... 136 60 -- -- 196
Intangibles, net................. 14 10 -- -- 24
Deferred income taxes............ 275 29 179 (179) 304
Other............................ 37 73 35 -- 145
------ ------ ------ ------- ------
3,920 281 5,782 (9,290) 693
------ ------ ------ ------- ------
Plant, property, and equipment, at
cost............................. 894 1,557 -- -- 2,451
Less--Reserves for depreciation
and amortization.............. 553 764 -- -- 1,317
------ ------ ------ ------- ------
341 793 -- -- 1,134
------ ------ ------ ------- ------
$4,710 $2,138 $5,832 $(9,561) $3,119
====== ====== ====== ======= ======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Short-term debt (including
current maturities of
long-term debt)
Short-term
debt--non-affiliated........ $ -- $ 14 $ 5 $ -- $ 19
Short-term debt--affiliated... 93 69 10 (172) --
Trade payables................... 218 552 -- (74) 696
Accrued taxes.................... 25 21 -- (22) 24
Other............................ 135 141 34 (2) 308
------ ------ ------ ------- ------
471 797 49 (270) 1,047
Long-term debt-non-affiliated...... -- 16 1,385 -- 1,401
Long-term debt-affiliated.......... 3,408 79 4,248 (7,735) --
Deferred income taxes.............. 242 63 -- (179) 126
Postretirement benefits and other
liabilities...................... 261 95 -- 6 362
Commitments and contingencies
Minority interest.................. -- 24 -- -- 24
Shareholders' equity............... 328 1,064 150 (1,383) 159
------ ------ ------ ------- ------
$4,710 $2,138 $5,832 $(9,561) $3,119
====== ====== ====== ======= ======
27
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005
----------------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ --------------- --------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $ 50 $ 85 $(173) $ -- $ (38)
----- ---- ----- ----- -----
INVESTING ACTIVITIES
Net proceeds from the sale of
assets............................ 3 1 -- -- 4
Expenditures for plant, property,
and equipment..................... (37) (63) -- -- (100)
Acquisition of business............. -- (11) -- -- (11)
Investments and other............... 3 (2) -- -- 1
----- ---- ----- ----- -----
Net cash used by investing
activities........................ (31) (75) -- -- (106)
----- ---- ----- ----- -----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- 6 -- 6
Issuance long-term debt............. -- 1 -- -- 1
Retirement of long-term debt........ -- (2) (41) -- (43)
Net increase (decrease) in
short-term debt excluding current
maturities of long-term debt...... -- 1 55 -- 56
Intercompany dividends and net
increase (decrease) in
intercompany obligations.......... (159) 6 153 -- --
Other............................... -- 1 -- -- 1
----- ---- ----- ----- -----
Net cash provided (used) by
financing activities.............. (159) 7 173 -- 21
----- ---- ----- ----- -----
Effect of foreign exchange rate
changes on cash and cash
equivalents....................... -- (2) -- -- (2)
----- ---- ----- ----- -----
Increase (decrease) in cash and cash
equivalents....................... (140) 15 -- -- (125)
Cash and cash equivalents, January
1................................. 140 74 -- -- 214
----- ---- ----- ----- -----
Cash and cash equivalents, September
30 (Note)......................... $ -- $ 89 $ -- $ -- $ 89
===== ==== ===== ===== =====
NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
28
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ --------------- --------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $156 $143 $(164) $ -- $135
---- ---- ----- ----- ----
INVESTING ACTIVITIES
Net proceeds from the sale of
assets............................ -- 12 -- -- 12
Expenditures for plant, property,
and equipment..................... (28) (59) -- -- (87)
Investments and other............... -- -- -- -- --
---- ---- ----- ----- ----
Net cash used by investing
activities........................ (28) (47) -- -- (75)
---- ---- ----- ----- ----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- 6 -- 6
Retirement of long-term debt........ -- (2) (4) -- (6)
Net increase (decrease) in
short-term debt excluding current
maturities of long-term debt...... -- 1 -- -- 1
Intercompany dividends and net
increase (decrease) in
intercompany obligations.......... (80) (82) 162 -- --
Other............................... -- 1 -- -- 1
---- ---- ----- ----- ----
Net cash provided (used) by
financing activities.............. (80) (82) 164 -- 2
---- ---- ----- ----- ----
Effect of foreign exchange rate
changes on cash and cash
equivalents....................... -- (4) -- -- (4)
---- ---- ----- ----- ----
Increase (decrease) in cash and cash
equivalents....................... 48 10 -- -- 58
Cash and cash equivalents, January
1................................. 70 75 -- -- 145
---- ---- ----- ----- ----
Cash and cash equivalents, September
30 (Note)......................... $118 $ 85 $ -- $ -- $203
==== ==== ===== ===== ====
NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
(The preceding notes are an integral part of the foregoing financial
statements.)
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
We are one of the world's leading manufacturers of automotive emission
control and ride control products and systems. We serve both original equipment
(OE) vehicle manufacturers and the repair and replacement markets, or
aftermarket, globally through leading brands, including Monroe(R), Rancho(R),
Clevite(R) Elastomers and Fric Rot(TM) ride control products and Walker(R),
Fonos(TM), and Gillet(TM) emission control products. Worldwide we serve more
than 30 different original equipment manufacturers, and our products or systems
are included on six of the top 10 passenger car models produced in North America
and Western Europe and all of the top 10 light truck models produced in North
America for 2004. During 2004, our aftermarket customers were comprised of
full-line and specialty warehouse distributors, retailers, jobbers, installer
chains and car dealers. We operate more than 70 manufacturing facilities
worldwide and employ approximately 18,400 people to service our customers'
demands.
Factors that are critical to our success include winning new business
awards, managing our overall global manufacturing footprint to ensure proper
placement and workforce levels in line with business needs, maintaining
competitive wages and benefits, maximizing efficiencies in manufacturing
processes, fixing or eliminating unprofitable businesses and reducing overall
costs. In addition, our ability to adapt to key industry trends, such as the
consolidation of OE customers, increasing technologically sophisticated content,
changing aftermarket distribution channels, increasing environmental standards
and extended product life of automotive parts, also plays a critical role in our
success. Other factors that are critical to our success include adjusting to
environmental and economic challenges such as increases in the cost of raw
materials and our ability to successfully reduce the impact of any such cost
increases through material substitutions, cost reduction initiatives and other
methods.
We have a substantial amount of indebtedness, with total debt, net of cash
balances, of $1.34 billion as of September 30, 2005. As such, our ability to
generate cash--both to fund operations and service our debt--is also a
significant area of focus for our company. See "Liquidity and Capital Resources"
below for further discussion of cash flows.
Total revenues for the third quarter of 2005 were $1.1 billion, a ten
percent increase over the third quarter of 2004. Higher global OE volumes,
customer recovery related to higher steel costs, strengthening currencies, and
improved aftermarket revenues primarily drove this increase. The balanced
distribution of our customers, geographies, markets, products and platforms
allowed us to outperform light vehicle market production rates in a difficult
auto environment. Gross margin for the third quarter of 2005 was 18.9 percent
down 1.2 percent from 20.1 percent in the third quarter of 2004. Higher gross
steel costs of $33 million, fuel surcharges on transportation costs, resolution
of an OE customer issue mentioned below, restructuring charges and business mix
more than offset savings and improved efficiencies from Lean manufacturing, Six
Sigma programs, cost recoveries, and other cost reduction initiatives. We
reported selling, general, administrative and engineering expenses for the third
quarter of 2005 of 10.8 percent of revenues, as compared to 11.3 percent of
revenues for the third quarter of 2004. The improvement was driven by higher
revenues, restructuring savings, and tight discretionary spending controls. EBIT
was $50 million for the third quarter of 2005, up $6 million from the $44
million reported in the third quarter of 2004. Stronger global volumes, lower
selling, general, administration and engineering costs, restructuring savings,
benefits from the company's ongoing manufacturing efficiency programs and
reduced costs through tight controls on discretionary spending helped drive this
improvement.
Total revenues for the first nine months of 2005 were $3.4 billion, an
eight percent increase over the $3.1 billion reported for the same period last
year. Strong OE volumes, customer recovery related to higher steel costs,
improved aftermarket revenues and currency appreciation primarily drove this
increase. Gross margin for first nine months of 2005 was 19.5 percent down one
percent from 20.5 percent for the first nine months of 2004 primarily due to the
impact of higher materials costs. Selling, general, administrative and
engineering expenses for the first nine months of 2005 were 10.4 percent of
revenues, compared to the 11.4 percent of revenues reported for the same period
last year. The decrease was driven by higher sales
30
volumes, headcount reductions taken at the end of 2004, and tight controls on
discretionary spending. EBIT was $177 million for the first nine months of 2005,
up $24 million from the $153 million reported for prior year. The increase in
EBIT was primarily driven by higher volumes and lower restructuring-related
expenses, customer changeover costs and consulting fees indexed to the stock
price.
During the quarter, Tenneco resolved commercial litigation that is recorded
as a component of other income and settled a customer issue, which is netted
against revenue. The net of these transactions had no financial impact on the
company's operating results.
In October 2004 and July 2005, we announced changes in the structure of our
organization which changed our reportable segments. The European segment now
includes South American and Indian operations. The Asia Pacific segment includes
our other Asian and Australian operations. While this will have no impact on our
consolidated results, it will change our segment results. These changes in
segment reporting have been reflected in this management discussion and analysis
for all periods presented.
In February 2005, we announced the acquisition of substantially all the
exhaust assets of Gabilan Manufacturing, Inc., a privately held company that had
developed and manufactured motorcycle exhaust systems for Harley-Davidson
motorcycles since 1978. The company also produced aftermarket muffler kits for
Harley-Davidson. We purchased Gabilan's assets, including working capital
adjustments, for $11 million in cash and expect the acquisition to be accretive
within the first year. Gabilan generated approximately $38 million in revenue in
2004.
RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
NET SALES AND OPERATING REVENUES
The following tables reflect our revenues for the third quarter of 2005 and
2004. We present these reconciliations of revenues in order to reflect the trend
in our sales in various product lines and geographic regions separately from the
effects of doing business in currencies other than the U.S. dollar.
Additionally, "pass-through" catalytic converter sales include precious metals
pricing, which may be volatile. These "pass-through" catalytic converter sales
occur when, at the direction of our OE customers, we purchase catalytic
converters or components from suppliers, use them in our manufacturing process,
and sell them as part of the completed system. While our original equipment
customers assume the risk of this volatility, it impacts our reported revenue.
Excluding "pass-through" catalytic converter sales removes this impact. We have
not reflected any currency impact in the 2004 table since this is the base
period for measuring the effects of currency during 2005 on our operations. We
use this information to analyze the trend in our revenues before
31
these factors. We believe investors find this information useful in
understanding period-to-period comparisons in our revenues.
THREE MONTHS ENDED SEPTEMBER 30, 2005
-----------------------------------------------------------------
PASS-THROUGH REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY PASS-THROUGH
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- ------------ ------------
(MILLIONS)
North America Original Equipment
Ride Control............................ $ 120 -- $ 120 -- $120
Emission Control........................ 249 3 246 69 177
------ --- ------ ---- ----
Total North America Original
Equipment.......................... 369 3 366 69 297
North America Aftermarket
Ride Control............................ 90 -- 90 -- 90
Emission Control........................ 43 -- 43 -- 43
------ --- ------ ---- ----
Total North America Aftermarket...... 133 -- 133 -- 133
------ --- ------ ---- ----
Total North America................ 502 3 499 69 430
Europe Original Equipment
Ride Control............................ 84 3 81 -- 81
Emission Control........................ 257 1 256 76 180
------ --- ------ ---- ----
Total Europe Original Equipment...... 341 4 337 76 261
Europe Aftermarket
Ride Control............................ 46 -- 46 -- 46
Emission Control........................ 51 -- 51 -- 51
------ --- ------ ---- ----
Total Europe Aftermarket............. 97 -- 97 -- 97
South America & India..................... 62 8 54 6 48
------ --- ------ ---- ----
Total Europe, South America &
India........................... 500 12 488 82 406
Asia...................................... 38 -- 38 10 28
Australia................................. 56 4 52 4 48
------ --- ------ ---- ----
Total Asia Pacific................. 94 4 90 14 76
------ --- ------ ---- ----
Total Tenneco............................. $1,096 $19 $1,077 $165 $912
====== === ====== ==== ====
32
THREE MONTHS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------------------
PASS-THROUGH REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY PASS-THROUGH
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- ------------ ------------
(MILLIONS)
North America Original Equipment
Ride Control............................ $108 $ -- $108 $ -- $108
Emission Control........................ 230 -- 230 71 159
---- ----- ---- ---- ----
Total North America Original
Equipment.......................... 338 -- 338 71 267
North America Aftermarket
Ride Control............................ $ 83 $ -- $ 83 $ -- $ 83
Emission Control........................ 44 -- 44 -- 44
---- ----- ---- ---- ----
Total North America Aftermarket...... 127 -- 127 -- 127
---- ----- ---- ---- ----
Total North America................ 465 -- 465 71 394
Europe Original Equipment
Ride Control............................ 81 -- 81 -- 81
Emission Control........................ 224 -- 224 74 150
---- ----- ---- ---- ----
Total Europe Original Equipment...... 305 -- 305 74 231
Europe Aftermarket
Ride Control............................ 44 -- 44 -- 44
Emission Control........................ 50 -- 50 -- 50
---- ----- ---- ---- ----
Total Europe Aftermarket............. 94 -- 94 -- 94
South America & India..................... 45 -- 45 4 41
---- ----- ---- ---- ----
Total Europe, South America &
India........................... 444 -- 444 78 366
Asia...................................... 37 -- 37 12 25
Australia................................. 50 -- 50 4 46
---- ----- ---- ---- ----
Total Asia Pacific................. 87 -- 87 16 71
---- ----- ---- ---- ----
Total Tenneco............................. $996 $ -- $996 $165 $831
==== ===== ==== ==== ====
Revenues from our North American operations increased $37 million in the
third quarter of 2005 compared to the same period last year reflecting higher
sales from both the OE and aftermarket businesses. Total North American OE
revenues were up $31 million to $369 million in the third quarter of 2005, as
compared to $338 million for the third quarter of 2004. OE emission control
revenues for the third quarter of 2005 were up $19 million compared to the prior
year primarily as a result of higher volumes on strong selling platforms,
including revenues from the Harley-Davidson business acquired earlier this year.
Adjusted for currency and pass-through sales, OE emission control sales were up
$18 million compared to the prior year. OE ride control revenues for the third
quarter of 2005 increased 11 percent from the prior year, driven by higher
medium and heavy-duty volumes as well as increased sales on specific Nissan
platforms. Total OE revenues, excluding pass-through sales and currency,
increased 11 percent in the third quarter of 2005, while the North American
light vehicle production experienced a two percent decline. Increasing exposure
to Japanese OE manufacturers, strong heavy-duty ride control volumes and $11
million in revenues from our recent acquisition of the exhaust business for
Harley-Davidson helped offset production declines on large SUV platforms.
Aftermarket revenues for North America were $133 million in the third quarter of
2005, representing an increase of five percent compared to the prior year.
Aftermarket ride control revenues increased $7 million or nine percent in the
third quarter of 2005, due to higher volumes and price increases in response to
higher steel costs. Aftermarket emission control revenues decreased two percent
in the third quarter of 2005 compared to 2004. Lower volumes due to softer
market conditions were the primary reason for the decline.
Our European, South American and Indian segment's revenues increased $56
million or 13 percent in the third quarter of 2005 compared to last year. Total
Europe OE revenues were $341 million in the third quarter
33
of 2005, up 12 percent from last year. OE emission control revenues increased 15
percent to $257 million in the third quarter of 2005, from $224 million in the
prior year. Excluding a $2 million increase in pass-through sales and a $1
million increase due to strengthening currency, OE emission control revenues
increased 20 percent over 2004. Our OE emission control revenues significantly
exceeded the one percent European light vehicle production rate decrease as a
result of our position on new and existing platforms with Ford, Volkswagen,
DaimlerChrysler, Peugeot, Nissan, Porsche and BMW. OE ride control revenues
increased to $84 million in the third quarter of 2005, up four percent from $81
million a year ago. We changed our reporting in the second quarter of 2005 for
an "assembly-only" contract with a European OE ride control customer and began
accounting for those revenues as net of the related cost of sales. If we had
reported our third quarter 2004 revenues in the same manner, they would have
been lower by $12 million. Our OE ride control revenue, excluding a $3 million
benefit from currency appreciation, increased two percent. We experienced an
increase in OE ride control revenues due to stronger sales volumes on successful
platforms with Audi, Ford, Nissan and Suzuki. European aftermarket sales were
$97 million in the third quarter of 2005 compared to $94 million last year. Ride
control aftermarket revenues were up five percent compared to the prior year as
a result of strong volumes and improved pricing. Aftermarket emission control
revenues increased by two percent, benefiting from price increases and market
share gains that are offsetting market declines relating to the introduction of
stainless steel (which lengthens our products' useful lives) by OE manufacturers
about 10 years ago. South American and Indian revenues were $62 million during
the third quarter of 2005, compared with $45 million a year earlier due to both
higher OE and aftermarket revenues. Currency appreciation in Brazil and
Argentina accounted for $8 million of the increase to South America's revenues.
Revenues from our Asia Pacific segment, which includes Australia and Asia,
increased $7 million to $94 million in the third quarter of 2005 as compared to
$87 million in the prior year. Revenues increased $1 million for our Asian
operations despite continued soft consumer sales at our largest China customer,
Volkswagen. In Australia, stronger OE volumes and strengthening currency
increased revenues by 13 percent to $56 million. Excluding the impact of
currency, Australian revenues increased six percent.
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")
THREE MONTHS
ENDED
SEPTEMBER 30,
---------------
2005 2004 CHANGE
---- ---- ------
(MILLIONS)
North America............................................... $37 $31 $6
Europe, South America & India............................... 9 10 (1)
Asia Pacific................................................ 4 3 1
--- --- --
$50 $44 $6
=== === ==
The EBIT results shown in the preceding table include the following items,
discussed below under "Restructuring and Other Charges" which have an effect on
the comparability of EBIT results between periods:
THREE MONTHS
ENDED
SEPTEMBER 30,
---------------
2005 2004
---- ----
(MILLIONS)
Europe, South America & India
Restructuring-related expenses............................ $2 $2
EBIT for North American operations increased to $37 million in the third
quarter of 2005, from $31 million one year ago. Higher OE volumes increased EBIT
by $7 million. Manufacturing efficiencies and currency added $1 million to EBIT.
These increases to North America EBIT were partially offset by steel cost
increases, net of other material costs savings and recovery from customers.
34
Our European, South American and Indian segment's EBIT was $9 million for
the third quarter of 2005 compared to $10 million during the same period last
year. Higher OE volumes from both emission and ride control product lines
increased EBIT by $6 million. Costs related to the implementation of a resource
planning system at our largest facility in Germany, manufacturing inefficiencies
related with aftermarket inventory reductions, currency transaction losses in
Eastern European countries and a reserve increase related to a pending legal
settlement, negatively impacted EBIT. Included in Europe, South America and
India's third quarter 2005 EBIT was $2 million in restructuring and
restructuring-related expenses. Europe, South America and India's 2004 EBIT
included $2 million in restructuring and restructuring-related expenses.
EBIT for our Asia Pacific segment was $4 million in the third quarter of
2005 compared to $3 million in the third quarter of 2004. Favorable customer
pricing and lower selling, general, administrative and engineering costs
increased EBIT by $2 million. Manufacturing efficiencies and favorable currency
also benefited EBIT. These additions to EBIT more than offset steel cost
increases, net of other material cost savings and recovery from customers.
EBIT AS A PERCENTAGE OF REVENUE
THREE MONTHS
ENDED
SEPTEMBER 30,
---------------
2005 2004
---- ----
North America............................................... 7% 7%
Europe, South America & India............................... 2% 2%
Asia Pacific................................................ 4% 3%
Total Tenneco............................................. 5% 4%
In North America, EBIT as a percentage of revenue for the third quarter of
2005 remained flat compared to the prior year. As a percent of revenues, higher
OE volumes and manufacturing efficiencies offset higher steel costs. In Europe,
South America and India, EBIT margins for the third quarter of 2005 remained
constant compared to the prior year. OE volume increases were offset by higher
selling, general, administrative and engineering costs as well as unfavorable
currency transactions and manufacturing inefficiencies. EBIT as a percentage of
revenue for our Asia Pacific operations increased one percent in the third
quarter of 2005 from the prior year. Customer pricing, manufacturing
efficiencies and lower selling, general, administrative and engineering costs
more than offset steel cost increases.
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $33 million in the third quarter of 2005
compared to $35 million in the prior year. This decrease is primarily due to the
November 2004 refinancing of $500 million 11 5/8 percent senior subordinated
notes for $500 million of 8 5/8 percent senior subordinated notes due in 2014.
Interest expense was also reduced due to a $40 million prepayment of our senior
term loan B facility and an amendment to our senior credit facility to reduce by
75 basis points the interest rate on the term loan B facility and the tranche
B-1 letter of credit/revolving loan facility. These decreases were partially
offset by higher interest expense on the variable portion of our debt. See more
detailed explanations on our debt structure, including our issuance of $500
million of 8 5/8 percent senior subordinated notes due 2014 in November 2004,
prepayments and amendments to our senior credit facility in February of 2005,
and their anticipated impact on our interest expense, in "Liquidity and Capital
Resources--Capitalization" later in this Management's Discussion and Analysis.
In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at an annual rate of
10 1/4 percent to floating interest rate debt at an annual rate of LIBOR plus an
average spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2004 resulted in lower interest expense of approximately $3 million for the year
ended December 31, 2004. Based on the rate in effect through July 15, 2005 and
using the current LIBOR as determined under these agreements of 3.82 percent
(which remains in effect until January 15,
35
2006), these swaps are expected to reduce our 2005 annual interest expense by
approximately $2 million compared to having this debt remain fixed. These swaps
qualify as fair value hedges in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and as such are
recorded on the balance sheet at market value with an offset to the underlying
hedged item, which is long-term debt. As of September 30, 2005, the fair value
of the interest rate swaps was a liability of approximately $4 million.
INCOME TAXES
Income taxes were $7 million in the third quarter of 2005, compared to $2
million in the prior year. The effective tax rate for the third quarter of 2005
was 40 percent. The third quarter of 2004 included $1 million of tax benefits,
primarily related to adjustments for settlement of outstanding tax issues.
Including these benefits the effective tax for the third quarter of 2004 was 18
percent. Excluding these benefits our effective tax rate was 33 percent.
EARNINGS PER SHARE
We reported net income of $10 million or $0.23 per diluted common share for
the third quarter of 2005, as compared to earnings of $6 million or $0.14 per
diluted common share for the third quarter of 2004. Included in the results for
the third quarter of 2005 were negative impacts from expenses related to our
restructuring activities. The net impact of these items decreased earnings per
diluted share by $0.04. Included in the results for the third three months of
2004 were negative impacts from expenses related to our restructuring activities
and the benefit of adjustments related to outstanding tax issues. The net impact
of these items decreased earnings per diluted share by $0.02. Please read the
Notes to the consolidated financial statements for more detailed information on
earnings per share.
RESTRUCTURING AND OTHER NONRECURRING CHARGES
Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by the Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. Prior to the change in accounting required for exit or disposal
activities, we recorded charges to income related to these plans for costs that
did not benefit future activities in the period in which the plans were
finalized and approved, while actions necessary to affect these restructuring
plans occurred over future periods in accordance with established plans.
In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. Project Genesis involved closing eight facilities, improving the
process flow and efficiency through value mapping and plant arrangement at 20
facilities, relocating production among facilities, and centralizing some
functional areas. The total of all these restructuring and other costs recorded
in the fourth quarter of 2001 was $32 million before tax, $31 million after tax,
or $0.81 per diluted common share. We eliminated 974 positions in connection
with Project Genesis. Additionally, we executed this plan more efficiently than
originally anticipated and as a result in the fourth quarter of 2002 reduced our
reserves related to this restructuring activity by $6 million, which was
recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2
million of severance reserve to the asset impairment reserve. This
reclassification became necessary, as actual asset impairments along with the
sale of our closed facilities were different than the original estimates. We
completed the remaining restructuring activities under Project Genesis as of the
end of 2004. Since Project Genesis was announced, we have undertaken a number of
related projects designed to restructure our operations, described below.
In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. This charge was primarily recorded in cost
of sales.
36
In October of 2003, we announced the closing of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees were
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $3 million in costs related to
this action in 2004. This action is in addition to the plant closings announced
in Project Genesis in the fourth quarter of 2001.
In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of layoffs were at middle and senior management levels. As of September 30,
2005, we have incurred $23 million in severance costs. Of this total, $7 million
was recorded in cost of sales and $16 million was recorded in selling, general
and administrative expense. We expect to generate savings of approximately $20
million annually from this initiative.
Including the above costs, we incurred $7 million in restructuring and
restructuring-related costs in the first nine months of 2005. Including the
costs incurred in 2002 through 2004 of $59 million, we have incurred a total of
$66 million for activities related to our restructuring initiatives.
We have generated about $31 million of annual savings from Project Genesis.
Approximately $7 million of savings was related to closing the eight facilities,
approximately $16 million of savings was related to value mapping and plant
arrangement and approximately $8 million of savings was related to relocating
production among facilities and centralizing some functional areas. There have
been no significant deviations from planned savings. All actions for Project
Genesis have been completed.
Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we were allowed to exclude up to $60 million
of cash charges and expenses, before taxes, related to cost reduction
initiatives over the 2002 to 2006 time period from the calculation of the
financial covenant ratios we are required to maintain under our senior credit
agreement. In February of 2005, our senior credit facility was amended to
exclude all remaining cash charges and expenses related to restructuring
initiatives started on or before February 21, 2005. As of September 30, 2005, we
have excluded $62 million in allowable charges relating to restructuring
initiatives previously started.
Under our amended facility, we are allowed to exclude up to an additional
$60 million of cash charges and expenses, before taxes, related to restructuring
activities initiated after February 21, 2005 from the calculation of the
financial covenant ratios required under our senior credit facility. As of
September 30, 2005, we have excluded $4 million in allowable charges relating to
restructuring initiatives against the $60 million available under the terms of
the February 2005 amendment to the senior credit facility.
In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will initiate actions that will
reduce our costs through implementing the most appropriate and efficient
logistics, distribution and manufacturing footprint for the future. There can be
no assurances, however, that we will undertake additional restructuring actions.
Actions that we take, if any, will require the approval of our Board of
Directors, or its authorized committee. We plan to conduct any workforce
reductions that result in compliance with all legal and contractual requirements
including obligations to consult with workers' councils, union representatives
and others.
CRITICAL ACCOUNTING POLICES
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing our
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required.
Revenue Recognition
We recognize revenue for sales to our original equipment and aftermarket
customers under the terms of our arrangements with those customers, generally at
the time of shipment from our plants or distribution
37
centers. For our aftermarket customers, we provide for promotional incentives
and returns at the time of sale. Estimates are based upon the terms of the
incentives and historical experience with returns. Where we have offered product
warranty, we also provide for warranty costs. Those estimates are based upon
historical experience and upon specific warranty issues as they arise. While we
have not experienced any material differences between these estimates and our
actual costs, it is reasonably possible that future warranty issues could arise
that could have a significant impact on our financial statements.
Long-Term Receivables
We expense pre-production design and development costs incurred for our
original equipment customers unless we have a contractual guarantee for
reimbursement of those costs from the customer. At September 30, 2005, we had
$17 million recorded as a long-term receivable from original equipment customers
for guaranteed pre-production design and development arrangements. While we
believe that the vehicle programs behind these arrangements will enter
production, these arrangements allow us to recover our pre-production design and
development costs in the event that the programs are cancelled or do not reach
expected production levels. We have not experienced any material losses on
arrangements where we have a contractual guarantee of reimbursement from our
customers.
Income Taxes
We have a U.S. Federal tax net operating loss ("NOL") carryforward at
September 30, 2005, of $559 million, which will expire in varying amounts from
2018 to 2025. The federal tax effect of that NOL is $196 million, and is
recorded as an asset on our balance sheet at September 30, 2005. We estimate,
based on available evidence both positive and negative, that it is more likely
than not that we will utilize the NOL within the prescribed carryforward period.
That estimate is based upon our expectations regarding future taxable income of
our U.S. operations and upon strategies available to accelerate usage of the
NOL. Circumstances that could change that estimate include future U.S. earnings
at lower than expected levels or a majority ownership change as defined in the
rules of the U.S. tax law. If that estimate changed, we would be required to
cease recognizing an income tax benefit for any new NOL and could be required to
record a reserve for some or all of the asset currently recorded on our balance
sheet.
Stock-Based Compensation
We utilize the intrinsic value method to account for our stock-based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." If our compensation costs for
our stock-based compensation plans were determined using the fair value method
of accounting as provided in Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," we estimate that
our pro-forma net income (loss) and earnings (loss) per share would be lower by
less than $1 million or $0.01 per diluted share for each of the quarters ended
September 30, 2005 and 2004.
Goodwill and Other Intangible Assets
We utilize an impairment-only approach to value our purchased goodwill in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year
in the fourth quarter, we perform an impairment analysis on the balance of
goodwill. Inherent in this calculation is the use of estimates as the fair value
of our designated reporting units is based upon the present value of our
expected future cash flows. In addition, our calculation includes our best
estimate of our weighted average cost of capital and growth rate. If the
calculation results in a fair value of goodwill which is less than the book
value of goodwill, an impairment charge would be recorded in the operating
results of the impaired reporting unit.
Pension and Other Postretirement Benefits
We have various defined benefit pension plans that cover substantially all
of our employees. We also have postretirement health care and life insurance
plans that cover a majority of our domestic employees. Our
38
pension and postretirement health care and life insurance expenses and
valuations are dependent on management's assumptions used by our actuaries in
calculating such amounts. These assumptions include discount rates, health care
cost trend rates, long-term return on plan assets, retirement rates, mortality
rates and other factors. Health care cost trend rate assumptions are developed
based on historical cost data and an assessment of likely long-term trends.
Retirement rates are based primarily on actual plan experience while mortality
rates are based upon the general population experience which is not expected to
differ materially from our experience.
Our approach to establishing the discount rate assumption for both our
domestic and foreign plans starts with high-quality investment-grade bonds
adjusted for an incremental yield based on actual historical performance. This
incremental yield adjustment is the result of selecting securities whose yields
are higher than the "normal" bonds that comprise the index. Based on this
approach, for 2004 we lowered the weighted average discount rate for pension
plans to 6.0 percent, from 6.1 percent. The discount rate for postretirement
benefits was lowered from 6.5 percent for 2003 to 6.25 percent for 2004.
Our approach to determining expected return on plan asset assumptions
evaluates both historical returns as well as estimates of future returns, and is
adjusted for any expected changes in the long-term outlook for the equity and
fixed income markets. As a result, our estimate of the weighted average
long-term rate of return on plan assets for our pension plans was 8.4 percent
for both 2004 and 2005.
Except in the U.K., generally, our pension plans do not require employee
contributions. Our policy is to fund our pension plans in accordance with
applicable U.S. and foreign government regulations and to make additional
payments as funds are available to achieve full funding of the accumulated
benefit obligation. At September 30, 2005, all legal funding requirements had
been met. Other postretirement benefit obligations, such as retiree medical, and
certain foreign pension plans are not funded.
Inventory Valuation
Effective January 1, 2005, we changed our accounting method for valuing
inventory for our U.S. based operations from the last-in, first-out ("LIFO")
method to the first-in, first-out ("FIFO") method. As a result, all U.S.
inventories are now stated at the lower of cost, determined on a FIFO basis, or
market. We elected to change to the FIFO method as we believe it is preferable
for the following reasons: 1) the change will provide better matching of revenue
and expenditures and 2) the change will achieve greater consistency in valuing
our global inventory. Additionally, we initially adopted LIFO as it provided
certain U.S. tax benefits which we no longer realize due to our U.S. net
operating losses (when applied for tax purposes, tax laws require that LIFO be
applied for accounting principles generally accepted in the United States of
America ("GAAP") as well). As a result of the change, we also expect to realize
administrative efficiencies.
In accordance with GAAP, the change in inventory accounting has been
applied by adjusting prior year's financial statements. The effect of the change
in accounting principle as of December 31, 2004, was to increase inventories by
$14 million, reduce deferred tax assets by $5 million, and increase retained
earnings by $9 million. There was no impact on consolidated net income for the
three- and nine-month periods ended September 30, 2004 from this restatement.
CHANGES IN ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs--An Amendment of Accounting Research Bulletin No.
43, Chapter 4." This statement requires idle facility expenses, excessive
spoilage, double freight and rehandling costs to be recognized as current period
charges regardless of whether they meet the criterion of "so abnormal." SFAS No.
151 is effective for fiscal years beginning after June 15, 2005. The adoption of
SFAS No. 151 did not have a material impact on our financial position or results
of operations.
In December 2004, the FASB revised SFAS No. 123, "Share-Based Payment"
which supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." This revised statement establishes standards for
the accounting for transactions in which an entity exchanges its
39
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. The revised SFAS No. 123 is
effective for interim reporting periods that begin at the beginning of the next
fiscal year January 1, 2006. We estimate that the impact on our net income for
the full year 2004 would not have exceeded approximately $2 million or $0.05 per
diluted share had we adopted the revised SFAS No. 123.
In December 2004, the FASB issued FASB Staff Position, ("FSP") No. 109-1.
FSP No. 109-1 provides guidance on the application of FASB Statement No. 109,
"Accounting for Income Taxes," to the provision within The American Jobs
Creation Act of 2004 ("The Act") that provides a tax deduction on qualified
production activities. The purpose behind this special deduction is to provide a
tax incentive to companies that maintain or expand U.S. manufacturing
activities. FSP No. 109-1 was effective upon issuance. The adoption of FSP 109-1
did not have any impact on our consolidated financial statements.
In December 2004, the FASB issued FSP No. 109-2. FSP No. 109-2 addresses
the question on the impact of a company's APB No. 23 Accounting for Income
Taxes--Special Areas representation under The Act, which provides for a special
one-time 85 percent dividend deduction on dividends from foreign subsidiaries.
FSP No. 109-2 was effective upon issuance. The issuance of FSP No. 109-2 does
not change how we apply APB No. 23, and therefore, did not have any impact on
our consolidated financial statements.
In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. 46 (revised December
2003)." The statement addresses whether a reporting enterprise should consider
whether it holds an implicit variable interest in a variable interest entity
("VIE") or potential VIE when specific conditions exist. The guidance should be
applied in the first reporting period beginning after March 3, 2005. The
adoption of FSP No. FIN 46(R)-5 does not have an impact on our consolidated
financial statements.
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations." This interpretation clarifies that the term
conditional asset retirement obligation as used in FASB No. 143, "Accounting for
Assets Retirement Obligation," refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. This interpretation is effective no later than the end of fiscal years
ending after December 15, 2005. The adoption of FIN No. 47 is not expected to
have a material impact on our financial position or results of operation.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Corrections," which supersedes APB No. 20, "Accounting Changes" and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements." This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 is not expected to have a material impact on our
financial position or results of operation.
In June 2005, the FASB issued FSP No. 143-1, "Accounting for Electronic
Equipment Waste Obligations." This statement addresses the accounting for
obligations associated with Directive 2005/96/EC on Waste Electrical and
Electronic Equipment adopted by the European Union. The Directive distinguishes
between "new" and "historical" waste. The guidance should be applied the later
of the first reporting period ending after June 8, 2005, or the date of the
adoption of the law by the applicable EU-member country. The adoption of FSP No.
143-1 is not expected to have a material impact on our financial position or
results of operations.
In October 2005, the FASB issued FSP No. 123(R)-2, "Practical Accommodation
to the Application of Grant Date as Defined in FASB Statement No. 123(R)." The
statement provides guidance on the application of grant date as defined in FASB
Statement No. 123 (revised 2004), Share-Based Payment. The guidance
40
should be applied upon initial adoption of SFAS No. 123(R). The adoption of FSP
No. 123(R)-2 is not expected to have a material impact on our financial position
or results of operation.
RESULTS FROM OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
NET SALES AND OPERATING REVENUES
The following tables reflect our revenues for the first nine months of 2005
and 2004, including the same reconciliations as are presented above for the
third quarter of 2005 and 2004. See "Results from Operations for the Three
Months Ended September 30, 2005 and 2004" for a description of why we present,
and how we use, these reconciliations.
NINE MONTHS ENDED SEPTEMBER 30, 2005
-----------------------------------------------------------------
PASS-THROUGH REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY PASS-THROUGH
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- ------------ ------------
(MILLIONS)
North America Original Equipment
Ride Control............................ $ 378 $-- $ 378 $ -- $ 378
Emission Control........................ 756 8 748 204 544
------ --- ------ ---- ------
Total North Original Equipment....... 1,134 8 1,126 204 922
North America Aftermarket
Ride Control............................ 284 -- 284 -- 284
Emission Control........................ 125 -- 125 -- 125
------ --- ------ ---- ------
Total North America Aftermarket...... 409 -- 409 -- 409
------ --- ------ ---- ------
Total North America................ 1,543 8 1,535 204 1,331
Europe Original Equipment
Ride Control............................ 291 19 272 -- 272
Emission Control........................ 813 27 786 236 550
------ --- ------ ---- ------
Total Europe Original Equipment...... 1,104 46 1,058 236 822
Europe Aftermarket
Ride Control............................ 134 3 131 -- 131
Emission Control........................ 154 4 150 -- 150
------ --- ------ ---- ------
Total Europe Aftermarket............. 288 7 281 -- 281
South America & India..................... 172 18 154 13 141
------ --- ------ ---- ------
Total Europe, South America &
India........................... 1,564 71 1,493 249 1,244
Asia...................................... 108 1 107 34 73
Australia................................. 162 9 153 13 140
------ --- ------ ---- ------
Total Asia Pacific................. 270 10 260 47 213
------ --- ------ ---- ------
Total Tenneco............................. $3,377 $89 $3,288 $500 $2,788
====== === ====== ==== ======
41
NINE MONTHS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------------------
PASS-THROUGH REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY PASS-THROUGH
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- ------------ ------------
(MILLIONS)
North America Original Equipment
Ride Control............................ $ 346 $ -- $ 346 $ -- $ 346
Emission Control........................ 752 -- 752 243 509
------ ----- ------ ---- ------
Total North Original Equipment....... 1,098 -- 1,098 243 855
North America Aftermarket
Ride Control............................ 268 -- 268 -- 268
Emission Control........................ 125 -- 125 -- 125
------ ----- ------ ---- ------
Total North America Aftermarket...... 393 -- 393 -- 393
------ ----- ------ ---- ------
Total North America................ 1,491 -- 1,491 243 1,248
Europe Original Equipment
Ride Control............................ 257 -- 257 -- 257
Emission Control........................ 719 -- 719 232 487
------ ----- ------ ---- ------
Total Europe Original Equipment...... 976 -- 976 232 744
Europe Aftermarket
Ride Control............................ 133 -- 133 -- 133
Emission Control........................ 144 -- 144 -- 144
------ ----- ------ ---- ------
Total Europe Aftermarket............. 277 -- 277 -- 277
South America & India..................... 121 -- 121 11 110
------ ----- ------ ---- ------
Total Europe, South America &
India........................... 1,374 -- 1,374 243 1,131
Asia...................................... 127 -- 127 45 82
Australia................................. 150 -- 150 12 138
------ ----- ------ ---- ------
Total Asia Pacific................. 277 -- 277 57 220
------ ----- ------ ---- ------
Total Tenneco............................. $3,142 $ -- $3,142 $543 $2,599
====== ===== ====== ==== ======
Revenues from our North American operations increased $52 million in the
first nine months of 2005 compared to last year's first nine months reflecting
higher sales from both OE and aftermarket businesses. Total North American OE
revenues increased three percent to $1,134 million in the first nine months of
this year. OE emission control revenues were up one percent in the first nine
months of 2005 as compared to the prior year. Pass-through emission control
sales decreased 16 percent to $204 million in the first nine months of 2005.
Adjusted for pass-through sales, and currency, OE emission control sales were up
seven percent compared to the prior year. OE ride control revenues increased
nine percent from the prior year. Total OE revenues, excluding pass-through
sales, and currency, increased eight percent in the first nine months of 2005,
while North American light vehicle production was down three percent from the
first nine months a year ago. We experienced revenue improvement despite the
decline in North American light vehicle production primarily due to our strong
position on top-selling platforms, as well as higher heavy-duty volumes and
revenues from the Harley-Davidson exhaust business acquired earlier this year.
Aftermarket revenues for North America were $409 million in the first nine
months of 2005, representing an increase of four percent compared to the same
period in the prior year. Aftermarket ride control revenues increased $16
million or six percent in the first nine months of 2005, primarily due to price
increases and higher sales of premium priced products. Aftermarket emission
control revenues were $125 million in the first nine months of 2005, flat
compared to the same period last year. Price increases driven by higher steel
costs helped offset lower emission control volumes.
Our European, South American and Indian segment's revenues increased $190
million or 14 percent in the first nine months of 2005 compared to last year's
first nine months. Total Europe OE revenues were $1,104 million, up 13 percent
from the first nine months of last year. OE emission control revenues in the
first
42
nine months increased 13 percent to $813 million from $719 million in the prior
year. Excluding a $4 million increase in pass-through sales and a $27 million
increase due to strengthening currency, OE emissions control revenues increased
13 percent over the first nine months of 2004. This improvement was greater than
overall European light vehicle production levels, which remained relatively
unchanged during the first nine months compared to a year ago. Strong volumes on
PSA, DaimlerChrysler, Volkswagen, Audi, BMW and Porsche platforms more than
offset the general market's flat production rates. OE ride control revenues in
the first nine months increased to $291 million, up 13 percent from $257 million
a year ago. We changed our reporting in the second quarter of 2005 for an
"assembly-only" contract with an European OE ride control customer and began
accounting for those revenues as net of the related cost of sales. If we had
reported our second and third quarter 2004 revenues in the same manner, they
would have been lower by $27 million. Excluding a $19 million benefit from
currency appreciation, OE ride control revenues increased six percent. We
experienced this revenue increase despite the overall flat market build rates
due to stronger sales on new and existing platforms with Volkswagen, Audi, Ford,
Nissan, and Suzuki. European aftermarket sales were $288 million in the first
nine months of this year compared to $277 million in last year's first nine
months. Excluding $7 million attributable to currency appreciation, European
aftermarket revenues increased by one percent in the first nine months of 2005
compared to the same period last year. Ride control aftermarket revenues,
excluding the impact of currency, were down two percent compared with the prior
year, reflecting continued market pressure from customer consolidations.
Aftermarket emission control revenues were up seven percent to $154 million
compared to the nine month period of last year. Excluding the impact of
currency, European aftermarket emission control revenues increased four percent
from the prior year. Stronger volumes, pricing and currency appreciation
increased South American and Indian revenues, by $51 million or 42 percent over
the same period last year.
Revenues from our Asia Pacific operations, which include Australia and
Asia, decreased $7 million to $270 million in the first nine months of 2005 as
compared to $277 million in the first nine months of the prior year. Lower OE
volumes and pass-through sales resulted in decreased revenues of $19 million at
our Asian operations. In Australia, revenues increased by nine percent to $162
million, primarily due to strengthening currency.
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
2005 2004 CHANGE
----- ----- ------
(MILLIONS)
North America............................................... $126 $111 $15
Europe, South America & India............................... 41 26 15
Asia Pacific................................................ 10 16 (6)
---- ---- ---
$177 $153 $24
==== ==== ===
43
The EBIT results shown in the preceding table include the following items,
discussed above under "Restructuring and Other Nonrecurring Charges", which have
an effect on the comparability of EBIT results between periods:
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
2005 2004
----- ----
(MILLIONS)
North America
Restructuring-related expenses............................ $ 2 $3
Changeover costs for a major new aftermarket customer..... -- 8
Consulting fees indexed to stock price.................... -- 2
Europe, South America & India
Restructuring-related expenses............................ 5 9
Consulting fees indexed to stock price.................... -- 1
Asia Pacific
Consulting fees indexed to stock price.................... -- 1
EBIT for North American operations increased to $126 million in the first
nine months of 2005, from $111 million one year ago. Higher OE volumes increased
EBIT by $13 million. Lower selling, general, administrative and engineering
costs improved EBIT by $19 million. These increases to North America EBIT were
partially offset by lower aftermarket volumes and steel cost increases, net of
other material costs savings and recovery from customers. Included in North
America's EBIT for the first nine months of 2005 was $2 million in restructuring
and restructuring-related costs. Included in North America's EBIT for the first
nine months of 2004 were $3 million in restructuring and restructuring-related
expenses, $8 million of changeover costs for a major new aftermarket customer
and $2 million in consulting fees indexed to stock price. The customer
changeover costs include the cost of acquiring and disposing of competitor
inventory when we supply aftermarket parts to a new customer. These costs were
substantial in the nine months of 2004 as we replaced a competitor at a
significant customer. The 2004 consulting fees relate to a 1999 agreement that
provided that a portion of the consultant's compensation would be in stock
appreciation rights that were priced above the market price of our stock at the
grant date. These rights expired in November 2004.
Our European, South American and Indian segment's EBIT was $41 million for
the first nine months of 2005 compared to $26 million during the same period
last year. Higher volumes, primarily European OE, increased EBIT $12 million.
Manufacturing efficiencies added $7 million to EBIT. These improvements to EBIT
were partially offset by increasing steel costs and higher selling, general,
administrative and engineering expenses. Included in Europe, South America and
India's EBIT for the first nine months of 2005 was $5 million in restructuring
and restructuring-related expenses. Europe and South America's 2004 EBIT
included $9 million in restructuring and restructuring-related expenses and $1
million in consulting fees indexed to the stock price.
EBIT for our Asia Pacific segment was $10 million in the first nine months
of 2005 compared to $16 million in the first nine months of 2004. Reduced
volumes, primarily in China, negatively impacted EBIT by $6 million. Higher
selling, general, administrative, and engineering costs reduced EBIT by $2
million. Steel cost increases, net of other material cost savings and recovery
from customers, also negatively impacted Asia Pacific's EBIT. Partially
offsetting these decreases to EBIT were manufacturing cost reductions and
efficiencies of $8 million. Asia Pacific's 2004 EBIT included $1 million in
consulting fees indexed to the stock price.
44
EBIT AS A PERCENTAGE OF REVENUE
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
2005 2004
---- ----
North America............................................... 8% 7%
Europe, South America & India............................... 3% 2%
Asia Pacific................................................ 4% 6%
Total Tenneco............................................. 5% 5%
In North America, EBIT as a percentage of revenue for the first nine months
of 2005 was up one percent compared to the prior year. Higher OE volumes and
lower selling, general, and administrative costs were partially offset by lower
aftermarket volumes and higher steel costs net of material cost savings and
recovery from customers. In Europe, South America and India, EBIT margins for
the first nine months of 2005 were up one percent compared with the same period
last year. OE volume increases and cost savings more than offset the impact of
higher steel and selling, general, administrative, and engineering costs. EBIT
as a percentage of revenue for our Asia Pacific operations decreased to four
percent in the first nine months of 2005 compared to six percent in the prior
year. Lower volumes and higher material costs primarily drove the decrease.
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $97 million for the first nine months of
2005 compared to $104 million in the prior year. This decrease is primarily due
to the November 2004 refinancing of $500 million 11 5/8 percent senior
subordinated notes for $500 million of 8 5/8 percent senior subordinated notes
due in 2014. Interest expense was also reduced due to a $40 million prepayment
of our senior term loan B facility and an amendment to our senior credit
facility to reduce by 75 basis points the interest rate on the term loan B
facility and the tranche B-1 letter of credit/revolving loan facility. These
decreases were partially offset by higher interest expense on the variable
portion of our debt. See more detailed explanations on our debt structure,
including our issuance of $500 million of 8 5/8 percent senior subordinated
notes due 2014 in November 2004, prepayments and amendments to our senior credit
facility in February of 2005, and their anticipated impact on our interest
expense, in "Liquidity and Capital Resources--Capitalization" later in this
Management's Discussion and Analysis.
INCOME TAXES
Income tax expense was $29 million for the first nine months of 2005,
compared to $11 million for the first nine months of 2004. The first nine months
of 2005 included $1 million of tax expense, primarily related to adjusting state
tax net operating loss carryforwards, partially offset by settlement of prior
year tax issues on a more favorable basis than originally anticipated. Including
these adjustments the effective tax for the first nine months of 2005 was 36
percent. Excluding these adjustments our effective tax rate was 35 percent. The
first nine months of 2004 included $6 million of tax benefits, reflecting the
settlement of prior year tax issues on a more favorable basis than originally
anticipated. Including these benefits the effective tax for the first nine
months of 2004 was 22 percent. Excluding these benefits our effective tax rate
was 34 percent.
EARNINGS PER SHARE
We reported earnings per diluted common share of $1.11 for the first nine
months of 2005, compared to $0.78 per diluted share for the first nine months of
2004. Included in the results for the first nine months of 2005 were the
negative impacts from expenses related to our restructuring activities and a tax
adjustment for state net operating loss carryforwards. In total, these items
decreased earnings per diluted common share by $0.13. Included in the results
for the first nine months of 2004 were the negative impacts from expenses
related to our restructuring activities, customer changeover costs for a major
new aftermarket customer, consulting fees indexed to the stock price and
benefits for the resolution of outstanding tax issues. In total,
45
these items decreased earnings per diluted common share by $0.23. You should
also read the Notes to the financial statements for more detailed information on
earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
CAPITALIZATION
SEPTEMBER 30, DECEMBER 31,
2005 2004 % CHANGE
------------- ------------ --------
(MILLIONS)
Short-term debt and current maturities.................... $ 71 $ 19 274%
Long-term debt............................................ 1,358 1,401 (3)
------ ------
Total debt................................................ 1,429 1,420 1
------ ------
Total minority interest................................... 23 24 (4)
Shareholders' equity...................................... 150 159 (6)
------ ------
Total capitalization...................................... $1,602 $1,603 --
====== ======
General. The year-to-date decrease in shareholders' equity primarily
results from $67 million related to the translation of foreign balances into
U.S. dollars. This amount was partially offset by our net income, premium on
common stock issued pursuant to benefit plans and other transactions which
contributed $58 million to shareholders' equity. Although our book equity
balance was small at September 30, 2005, it should not affect our business
operations. We have no debt covenants that are based upon our book equity, and
there are no other agreements that are adversely impacted by our relatively low
book equity. You should also read Note 3 to our consolidated financial
statements.
Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries, as well as our revolving
credit facilities, increased approximately $52 million primarily related to
borrowings outstanding under our credit facilities. The current portion of
long-term debt decreased by approximately $5 million and was offset by a $2
million increase in foreign subsidiaries' obligations. Borrowings under our
revolving credit facilities were approximately $55 million as of September 30,
2005. There were no borrowings outstanding under our revolving credit facilities
as of September 30, 2004. The overall decrease in long-term debt resulted from
payments made on our outstanding long-term debt and capital leases in addition
to our position on interest rate swaps entered into in April 2004. See below for
further information on the interest rate swaps.
Senior Credit Facility--Overview and Recent Transactions. Our financing
arrangements are primarily provided by a committed senior secured financing
arrangement with a syndicate of banks and other financial institutions. The
arrangement is secured by substantially all our domestic assets and pledges of
66 percent of the stock of certain first-tier foreign subsidiaries, as well as
guarantees by our material domestic subsidiaries. We originally entered into
this facility in 1999 and since that time have periodically requested and
received amendments to the facility for various purposes. In December of 2003,
we engaged in a series of transactions that resulted in the full refinancing of
the facility, through an amendment and restatement. In February 2005, we amended
the facility, which resulted in reduced interest rates on the term loan B and
tranche B-1 letter of credit/revolving loan portions of the facility. We also
made a voluntary prepayment of $40 million on the term loan B facility, reducing
borrowings to $356 million. During the first nine months of 2005, we increased
the amount of commitments under our revolving credit facility from $220 million
to $300 million and reduced the amount of commitments under our tranche B-1
letter of credit/revolving loan facility from $180 million to $155 million. As
of September 30, 2005, the senior credit facility consisted of a seven-year,
$356 million term loan B facility maturing in December 2010; a five-year, $300
million revolving credit facility maturing in December 2008; and a seven-year,
$155 million tranche B-1 letter of credit/revolving loan facility maturing in
December 2010. These transactions are described in more detail below.
In June 2003, we issued $350 million of 10 1/4 percent senior secured
notes. The notes have a final maturity date of July 15, 2013. In December 2003,
we amended and restated our senior credit facility and issued an additional $125
million of 10 1/4 percent senior secured notes. We incurred $27 million in fees
46
associated with the issuance of the aggregate $475 million of 10 1/4 percent
senior secured notes and the amendment and restatement of our senior credit
facility. These fees will be amortized over the term of the senior secured notes
and the amended and restated senior credit facility. Based on our use of the net
proceeds from both the June and December 2003 transactions, these transactions
would have increased our annual interest expense by approximately $9 million.
This does not give effect to the fixed-to-floating interest rate swaps we
completed in April 2004, described below.
In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at an annual rate of
10 1/4 percent to floating interest rate debt at an annual rate of LIBOR plus an
average spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2004 resulted in lower interest expense of approximately $3 million for the year
ended December 31, 2004. Based upon the rate in effect through July 15, 2005 and
using the current LIBOR as determined under these agreements of 3.82 percent
(which remains in effect until January 15, 2006), these swaps are expected to
reduce our 2005 annual interest expense by approximately $2 million, compared to
having this debt remain fixed. These swaps qualify as fair value hedges in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, and as such are recorded on the balance sheet at market
value with an offset to the underlying hedged item, which is long-term debt. As
of September 30, 2005, the fair value of the interest rate swaps was a liability
of approximately $4 million. On September 30, 2005, we had $994 million in
long-term debt obligations that have fixed interest rates. Of that amount, $475
million is fixed through July 2013 and $500 million through November 2014, while
the remainder is fixed over periods of 2005 through 2025. Included in the $475
million is $150 million of long-term debt obligations subject to variable
interest rates as a result of our swap agreements. There is also $356 million in
long-term debt obligations that have variable interest rates based on a current
market rate of interest.
In November 2004, we refinanced our $500 million of 11 5/8 percent senior
subordinated notes maturing in October of 2009 with new senior subordinated
notes. The new notes have an interest rate of 8 5/8 percent, a maturity date of
November 15, 2014 and contain substantially similar terms as the notes
refinanced. Premium payments and other fees in connection with the refinancing
of these notes totaled approximately $40 million, including a $29 million or
5.813% price premium over par on the redeemed notes. The new notes accrue
interest from November 19, 2004 with an initial interest payment date of May 15,
2005. These notes are described in more detail below under "Senior Secured and
Subordinated Notes."
In connection with the refinancing of the $500 million in senior
subordinated notes we amended the senior credit facility effective November 17,
2004. This amendment allowed us to use up to $50 million in cash on hand to pay
redemption premiums and/or other fees and costs in connection with the
redemption and refinancing of the senior subordinated notes. This amendment also
excluded any redemption premium associated with the 11 5/8 percent senior
subordinated notes and any interest incurred on the notes between the call date
of November 19, 2004 and the redemption date of December 20, 2004 from cash
interest expense for purposes of the definition of consolidated interest expense
in the senior credit facility. In exchange for these amendments, we agreed to
pay a small fee to the consenting lenders. We also incurred approximately $13
million in legal, advisory and other costs related to the amendment and the
issuance of the new senior subordinated notes. These amounts were capitalized
and will be amortized over the remaining terms of the senior subordinated notes
and senior credit facility.
Our interest expense increased in 2004 by $42 million due to the fees and
expenses associated with the refinancing of our senior subordinated notes, which
includes an expense of $8 million for existing deferred debt issuance costs
associated with the 11 5/8 percent senior subordinated notes. Beginning in 2005,
annual interest expense savings from this transaction are anticipated to be
about $15 million. This does not give effect to the fixed-to-floating interest
rate swaps we completed in April 2004 described above.
In February 2005 we amended our senior credit facility to reduce by 75
basis points the interest rate on the term loan B facility and the tranche B-1
letter of credit/revolving loan facility. In connection with the
47
amendment, we voluntarily prepaid $40 million in principal on the term loan B,
reducing the term loan B facility from $396 million to $356 million.
Additional provisions of the February 2005 amendment to the senior credit
facility agreement were as follows: (i) amend the definition of EBITDA to
exclude up to $60 million in restructuring-related expenses announced and taken
after February 2005, (ii) increase permitted investments to $50 million, (iii)
exclude expenses related to the issuance of stock options from the definition of
consolidated net income, (iv) permit us to redeem up to $125 million of senior
secured notes after January 1, 2008 (subject to certain conditions), (v)
increase our ability to add commitments under the revolving credit facility by
$25 million, and (vi) make other minor modifications. We incurred approximately
$1 million in fees and expenses associated with this amendment, which were
capitalized and are being amortized over the remaining term of the agreement. As
a result of the amendment and the voluntary prepayment of $40 million under the
term loan B, our interest expense in 2005 will be approximately $6 million lower
than what it would otherwise have been.
During the first nine months of 2005, we increased the amount of
commitments under our revolving credit facility from $220 million to $300
million and reduced the amount of commitments under our tranche B-1 letter of
credit/revolving loan facility from $180 million to $155 million. This reduction
of our tranche B-1 letter of credit/revolving loan facility was required under
the terms of the senior credit facility, as we had increased the amount of our
revolving credit facility commitments by more than $55 million.
In October 2005, we further amended our senior credit facility increasing
the amount of commitments we may seek under the revolving credit portion of the
facility from $300 million to $350 million, along with other technical changes.
We were not required to reduce the commitments under our tranche B-1 letter of
credit/ revolving loan facility. We have not yet sought any such increased
commitments, but may do so when, in our judgment, market conditions are
favorable.
Senior Credit Facility--Forms of Credit Provided. Following the February
2005 voluntary prepayment of $40 million, the term loan B facility is payable as
follows: $74 million due March 31, 2010, and $94 million due each of June 30,
September 30 and December 12, 2010. The revolving credit facility requires that
if any amounts are drawn, they be repaid by December 2008. Prior to that date,
funds may be borrowed, repaid and reborrowed under the revolving credit facility
without premium or penalty. Letters of credit may be issued under the revolving
credit facility.
The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by December 2010. We can borrow revolving loans from the $155 million
tranche B-1 letter of credit/revolving loan facility and use that facility to
support letters of credit. The tranche B-1 letter of credit/revolving loan
facility lenders have deposited $155 million with the administrative agent, who
has invested that amount in time deposits. We do not have an interest in any of
the funds on deposit. When we draw revolving loans under this facility, the
loans are funded from the $155 million on deposit with the administrative agent.
When we make repayments, the repayments are redeposited with the administrative
agent.
The tranche B-1 letter of credit/revolving loan facility will be reflected
as debt on our balance sheet only if we borrow money under this facility or if
we use the facility to make payments for letters of credit. We will not be
liable for any losses to or misappropriation of any (i) return due to the
administrative agent's failure to achieve the return described above or to pay
all or any portion of such return to any lender under such facility or (ii)
funds on deposit in such account by such lender (other than the obligation to
repay funds released from such accounts and provided to us as revolving loans
under such facility).
Senior Credit Facility--Interest Rates and Fees. Borrowings under the term
loan B facility and the tranche B-1 letter of credit/revolving loan facility
bear interest at an annual rate equal to, at our option, either (i) the London
Interbank Offering Rate plus a margin of 225 basis points reduced from 300 basis
points in February 2005; or (ii) a rate consisting of the greater of the JP
Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a
margin of 125 basis points reduced from 200 basis points in February 2005. There
is no cost to us for issuing letters of credit under the tranche B-1 letter of
credit/revolving loan facility, however outstanding letters of credit reduce our
availability to borrow revolving loans under this portion of the facility. If a
letter of credit issued under this facility is subsequently paid and we do not
reimburse the amount
48
paid in full, then a ratable portion of each lender's deposit would be used to
fund the letter of credit. We pay the tranche B-1 lenders a fee which is equal
to LIBOR plus 225 basis points reduced from 300 basis points in February 2005.
This fee is offset by the return on the funds deposited with the administrative
agent which earn interest at a per annum rate approximately equal to LIBOR.
Outstanding revolving loans reduce the funds on deposit with the administrative
agent which in turn reduce the earnings of those deposits and effectively
increases our interest expense at a per annum rate equal to LIBOR. The interest
margins for borrowings under the term loan B facility and tranche B-1 letter of
credit/revolving loan facility will be further reduced by 25 basis points
following: the end of each fiscal quarter for which the consolidated leverage
ratio is less than 3.0 or at the point our credit ratings are improved to BB- or
better by Standard & Poor's (and are rated at least B1 by Moody's) or to Ba3 or
better by Moody's (and are rated at least B+ by Standard & Poor's).
Through the first nine months of 2005, borrowings under the revolving
credit facility bore interest at an annual rate equal to, at our option, either
(i) the London Interbank Offering Rate plus a margin of 300 basis points
(through July) reduced from 325 basis points in March and further reduced to 275
basis points in August 2005; or (ii) a rate consisting of the greater of the JP
Morgan Chase prime rate or the Federal Funds rate plus 50 basis points reduced
to 37.5 basis points in August of 2005, plus a margin of 200 basis points
(through July) reduced from 225 basis points in March and further reduced to 175
basis points in August of 2005. Letters of credit issued under the revolving
credit facility accrue a letter of credit fee at a per annum rate of 300 basis
points (through July) reduced from 325 basis points in March and further reduced
to 275 basis points in August of 2005 for the pro rata account of the lenders
under such facility and a fronting fee for the ratable account of the issuers
thereof at a per annum rate in an amount to be agreed upon payable quarterly in
arrears. The interest margins for borrowings and letters of credit issued under
the revolving credit facility are subject to adjustment based on the
consolidated leverage ratio (consolidated indebtedness divided by consolidated
EBITDA as defined in the senior credit facility agreement) measured at the end
of each quarter. The margin we pay on the revolving credit facility is reduced
by 25 basis points following each fiscal quarter for which the consolidated
leverage ratio is less than 4.0 beginning in March 2005. Since our consolidated
leverage ratio was 3.52 as of March 31, 2005, and 3.42 as of June 30, 2005, the
margin we pay on the revolving credit facility was reduced by 25 basis points in
the second quarter of 2005 and was further reduced by 25 basis points in the
third quarter of 2005. We also pay a commitment fee of 50 basis points on the
unused portion of the revolving credit facility. This commitment fee was reduced
by 12.5 basis points during the third quarter of 2005 as our consolidated
leverage ratio was less than 3.5.
Senior Credit Facility--Other Terms and Conditions. The amended and
restated senior credit facility requires that we maintain financial ratios equal
to or better than the following consolidated leverage ratio (consolidated
indebtedness divided by consolidated EBITDA), consolidated interest coverage
ratio (consolidated EBITDA divided by consolidated cash interest paid), and
fixed charge coverage ratio (consolidated EBITDA less consolidated capital
expenditures, divided by consolidated cash interest paid) at the end of each
period indicated. The financial ratios required under the amended senior credit
facility and, the actual ratios we achieved for the first, second and third
quarters of 2005, are shown in the following tables:
QUARTER ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2005 2005 2005 2005
------------ ------------ -------------- ------------
REQ. ACT. REQ. ACT. REQ. ACT. REQ.
---- ---- ---- ---- ----- ----- ------------
Leverage Ratio (maximum)..................... 4.75 3.52 4.75 3.42 4.50 3.39 4.50
Interest Coverage Ratio (minimum)............ 2.00 2.83 2.00 3.06 2.00 3.12 2.00
Fixed Charge Coverage Ratio (minimum)........ 1.10 1.86 1.10 2.02 1.10 2.05 1.10
49
QUARTERS ENDING
------------------------------------------------------------------------
MARCH 31- MARCH 31- MARCH 31- MARCH 31- MARCH 31-
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2007 2008 2009 2010
------------ ------------ ------------ ------------ ------------
REQ. REQ. REQ. REQ. REQ.
------------ ------------ ------------ ------------ ------------
Leverage Ratio (maximum)............. 4.25 3.75 3.50 3.50 3.50
Interest Coverage Ratio (minimum).... 2.10 2.20 2.35 2.50 2.75
Fixed Charge Coverage Ratio
(minimum).......................... 1.15 1.25 1.35 1.50 1.75
The senior credit facility agreement provides: (i) the ability to refinance
our senior subordinated notes and/or our senior secured notes using the net cash
proceeds from the issuance of similarly structured debt; (ii) the ability to
repurchase our senior subordinated notes and/or our senior secured notes using
the net cash proceeds from issuing shares of our common stock; and (iii) the
prepayment of the term loans by an amount equal to 50 percent of our excess cash
flow as defined by the agreement.
The senior credit facility agreement also contains restrictions on our
operations that are customary for similar facilities, including limitations on:
(i) incurring additional liens; (ii) sale and leaseback transactions (except for
the permitted transactions as described in the amendment); (iii) liquidations
and dissolutions; (iv) incurring additional indebtedness or guarantees; (v)
capital expenditures; (vi) dividends; (vii) mergers and consolidations; and
(viii) prepayments and modifications of subordinated and other debt instruments.
Compliance with these requirements and restrictions is a condition for any
incremental borrowings under the senior credit facility agreement and failure to
meet these requirements enables the lenders to require repayment of any
outstanding loans. As of September 30, 2005, we were in compliance with all the
financial covenants (as indicated above) and operational restrictions of the
facility.
Our senior credit facility does not contain any terms that could accelerate
the payment of the facility as a result of a credit rating agency downgrade.
Senior Secured and Subordinated Notes. Our outstanding debt also includes
$475 million of 10 1/4 percent senior secured notes due July 15, 2013, in
addition to the $500 million of 8 5/8 percent senior subordinated notes due
November 15, 2014 described above. We can redeem some or all of the notes at any
time after July 15, 2008, in the case of the senior secured notes, and November
15, 2009, in the case of the senior subordinated notes. If we sell certain of
our assets or experience specified kinds of changes in control, we must offer to
repurchase the notes. We are permitted to redeem up to 35 percent of the senior
secured notes with the proceeds of certain equity offerings completed before
July 15, 2006 and up to 35 percent of the senior subordinated notes with the
proceeds of certain equity offerings completed before November 15, 2007.
Our senior secured and subordinated notes require that, as a condition
precedent to incurring certain types of indebtedness not otherwise permitted,
our consolidated fixed charge coverage ratio, as calculated on a proforma basis,
to be greater than 2.25 and 2.00, respectively. We have not incurred any of the
types of indebtedness not otherwise permitted by the indentures. The indentures
also contain restrictions on our operations, including limitations on: (i)
incurring additional indebtedness or liens; (ii) dividends; (iii) distributions
and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and
consolidations. Subject to limited exceptions, all of our existing and future
material domestic wholly owned subsidiaries fully and unconditionally guarantee
these notes on a joint and several basis. In addition, the senior secured notes
and related guarantees are secured by second priority liens, subject to
specified exceptions, on all of our and our subsidiary guarantors' assets that
secure obligations under our senior credit facility, except that only a portion
of the capital stock of our and our subsidiary guarantor's domestic subsidiaries
is provided as collateral and no assets or capital stock of our direct or
indirect foreign subsidiaries secure the notes or guarantees. There are no
significant restrictions on the ability of the subsidiaries that have guaranteed
these notes to make distributions to us. The senior subordinated notes rank
junior in right of payment to our senior credit facility and any future senior
debt incurred. As of September 30, 2005, we were in compliance with the
covenants and restrictions of these indentures.
Accounts Receivable Securitization. In addition to our senior credit
facility, senior secured notes and senior subordinated notes, we also sell some
of our accounts receivable. In North America, we have an
50
accounts receivable securitization program with two commercial banks. We sell
original equipment and aftermarket receivables on a daily basis under this
program. We sold accounts receivable under this program of $97 million and $69
million at September 30, 2005 and 2004, respectively. This program is subject to
cancellation prior to its maturity date if we were to (i) fail to pay interest
or principal payments on an amount of indebtedness exceeding $50 million, (ii)
default on the financial covenant ratios under the senior credit facility, or
(iii) fail to maintain certain financial ratios in connection with the accounts
receivable securitization program. In January 2005, this program was renewed for
364 days to January 30, 2006 at the existing facility size of $75 million. In
March 2005, the program was amended to increase the size to $90 million. In July
2005, the program was again amended to increase the size up to $115 million. We
also sell some receivables in our European operations to regional banks in
Europe. At September 30, 2005, we sold $49 million of accounts receivable in
Europe down from $79 million at September 30, 2004. The arrangements to sell
receivables in Europe are not committed and can be cancelled at any time. If we
were not able to sell receivables under either the North American or European
securitization programs, our borrowings under our revolving credit agreements
would increase. These accounts receivable securitization programs provide us
with access to cash at costs that are generally favorable to alternative sources
of financing, and allow us to reduce borrowings under our revolving credit
agreements.
Capital Requirements. We believe that cash flows from operations, combined
with available borrowing capacity described above, assuming that we maintain
compliance with the financial covenants and other requirements of our loan
agreement, will be sufficient to meet our future capital requirements for the
following year. Our ability to meet the financial covenants depends upon a
number of operational and economic factors, many of which are beyond our
control. Factors that could impact our ability to comply with the financial
covenants include the rate at which consumers continue to buy new vehicles and
the rate at which they continue to repair vehicles already in service, as well
as our ability to successfully implement our restructuring plans and offset
higher raw material prices. Lower North American vehicle production levels,
weakening in the global aftermarket, or a reduction in vehicle production levels
in Europe, beyond our expectations, could impact our ability to meet our
financial covenant ratios. In the event that we are unable to meet these
financial covenants, we would consider several options to meet our cash flow
needs. These options could include further renegotiations with our senior credit
lenders, additional cost reduction or restructuring initiatives, sales of assets
or common stock, or other alternatives to enhance our financial and operating
position. Should we be required to implement any of these actions to meet our
cash flow needs, we believe we can do so in a reasonable time frame.
51
CONTRACTUAL OBLIGATIONS
Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments as of September 30, 2005,
are shown in the following table:
PAYMENTS DUE IN:
--------------------------------------------------------
BEYOND
2005 2006 2007 2008 2009 2009 TOTAL
---- ---- ---- ---- ---- ------ ------
(MILLIONS)
Obligations:
Revolver borrowings....................... $ 55 $ -- $ -- $ -- $ -- $ -- $ 55
Senior long-term debt..................... -- -- -- -- -- 356 356
Long-term notes........................... 1 -- 1 2 -- 472 476
Capital leases............................ 1 3 3 2 2 3 14
Subordinated long-term debt............... -- -- -- -- -- 500 500
Other subsidiary debt..................... 1 -- -- -- 1 -- 2
Short-term debt........................... 12 -- -- -- -- -- 12
---- ---- ---- ---- ---- ------ ------
Debt and capital lease obligations.......... 70 3 4 4 3 1,331 1,415
Operating leases............................ 4 13 11 7 5 5 45
Interest payments........................... 37 122 122 122 122 408 933
Capital commitments......................... 8 -- -- -- -- -- 8
---- ---- ---- ---- ---- ------ ------
Total Payments.............................. $119 $138 $137 $133 $130 $1,744 $2,401
==== ==== ==== ==== ==== ====== ======
We principally use our revolving credit facilities to finance our
short-term capital requirements. As a result, we classify any outstanding
balances of the revolving credit facilities within our short-term debt even
though the revolving credit facility has a termination date of December 13, 2008
and the tranche B-1 letter of credit facility/revolving loan facility has a
termination date of December 13, 2010.
If we do not maintain compliance with the terms of our senior credit
facility, senior secured notes indenture and senior subordinated debt indenture
described above, all amounts under those arrangements could, automatically or at
the option of the lenders or other debt holders, become due. Additionally, each
of those facilities contains provisions that payment defaults and events that
cause, or in some cases permit, acceleration under one facility will constitute
a default under the other facility, allowing the acceleration of all amounts
due. We currently expect to maintain compliance with terms of all of our various
credit agreements for the foreseeable future.
Included in our contractual obligations is the amount of interest to be
paid on our long-term debt. As our debt structure contains both fixed and
variable rate interest debt, we have made assumptions in calculating the amount
of the future interest payments. Interest on our senior secured notes and senior
subordinated notes is calculated using the fixed rates of 10 1/4 percent and
8 5/8 percent, respectively. Interest on our variable rate debt is calculated as
225 basis points plus LIBOR of 3.83 percent which was the rate at September 30,
2005. We have assumed that LIBOR will remain unchanged for the outlying years.
See "--Capitalization." In addition we have included the impact of our interest
rate swaps entered into in April 2004. See "Interest Rate Risk" below.
We have also included an estimate of expenditures required after September
30, 2005 to complete the facilities and projects authorized at December 31,
2004, in which we have made substantial commitments in connections with
facilities.
We have not included purchase obligations as part of our contractual
obligations as we generally do not enter into long-term agreements with our
suppliers. In addition, the agreements we currently have do not specify the
volumes we are required to purchase. If any commitment is provided, in many
cases the agreements state only the minimum percentage of our purchase
requirements we must buy from the supplier. As a result, these purchase
obligations fluctuate from year to year and we are not able to quantify the
amount of our future obligation.
52
We have not included material cash requirements for taxes as we are a
taxpayer in certain foreign jurisdictions but not in domestic locations.
Additionally, it is difficult to estimate taxes to be paid as changes in where
we generate income can have a significant impact on future tax payments. We have
also not included cash requirements for funding pension and postretirement
benefit costs. Based upon current estimates we believe we will be required to
make contributions between $58 million to $63 million to those plans in 2005, of
which approximately $53 million has been contributed as of September 30, 2005.
Pension and postretirement contributions beyond 2005 will be required but those
amounts will vary based upon many factors, including the performance of our
pension fund investments during 2005. In addition, we have not included cash
requirements for environmental remediation. Based upon current estimates we
believe we will be required to spend approximately $9 million over the next 20
to 30 years. However, due to possible modifications in remediation processes and
other factors, it is difficult to determine the actual timing of the payments.
See "--Environmental and Other Matters".
We occasionally provide guarantees that could require us to make future
payments in the event that the third party primary obligor does not make its
required payments. We have not recorded a liability for any of these guarantees.
The only third party guarantee we have made is the performance of lease
obligations by a former affiliate. Our maximum liability under this guarantee
was approximately $1 million at both September 30, 2005 and 2004, respectively.
We have no recourse in the event of default by the former affiliate. However, we
have not been required to make any payments under this guarantee.
Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our existing and future material
domestic wholly-owned subsidiaries fully and unconditionally guarantee our
senior credit facility, our senior secured notes and our senior subordinated
notes on a joint and several basis. The arrangement for the senior credit
facility is also secured by first-priority liens on substantially all our
domestic assets and pledges of 66 percent of the stock of certain first-tier
foreign subsidiaries. The arrangement for the $475 million senior secured notes
is also secured by second-priority liens on substantially all our domestic
assets, excluding some of the stock of our domestic subsidiaries. No assets or
capital stock of our direct or indirect foreign subsidiaries secure these notes.
You should also read Note 14 where we present the Supplemental Guarantor
Condensed Consolidating Financial Statements.
We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities, travel and procurement card programs, and
cash management requirements for some of our subsidiaries totaling $27 million.
We have also issued $19 million in letters of credit to support some of our
subsidiaries' insurance arrangements. In addition, we have issued $3 million in
guarantees through letters of credit to guarantee other obligations of
subsidiaries primarily related to environmental remediation activities.
CASH FLOWS
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
2005 2004
----- ----
(MILLIONS)
Cash provided (used) by:
Operating activities...................................... $ (38) $135
Investing activities...................................... (106) (75)
Financing activities...................................... 21 2
Operating Activities
For the nine months ended September 30, 2005, operating activities used $38
million in cash compared to a source of $135 million in cash during the same
period last year. For the first nine months of 2005, cash used for working
capital was $188 million versus $28 million for the first nine months of 2004.
Higher revenues and the discontinuation of accelerated payment programs with
three major OE customers in North America was
53
the primary reason for higher year over year receivables balances that resulted
in a cash outflow of $209 million, a $143 million increase from last year.
Inventory represented a cash outflow of $22 million during the first nine months
of 2005, consistent with last year. Accounts payable provided cash of $52
million, slightly lower than last year's cash inflow of $55 million. Other
current liabilities resulted in a source of $5 million in cash for the first
nine months of 2005, versus a source of $21 million in cash during the same
period last year. This change of $16 million was primarily related to severance
payments during the first nine months of 2005, as well as last year's increase
in accruals for a new aftermarket customer. Cash taxes were a $16 million
outflow in the latest nine months ending September 30, 2005, consistent with the
$15 million prior year outflow. Other operating activity was a use of $39
million in cash for the first nine months of 2005 compared to a source of $9
million in cash in the prior year. This change is primarily related to an
increase in pension contributions during the first nine months of 2005.
We had arrangements with three major OE customers in North America under
which, in exchange for a discount, payments for product sales were made earlier
than otherwise required under existing payment terms. These arrangements reduced
accounts receivable by $88 million as of December 31, 2004. All three of these
programs were discontinued during the first nine months of 2005. To mitigate the
impact on our liquidity from the termination of these programs, in February 2005
we supplemented our existing senior credit facility by increasing from $220
million to $300 million the amount of lenders' commitments under the revolving
credit facility portion of the senior credit facility. As part of this
agreement, we reduced from $180 million to $155 million the amount of lenders'
commitments under the tranche B-1 letter of credit/revolving loan facility
portion of the senior credit facility as required by the terms of the senior
credit facility. In October 2005, we further supplemented the senior credit
facility by increasing from $300 million to $350 million the amount of
commitments we may seek (we have not yet sought any such additional
commitments). We were not required to reduce the commitments under the tranche
B-1 letter of credit/revolving loan facility.
One of our European subsidiaries receives payment from an OE customer
whereby accounts receivable are satisfied through the delivery of negotiable
financial instruments. We may collect these financial instruments before their
maturity date by either selling them at a discount or using them to satisfy
accounts receivable that have previously been sold to a European bank. The
reported sales of these financial instruments were no longer included in the
account receivables sold beginning in the fourth quarter of 2004. Any of these
financial instruments that are not sold are classified as other current assets
as they do not meet our definition of cash equivalents. The amount of these
financial instruments that were collected before their maturity date totaled $26
million at September 30, 2005, compared with $44 million at December 31, 2004.
Investing Activities
Cash used for investing activities was $31 million higher in the first nine
months of 2005 compared to the same period one year ago. During the first nine
months of 2005, we used $11 million in cash to acquire the exhaust operations of
Gabilan Manufacturing, partially offset by net proceeds from the sale of assets
of $4 million. In the first nine months of 2004, we received $12 million in cash
from the sale of assets, primarily driven by the sale of our Birmingham, U.K.
facility. Capital expenditures were $100 million in the first nine months of
2005 compared to $87 million a year ago. This increase of $13 million in capital
expenditures was primarily due to the timing of future OE customer platform
launches.
Financing Activities
Cash flow from financing activities was a $21 million inflow in the first
nine months of 2005 compared to an inflow of $2 million in the same period of
2004. This is primarily attributable to $56 million increased borrowings from
our revolving credit facility partially offset by $43 million in cash used to
reduce our long-term debt during the first nine months of 2005.
INTEREST RATE RISK
Our financial instruments that are sensitive to market risk for changes in
interest rates are our debt securities. We primarily use our revolving credit
facilities to finance our short-term capital requirements. We
54
pay a current market rate of interest on these borrowings. We have financed our
long-term capital requirements with long-term debt with original maturity dates
ranging from five to ten years.
In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at an annual rate of
10 1/4 percent to floating interest rate debt at an annual rate of LIBOR plus an
average spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2004 resulted in lower interest expense of approximately $3 million for the year
ended December 31, 2004. Based on the rate in effect through July 15, 2005 and
using the current LIBOR as determined under these agreements of 3.82 percent
(which remains in effect until January 15, 2006), these swaps are expected to
reduce our 2005 annual interest expense by approximately $2 million compared to
having this debt remain fixed. These swaps qualify as fair value hedges in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended and as such are recorded on the balance sheet at market
value with an offset to the underlying hedged item, which is long-term debt. As
of September 30, 2005, the fair value of the interest rate swaps was a liability
of approximately $4 million. On September 30, 2005, we had $994 million in
long-term debt obligations that have fixed interest rates. Of that amount, $475
million is fixed through July 2013 and $500 million through November 2014, while
the remainder is fixed over periods of 2005 through 2025. Included in the $475
million is $150 million of long-term debt obligations subject to variable
interest rates as a result of our swap agreements. There is also $356 million in
long-term debt obligations that have variable interest rates based on a current
market rate of interest.
We estimate that the fair value of our long-term debt at September 30, 2005
was about 105 percent of its book value. A one percentage point increase or
decrease in interest rates would increase or decrease the annual interest
expense we recognize in the income statement and the cash we pay for interest
expense by about $3 million after tax, excluding the effect of the interest rate
swaps we completed in April 2004. A one percentage point increase or decrease in
interest rates on the swaps we completed in April 2004 would increase or
decrease the annual interest expense we recognize in the income statement and
the cash we pay for interest expense by approximately $1 million after tax.
OUTLOOK
Continued higher steel pricing, volatile oil prices and rising interest
rates make this an uncertain and challenging environment for automotive
suppliers. North American OE light vehicle production levels for 2004 were 15.7
million units. Current estimates for 2005 indicate that North American OE light
vehicle production levels will finish the year one-half of a percent lower than
2004. However future OE production levels in North America remain somewhat
uncertain. While incentive programs have reduced North American OE inventory
levels, consumer sales have been pulled forward, potentially reducing demand for
the fourth quarter of 2005. In addition, energy prices appear to be reducing
consumer spending and adversely impacting the vehicle sales mix. Western Europe
light vehicle production volumes grew during 2004 to 16.4 million units.
Expectations for 2005 indicate production will drop 1.4 percent to 16.2 million
units. We saw a strong increase in heavy-duty truck production rates during
2004. Production rates for 2005 are expected to increase approximately 11
percent for class five through seven heavy-duty trucks and as much as 21 percent
for class eight heavy-duty trucks. Although heavy-duty business represents a
small percentage of our overall revenues, this should benefit our North American
operations. In Asia, Volkswagen's market share decline in China is expected to
continue to negatively impact our revenues in this region. Over time we believe
that new joint ventures to serve Ford and BMW, and a growing relationship with
General Motors in China will improve our position in the Asia Pacific region. In
the global aftermarket, issues related to heightened regional competition and
longer product replacement cycles that have impacted revenues in the past
continue to be a challenge in 2005. In addition, higher energy prices may impact
vehicle maintenance spending. As a result there could be softness in the
aftermarket during the remainder of 2005.
These factors make us cautious concerning the outlook for the remainder of
2005. However, our customer, geographic and market diversity, stable management
team and regulatory environment provide us with an opportunity to meet industry
challenges. We believe our diversified customer base, geographies,
55
product lines, platforms and markets provide the opportunity to mitigate the
impact of specific declines in any one area. We are also benefiting from
environmental legislation and consumer safety concerns that drive higher content
for exhaust and ride control suppliers with innovative product solutions.
We continue to focus on mitigating the impact of higher costs by pursuing
restructuring initiatives such as the one announced in the fourth quarter of
last year, which is expected to generate $20 million in annual savings;
improving manufacturing efficiency with Lean; generating at least $20 million in
Six Sigma savings; and capitalizing on our anticipated increase in 2005 revenues
over those we achieved in 2004. Lower interest expense as a result of our debt
refinancing in the fourth quarter of 2004 and amendments to our senior credit
facility in the first quarter of 2005 also help mitigate the impact. In
addition, as we finish the remainder of 2005 we are not expecting a significant
impact on EBIT year-over-year from higher steel costs, net of other material
cost savings and recovery from customers, as a result of a variety of offsetting
cost reduction initiatives.
ENVIRONMENTAL AND OTHER MATTERS
We are subject to a variety of environmental and pollution control laws and
regulations in all jurisdictions in which we operate. We expense or capitalize,
as appropriate, expenditures for ongoing compliance with environmental
regulations that relate to current operations. We expense expenditures that
relate to an existing condition caused by past operations and that do not
contribute to current or future revenue generation. We record liabilities when
environmental assessments indicate that remedial efforts are probable and the
costs can be reasonably estimated. Estimates of the liability are based upon
currently available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and other
societal and economic factors. We consider all available evidence including
prior experience in remediation of contaminated sites, other companies' cleanup
experiences and data released by the United States Environmental Protection
Agency or other organizations. These estimated liabilities are subject to
revision in future periods based on actual costs or new information. Where
future cash flows are fixed or reliably determinable, we have discounted the
liabilities. All other environmental liabilities are recorded at their
undiscounted amounts. We evaluate recoveries separately from the liability and,
when they are assured, recoveries are recorded and reported separately from the
associated liability in our financial statements.
As of September 30, 2005, we are designated as a potentially responsible
party in one Superfund site. We have estimated our share of the remediation
costs for this site to be less than $1 million in the aggregate. In addition to
the Superfund site, we may have the obligation to remediate current or former
facilities, and we estimate our share of remediation costs at these facilities
to be approximately $9 million. For the Superfund site and the current and
former facilities, we have established reserves that we believe are adequate for
these costs. Although we believe our estimates of remediation costs are
reasonable and are based on the latest available information, the cleanup costs
are estimates and are subject to revision as more information becomes available
about the extent of remediation required. At some sites, we expect that other
parties will contribute to the remediation costs. In addition, at the Superfund
site, the Comprehensive Environmental Response, Compensation and Liability Act
provides that our liability could be joint and several, meaning that we could be
required to pay in excess of our share of remediation costs. Our understanding
of the financial strength of other potentially responsible parties at the
Superfund site, and of other liable parties at our current and former
facilities, has been considered, where appropriate, in our determination of our
estimated liability.
We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund site, or as a liable party at our
current or former facilities, will not be material to our results of operations
or consolidated financial position.
From time to time we are subject to product warranty claims whereby we are
required to bear costs of repair or replacement of certain of our products.
Warranty claims may range from individual customer claims to full recalls of all
products in the field. See Note 6 to our consolidated financial statements
included under Item 1 for information regarding our warranty reserves.
We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental
56
liabilities (including toxic tort, property damage and remediation),
intellectual property matters (including patent, trademark and copyright
infringement, and licensing disputes), personal injury claims (including
injuries due to product failure, design or warnings issues, and other product
liability related matters), taxes, employment matters, and commercial or
contractual disputes, sometimes related to acquisitions or divestitures. For
example, one of our Chinese joint ventures is currently under investigation by
local customs officials related to whether the joint venture applied the proper
tariff code to certain of its imports. We vigorously defend ourselves against
all of these claims. In future periods, we could be subjected to cash costs or
non-cash charges to earnings if any of these matters is resolved on unfavorable
terms. However, although the ultimate outcome of any legal matter cannot be
predicted with certainty, based on present information, including our assessment
of the merits of the particular claim, we do not expect that these legal
proceedings or claims will have any material adverse impact on our future
consolidated financial position or results of operations. In addition, we are
subject to a number of lawsuits initiated by a significant number of claimants
alleging health problems as a result of exposure to asbestos. Many of these
cases involve significant numbers of individual claimants. However, only a small
percentage of these claimants allege that they were automobile mechanics who
were allegedly exposed to our former muffler products and a significant number
appear to involve workers in other industries or otherwise do not include
sufficient information to determine whether there is any basis for a claim
against us. We believe, based on scientific and other evidence, it is unlikely
that mechanics were exposed to asbestos by our former muffler products and that,
in any event, they would not be at increased risk of asbestos-related disease
based on their work with these products. Further, many of these cases involve
numerous defendants, with the number of each in some cases exceeding 200
defendants from a variety of industries. Additionally, the plaintiffs either do
not specify any, or specify the jurisdictional minimum, dollar amount for
damages. As major asbestos manufacturers continue to go out of business, we may
experience an increased number of these claims. We vigorously defend ourselves
against these claims as part of our ordinary course of business. In future
periods, we could be subject to cash costs or non-cash charges to earnings if
any of these matters is resolved unfavorably to us. To date, with respect to
claims that have proceeded sufficiently through the judicial process, we have
regularly achieved favorable resolution in the form of a dismissal of the claim
or a judgment in our favor. Accordingly, we presently believe that these
asbestos-related claims will not have a material adverse impact on our future
financial condition or results of operations.
EMPLOYEE STOCK OWNERSHIP PLANS
We have established Employee Stock Ownership Plans for the benefit of our
employees. Under the plans, subject to limitations in the Internal Revenue Code,
participants may elect to defer up to 50 percent of their salary through
contributions to the plan, which are invested in selected mutual funds or used
to buy our common stock. We currently match in cash 50 percent of each
employee's contribution up to eight percent of the employee's salary. We
recorded expense for these matching contributions of approximately $5 million
for each of the nine months ended September 30, 2005 and 2004, respectively. All
contributions vest immediately.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to interest rate risk, see the
caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations," which is
incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the quarter covered by this report. Based
on their evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that the company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by our company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
57
PART II
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) Not applicable.
(c) Purchase of equity securities by the issuer and affiliated
purchasers. The following table provides information relating to the Company's
purchase of shares of its common stock in the third quarter of 2005. All of
these purchases reflect shares withheld upon vesting of restricted stock upon
employees' termination of employment, to satisfy tax withholding obligations.
TOTAL NUMBER OF AVERAGE
PERIOD SHARES PURCHASED PRICE PAID
------ ---------------- ----------
July 2005................................................... -- $ --
August 2005................................................. -- $ --
September 2005.............................................. 304 $17.38
---
Total..................................................... 304 $17.38
===
The Company presently has no publicly announced repurchase plan or program,
but intends to continue to satisfy tax withholding obligations in connection
with the vesting of outstanding restricted stock through the withholding of
shares.
ITEM 6. EXHIBITS
(a) Exhibits. The exhibits filed with this report are listed on the
Exhibit Index following the signature page of this report, which is incorporated
herein by reference.
58
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Tenneco Inc. has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TENNECO INC.
By: /s/ KENNETH R. TRAMMELL
------------------------------------
Kenneth R. Trammell
Senior Vice President and
Chief Financial Officer
Dated: November 4, 2005
59
INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2005
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2 -- None
3.1(a) -- Restated Certificate of Incorporation of the registrant
dated December 11, 1996 (incorporated herein by reference
from Exhibit 3.1(a) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1997, File No.
1-12387).
3.1(b) -- Certificate of Amendment, dated December 11, 1996
(incorporated herein by reference from Exhibit 3.1(c) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 1-12387).
3.1(c) -- Certificate of Ownership and Merger, dated July 8, 1997
(incorporated herein by reference from Exhibit 3.1(d) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 1-12387).
3.1(d) -- Certificate of Designation of Series B Junior Participating
Preferred Stock dated September 9, 1998 (incorporated herein
by reference from Exhibit 3.1(d) of the registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, File No. 1-12387).
3.1(e) -- Certificate of Elimination of the Series A Participating
Junior Preferred Stock of the registrant dated September 11,
1998 (incorporated herein by reference from Exhibit 3.1(e)
of the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, File No. 1-12387).
3.1(f) -- Certificate of Amendment to Restated Certificate of
Incorporation of the registrant dated November 5, 1999
(incorporated herein by reference from Exhibit 3.1(f) of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-12387).
3.1(g) -- Certificate of Amendment to Restated Certificate of
Incorporation of the registrant dated November 5, 1999
(incorporated herein by reference from Exhibit 3.1(g) of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-12387).
3.1(h) -- Certificate of Ownership and Merger merging Tenneco
Automotive Merger Sub Inc. with and into the registrant,
dated November 5, 1999 (incorporated herein by reference
from Exhibit 3.1(h) of the registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, File No.
1-12387).
3.1(i) -- Certificate of Amendment to Restated Certificate of
Incorporation of the registrant dated May 9, 2000
(incorporated herein by reference from Exhibit 3.1(i) of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000, File No. 1-12387).
3.1(j) -- Certificate of Ownership and Merger merging Tenneco Inc.
with and into the registrant, effective October 28, 2005
(incorporated herein by reference from Exhibit 99.1 of the
registrant's Current Report on Form 8-K dated October 28,
2005, File No. 1 -12387).
3.2 -- By-laws of the registrant, as amended October 28, 2005
(incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated October 28,
2005, File No. 1-12387).
3.3 -- Certificate of Incorporation of Tenneco Global Holdings Inc.
("Global"), as amended (incorporated herein by reference to
Exhibit 3.3 to the registrant's Registration Statement on
Form S-4, Reg. No. 333-93757).
3.4 -- By-laws of Global (incorporated herein by reference to
Exhibit 3.4 to the registrant's Registration Statement on
Form S-4, Reg. No. 333-93757).
3.5 -- Certificate of Incorporation of TMC Texas Inc. ("TMC")
(incorporated herein by reference to Exhibit 3.5 to the
registrant's Registration Statement on Form S-4, Reg. No.
333-93757).
3.6 -- By-laws of TMC (incorporated herein by reference to Exhibit
3.6 to the registrant's Registration Statement on Form S-4,
Reg. No. 333-93757).
60
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.7 -- Amended and Restated Certificate of Incorporation of Tenneco
International Holding Corp. ("TIHC") (incorporated herein by
reference to Exhibit 3.7 to the registrant's Registration
Statement on Form S-4, Reg. No. 333-93757).
3.8 -- Amended and Restated By-laws of TIHC (incorporated herein by
reference to Exhibit 3.8 to the registrant's Registration
Statement on Form S-4, Reg. No. 333-93757).
3.9 -- Certificate of Incorporation of Clevite Industries Inc.
("Clevite"), as amended (incorporated herein by reference to
Exhibit 3.9 to the registrant's Registration Statement on
Form S-4, Reg. No. 333-93757).
3.10 -- By-laws of Clevite (incorporated herein by reference to
Exhibit 3.10 to the registrant's Registration Statement on
Form S-4, Reg. No. 333-93757).
3.11 -- Amended and Restated Certificate of Incorporation of the
Pullman Company ("Pullman") (incorporated herein by
reference to Exhibit 3.11 to the registrant's Registration
Statement on Form S-4, Reg. No. 333-93757).
3.12 -- By-laws of Pullman (incorporated herein by reference to
Exhibit 3.12 to the registrant's Registration Statement on
Form S-4, Reg. No. 333-93757).
3.13 -- Certificate of Incorporation of Tenneco Automotive Operating
Company Inc. ("Operating") (incorporated herein by reference
to Exhibit 3.13 to the registrant's Registration Statement
on Form S-4, Reg. No. 333-93757).
3.14 -- By-laws of Operating (incorporated herein by reference to
Exhibit 3.14 to the registrant's Registration Statement on
Form S-4, Reg. No. 333-93757).
4.1(a) -- Rights Agreement dated as of September 8, 1998, by and
between the registrant and First Chicago Trust Company of
New York, as Rights Agent (incorporated herein by reference
from Exhibit 4.1 of the registrant's Current Report on Form
8-K dated September 24, 1998, File No. 1-12387).
4.1(b) -- Amendment No. 1 to Rights Agreement, dated March 14, 2000,
by and between the registrant and First Chicago Trust
Company of New York, as Rights Agent (incorporated herein by
reference from Exhibit 4.4(b) of the registrant's Annual
Report on Form 10-K for the year ended December 31, 1999,
File No. 1-12387).
4.1(c) -- Amendment No. 2 to Rights Agreement, dated February 5, 2001,
by and between the registrant and First Union National Bank,
as Rights Agent (incorporated herein by reference from
Exhibit 4.4(b) of the registrant's Post-Effective Amendment
No. 3, dated February 26, 2001, to its Registration
Statement on Form 8-A dated September 17, 1998).
4.2(a) -- Indenture, dated as of November 1, 1996, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference from Exhibit 4.1 of the
registrant's Registration Statement on Form S-4,
Registration No. 333-14003).
4.2(b) -- First Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference from Exhibit 4.3(b) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
4.2(c) -- Second Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference from Exhibit 4.3(c) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
4.2(d) -- Third Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference from Exhibit 4.3(d) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
4.2(e) -- Fourth Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference from Exhibit 4.3(e) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
61
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.2(f) -- Eleventh Supplemental Indenture, dated October 21, 1999, to
Indenture dated November 1, 1996 between The Chase Manhattan
Bank, as Trustee, and the registrant (incorporated herein by
reference from Exhibit 4.2(l) of the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-12387).
*4.3 -- Specimen stock certificate for Tenneco Inc. common stock.
4.4(a) -- Indenture dated October 14, 1999 by and between the
registrant and The Bank of New York, as trustee
(incorporated herein by reference from Exhibit 4.4(a) of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-12387).
4.4(b) -- Supplemental Indenture dated November 4, 1999 among Tenneco
Automotive Operating Company Inc., Tenneco International
Holding Corp., Tenneco Global Holdings Inc., the Pullman
Company, Clevite Industries Inc. and TMC Texas Inc. in favor
of The Bank of New York, as trustee (incorporated herein by
reference from Exhibit 4.4(b) of the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-12387).
4.4(c) -- Subsidiary Guarantee dated as of October 14, 1999 from
Tenneco Automotive Operating Company Inc., Tenneco
International Holding Corp., Tenneco Global Holdings Inc.,
the Pullman Company, Clevite Industries Inc. and TMC Texas
Inc. in favor of The Bank of New York, as trustee
(incorporated herein by reference to Exhibit 4.4(c) to the
registrant's Registration Statement on Form S-4, Reg. No.
333-93757).
4.5(a) -- Amended and Restated Credit Agreement, dated as of December
12, 2003, among the registrant, the several banks and other
financial institutions or entities from time to time parties
thereto, Bank of America, N.A. and Citicorp North America,
Inc., as co-documentation agents, Deutsche Bank Securities
Inc., as syndication agent, and JP Morgan Chase Bank, as
administrative agent (incorporated herein by reference to
Exhibit 4.5(a) to the registrant's Annual Report on Form
10-K for the year ended December 31, 2003, File No.
1-12387).
4.5(b) -- Amended and Restated Guarantee And Collateral Agreement,
dated as of November 4, 1999, by the registrant and the
subsidiary guarantors named therein, in favor of JPMorgan
Chase Bank, as Administrative Agent (incorporated herein by
reference from Exhibit 4.5(f) to the registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003,
File No. 1-12387).
4.5(c) -- First Amendment, dated as of April 30, 2004, to the Amended
and Restated Credit Agreement dated as of December 12, 2003,
among the registrant, JP Morgan Chase Bank as administrative
agent and the various lenders party thereto (incorporated
herein by reference from Exhibit 4.5(c) to the registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004, File No. 1-12387).
4.5(d) -- Second Amendment, dated November 19, 2004, to the Amended
and Restated Credit Agreement dated as of December 12, 2003,
among the registrant, JP Morgan Chase Bank as administrative
agent and the various lenders party thereto (incorporated
herein by reference from Exhibit 99.2 of the registrant's
Current Report on Form 8-K dated November 19, 2004, File No.
1-12387).
4.5(e) -- Third Amendment, dated February 17, 2005, to the Amended and
Restated Credit Agreement, dated as of December 12, 2003
among the registrant, JP Morgan Chase Bank as administrative
agent and the various lenders party thereto (incorporated by
reference to Exhibit 99.1 to the registrant's Current Report
on Form 8-K dated February 17, 2005, File No. 1-12387).
62
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.5(f) -- New Lender Supplement, dated as of March 31, 2005, by and
among Wachovia Bank, National Association, the registrant
and JPMorgan Chase Bank, N.A.; New Lender Supplement, dated
as of March 31, 2005, by and among Wells Fargo Foothill,
LLC, the registrant and JPMorgan Chase Bank, N.A.; New
Lender Supplement, dated as of March 31, 2005, by and among
Charter One Bank, NA, Tenneco Inc. and JPMorgan Chase Bank,
N.A (incorporated herein by reference from Exhibit 4.5(f) to
the registrant's Quarterly Report on form 10-Q for the
quarter ended March 31, 2005, File No. 1-12387).
4.5(g) -- New Lender Supplement, dated as of April 29, 2005, by and
among The Bank of Nova Scotia, the registrant and JPMorgan
Chase Bank, N.A (incorporated herein by reference from
Exhibit 4.5(g) to the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2005, File No.
1-12387).
*4.5(h) -- Fourth Amendment, dated October 7, 2005, to the Amended and
Restated Credit Agreement, dated as of December 12, 2003,
among the registrant, JP Morgan Chase Bank as administrative
agent and the various lenders party thereto.
*4.5(i) -- First Amendment, dated October 7, 2005, to the Amended and
Restated Guarantee and Collateral Agreement, dated as of
November 4, 1999, by the registrant and the subsidiary
guarantors named therein, in favor of JPMorgan Chase Bank,
as Administrative Agent.
4.6(a) -- Indenture, dated as of June 19, 2003, among the registrant,
the subsidiary guarantors named therein and Wachovia Bank,
National Association (incorporated herein by reference from
Exhibit 4.6(a) to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, File No. 1-12387).
4.6(b) -- Collateral Agreement, dated as of June 19, 2003, by the
registrant and the subsidiary guarantors named therein in
favor of Wachovia Bank, National Association (incorporated
herein by reference from Exhibit 4.6(b) to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003, File No. 1-12387).
4.6(c) -- Registration Rights Agreement, dated as of June 19, 2003,
among the registrant, the subsidiary guarantors named
therein, and the initial purchasers named therein, for whom
JPMorgan Securities Inc. acted as representative
(incorporated herein by reference from Exhibit 4.6(c) to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003, File No. 1-12387).
4.6(d) -- Supplemental Indenture, dated as of December 12, 2003, among
the registrant, the subsidiary guarantors named therein and
Wachovia Bank, National Association (incorporated herein by
reference to Exhibit 4.6(d) to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2003,
File No. 1-12387).
4.6(e) -- Registration Rights Agreement, dated as of December 12,
2003, among the registrant, the subsidiary guarantors named
therein, and the initial purchasers named therein, for whom
Banc of America Securities LLC acted as representative agent
(incorporated herein by reference to Exhibit 4.5(a) to the
registrant's Annual Report on Form 10-K for the year ended
December 31, 2003, File No. 1-12387).
*4.6(f) -- Second Supplemental Indenture, dated as of October 28, 2005,
among the registrant, the subsidiary guarantors named
therein and Wachovia Bank, National Association
4.7 -- Intercreditor Agreement, dated as of June 19, 2003, among
JPMorgan Chase Bank, as Credit Agent, Wachovia Bank,
National Association, as Trustee and Collateral Agent, and
the registrant (incorporated herein by reference from
Exhibit 4.7 to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, File No. 1-12387).
4.8(a) -- Indenture, dated as of November 19, 2004, among the
registrant, the subsidiary guarantors named therein and The
Bank of New York Trust Company (incorporated herein by
reference from Exhibit 99.1 of the registrant's Current
Report on Form 8-K dated November 19, 2004, File No.
1-12387).
63
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.8(b) -- Supplemental Indenture, dated as of March 28, 2005, among
the registrant, the guarantors party thereto and the Bank of
New York Trust Company, N.A., as trustee (incorporated
herein by reference from Exhibit 4.3 to the registrant's
Registration Statement on Form S-4, Reg. No. 333-123752).
4.8(c) -- Registration Rights Agreement, dated as of November 19,
2004, among the registrant, the guarantors party thereto and
the initial purchasers party thereto (incorporated herein by
reference from Exhibit 4.2 to the registrant's Registration
Statement on Form S-4, Reg. No. 333-123752).
*4.8(d) -- Second Supplemental Indenture, dated as of October 28, 2005,
among the registrant, the guarantors party thereto and the
Bank of New York Trust Company, N.A., as trustee.
10.1 -- Distribution Agreement, dated November 1, 1996, by and among
El Paso Tennessee Pipeline Co., the registrant, and Newport
News Shipbuilding Inc. (incorporated herein by reference
from Exhibit 2 of the registrant's Form 10, File No.
1-12387).
10.2 -- Amendment No. 1 to Distribution Agreement, dated as of
December 11, 1996, by and among El Paso Tennessee Pipeline
Co., the registrant, and Newport News Shipbuilding Inc.
(incorporated herein by reference from Exhibit 10.2 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
10.3 -- Debt and Cash Allocation Agreement, dated December 11, 1996,
by and among El Paso Tennessee Pipeline Co., the registrant,
and Newport News Shipbuilding Inc. (incorporated herein by
reference from Exhibit 10.3 of the registrant's Annual
Report on Form 10-K for the year ended December 31, 1996,
File No. 1-12387).
10.4 -- Benefits Agreement, dated December 11, 1996, by and among El
Paso Tennessee Pipeline Co., the registrant, and Newport
News Shipbuilding Inc. (incorporated herein by reference
from Exhibit 10.4 of the registrant's Annual Report on Form
10-K for the year ended December 31, 1996, File No.
1-12387).
10.5 -- Insurance Agreement, dated December 11, 1996, by and among
El Paso Tennessee Pipeline Co., the registrant, and Newport
News Shipbuilding Inc. (incorporated herein by reference
from Exhibit 10.5 of the registrant's Annual Report on Form
10-K for the year ended December 31, 1996, File No.
1-12387).
10.6 -- Tax Sharing Agreement, dated December 11, 1996, by and among
El Paso Tennessee Pipeline Co., Newport News Shipbuilding
Inc., the registrant, and El Paso Natural Gas Company
(incorporated herein by reference from Exhibit 10.6 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
10.7 -- First Amendment to Tax Sharing Agreement, dated as of
December 11, 1996, among El Paso Tennessee Pipeline Co.
(formerly Tenneco Inc.), the registrant, El Paso Natural Gas
Company and Newport News Shipbuilding Inc. (incorporated
herein by reference from Exhibit 10.7 of the registrants's
Annual Report on Form 10-K for the year ended December 31,
1996, File No. 1-12387).
10.8 -- Value Added "TAVA" Incentive Compensation Plan (incorporated
herein by reference from Exhibit 10.8 of the registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003, File No. 1-12387).
10.9 -- Change of Control Severance Benefits Plan for Key Executives
(incorporated herein by reference from Exhibit 10.13 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-12387).
10.10 -- Stock Ownership Plan (incorporated herein by reference from
Exhibit 10.10 of the registrant's Registration Statement on
Form S-4, Reg. No. 333-93757).
10.11 -- Key Executive Pension Plan (incorporated herein by reference
from Exhibit 10.11 to the registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, File No.
1-12387).
64
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.12 -- Deferred Compensation Plan (incorporated herein by reference
from Exhibit 10.12 to the registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, File No.
1-12387).
10.13 -- Supplemental Executive Retirement Plan (incorporated herein
by reference from Exhibit 10.13 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, File No. 1-12387).
10.14 -- Human Resources Agreement by and between the registrant and
Tenneco Packaging Inc. dated November 4, 1999 (incorporated
herein by reference to Exhibit 99.1 to the registrant's
Current Report on Form 8-K dated November 4, 1999, File No.
1-12387).
10.15 -- Tax Sharing Agreement by and between the registrant and
Tenneco Packaging Inc. dated November 3, 1999 (incorporated
herein by reference to Exhibit 99.2 to the registrant's
Current Report on Form 8-K dated November 4, 1999, File No.
1-12387).
10.16 -- Amended and Restated Transition Services Agreement by and
between the registrant and Tenneco Packaging Inc. dated as
of November 4, 1999 (incorporated herein by reference from
Exhibit 10.21 of the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, File No.
1-12387).
10.17 -- Assumption Agreement among Tenneco Automotive Operating
Company Inc., Tenneco International Holding Corp., Tenneco
Global Holdings Inc., The Pullman Company, Clevite
Industries Inc., TMC Texas Inc., Salomon Smith Barney Inc.
and the other Initial Purchasers listed in the Purchase
Agreement dated as of November 4, 1999 (incorporated herein
by reference from Exhibit 10.24 of the registrant's
Registration Statement on Form S-4, Reg. No. 333-93757).
10.18 -- Amendment No. 1 to Change in Control Severance Benefits Plan
for Key Executives (incorporated herein by reference from
Exhibit 10.23 to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, File No 1-12387).
10.19 -- Letter Agreement dated July 27, 2000 between the registrant
and Mark P. Frissora (incorporated herein by reference from
Exhibit 10.24 to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, File No. 1-12387).
10.20 -- Letter Agreement dated July 27, 2000 between the registrant
and Richard P. Schneider (incorporated herein by reference
from Exhibit 10.26 to the registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, File No.
1-12387).
10.21 -- Letter Agreement dated July 27, 2000 between the registrant
and Timothy R. Donovan (incorporated herein by reference
from Exhibit 10.28 to the registrant's Annual Report on Form
10-K for the year ended December 31, 2000, File No.
1-12387).
10.22 -- Form of Indemnity Agreement entered into between the
registrant and the following directors of the registrant:
Paul Stecko, M. Kathryn Eickhoff and Dennis Severance
(incorporated herein by reference from Exhibit 10.29 to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000, File No. 1-12387).
10.23 -- Mark P. Frissora Special Appendix under the Supplemental
Executive Retirement Plan (incorporated herein by reference
from Exhibit 10.30 to the registrant's Annual Report on Form
10-K for the year ended December 31, 2000, File No.
1-12387).
10.24 -- Letter Agreement dated as of June 1, 2001 between the
registrant and Hari Nair (incorporated herein by reference
from Exhibit 10.28 to the registrant's Annual Report on Form
10-K for the year ended December 31, 2001. File No.
1-12387).
10.25 -- 2002 Long-Term Incentive Plan (As Amended and Restated
Effective March 11, 2003) (incorporated herein by reference
from Exhibit 10.26 to the registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003. File No.
1-12387).
10.26 -- Amendment No. 1 to the Deferred Compensation Plan
(incorporated herein by reference from Exhibit 10.27 to the
registrant's Annual Report on Form 10-K for the year ended
December 31, 2002, File No. 1-12387).
65
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.27 -- Supplemental Stock Ownership Plan (incorporated herein by
reference from Exhibit 10.28 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2002,
File No. 1-12387).
10.28 -- Form of Stock Equivalent Unit Award Agreement under the 2002
Long-Term Incentive Plan, as amended (incorporated herein by
reference from Exhibit 99.1 of the registrant's Current
Report on Form 8-K dated January 13, 2005, File No.
1-12387).
10.29 -- Form of Stock Option Agreement for employees under the 2002
Long-Term Incentive Plan, as amended (providing for a ten
year option term) (incorporated herein by reference from
Exhibit 99.2 of the registrant's Current Report on Form 8-K
dated January 13, 2005, File No. 1-12387).
10.30 -- Form of Stock Option Agreement for non-employee directors
under the 2002 Long-Term Incentive Plan, as amended
(providing for a ten year option term) (incorporated herein
by reference from Exhibit 99.3 of the registrant's Current
Report on Form 8-K dated January 13, 2005, File No.
1-12387).
10.31 -- Form of Restricted Stock Award Agreement for employees under
the 2002 Long-Term Incentive Plan, as amended (three year
cliff vesting) (incorporated herein by reference from
Exhibit 99.4 of the registrant's Current Report on Form 8-K
dated January 13, 2005, File No. 1-12387).
10.32 -- Form of Restricted Stock Award Agreement for non-employee
directors under the 2002 Long-Term Incentive Plan, as
amended (incorporated herein by reference from Exhibit 99.5
of the registrant's Current Report on Form 8-K dated January
13, 2005, File No. 1-12387).
10.33 -- Form of Restricted Stock Award Agreement for employees under
the 2002 Long-Term Incentive Plan, as amended (vesting 1/3
annually) (incorporated herein by reference from Exhibit
99.1 of the registrant's Current Report on Form 8-K dated
January 17, 2005, File No. 1-12387).
10.34 -- Form of Stock Option Agreement for employees under the 2002
Long-Term Incentive Plan, as amended (providing for a seven
year option term) (incorporated herein by reference from
Exhibit 99.2 of the registrant's Current Report on Form 8-K
dated January 17, 2005, File No. 1-12387).
10.35 -- Form of Stock Option Agreement for non-employee directors
under the 2002 Long-Term Incentive Plan, as amended
(providing for a seven year option term) (incorporated
herein by reference from Exhibit 99.3 of the registrant's
Current Report on Form 8-K dated January 17, 2005, File No.
1-12387).
10.36 -- Form of Performance Share Agreement for non-employee
directors under the 2002 Long-Term Incentive Plan, as
amended. (incorporated herein by reference from Exhibit
10.36 of the registrant's Annual Report on Form 10-K for the
year ended December 31, 2004, File No. 1-12387).
10.37 -- Summary of 2005 Outside Directors' Compensation.
(incorporated herein by reference from Exhibit 10.37 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 2004, File No. 1-12387).
10.38 -- Summary of 2005 Named Executive Officer Compensation
(incorporated herein by reference from Exhibit 10.38 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005, File No. 1-12387).
10.39 -- First Amendment to the Key Executive Pension Plan
(incorporated herein by reference from Exhibit 10.39 to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005, File No. 1-12387).
10.40 -- Amendment No. 1 to the Supplemental Executive Retirement
Plan (incorporated herein by reference from Exhibit 10.40 of
the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005, File No. 1-12387).
66
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.41 -- Second Amendment to the Key Executive Pension Plan
(incorporated herein by reference from Exhibit 10.41 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005, File No. 1-12387).
10.42 -- Amendment No. 2 to the Deferred Compensation Plan
(incorporated herein by reference from Exhibit 10.42 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005, File No. 1-12387).
10.43 -- Supplemental Retirement Plan (incorporated herein by
reference from Exhibit 10.43 of the registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2005,
File No. 1-12387).
10.44 -- Mark P. Frissora Special Appendix under the Supplemental
Retirement Plan (incorporated herein by reference from
Exhibit 10.44 of the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2005, File No. 1-12387).
10.45 -- Supplemental Pension Plan for Management (incorporated
herein by reference from Exhibit 10.45 of the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2005, File No. 1-12387).
10.46 -- Incentive Deferral Plan (incorporated herein by reference
from Exhibit 10.46 of the registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005, File No.
1-12387).
11 -- None.
*12 -- Computation of Ratio of Earnings to Fixed Charges.
*15 -- Letter of Deloitte & Touche LLP regarding interim financial
information.
19 -- None.
22 -- None.
23 -- None.
24 -- None.
*31.1 -- Certification of Mark P. Frissora under Section 302 of the
Sarbanes-Oxley Act of 2002.
*31.2 -- Certification of Kenneth R. Trammell under Section 302 of
the Sarbanes-Oxley Act of 2002.
*32.1 -- Certification of Mark P. Frissora and Kenneth R. Trammell
under Section 906 of the Sarbanes-Oxley Act of 2002.
99 -- None.
---------------
* Filed herewith.
67