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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
500 NORTH FIELD DRIVE 60045
LAKE FOREST, IL (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 482-5000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
7.45% Debentures due 2025; New York Stock Exchange
9.20% Debentures due 2012; 10.20% Debentures due 2008
Common Stock, par value $.01 per share New York, Chicago, Pacific and
London Stock Exchanges
Preferred Share Purchase Rights New York, Chicago, Pacific and
London Stock Exchanges
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes X No ______
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ______ No X
Note -- Checking the box above will not relieve any registrant required to
file reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer _____ Non-accelerated filer _____
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ______ No X
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter.
CLASS OF COMMON EQUITY AND NUMBER OF SHARES
HELD BY NON-AFFILIATES AT JUNE 30, 2005 MARKET VALUE HELD BY NON-AFFILIATES*
------------------------------------------- ------------------------------------
Common Stock,43,142,861 shares $717,897,207
-------------------------
* Based upon the closing sale price on the New York Stock Exchange Composite
Tape for the Common Stock on June 30, 2005.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, par
value $.01 per share, 45,076,289 shares outstanding as of February 28, 2006.
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF THE FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
-------- -----------------------
Portions of Tenneco Inc.'s Definitive Proxy Statement
for the Annual Meeting of Stockholders to be held May 9,
2006 Part III
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning, among other
things, the prospects and developments of the Company (as defined) and business
strategies for our operations, all of which are subject to risks and
uncertainties. These forward-looking statements are included in various sections
of this report, including the section entitled "Outlook" appearing in Item 7 of
this report. These statements are identified as "forward-looking statements" or
by their use of terms (and variations thereof) such as "will," "may," "can,"
"anticipate," "intend," "continue," "estimate," "expect," "plan," "should,"
"outlook," "believe," and "seek" and similar terms (and variations thereof) and
phrases.
When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, we caution that, while we
believe such assumptions or bases to be reasonable and make them in good faith,
assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, we or
our management expresses an expectation or belief as to future results, we
express that expectation or belief in good faith and believe it has a reasonable
basis, but we can give no assurance that the statement of expectation or belief
will result or be achieved or accomplished.
Our actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include the matters described in the section entitled "Risk Factors" appearing
in Item 1A of this report and the following:
- general economic, business and market conditions;
- potential legislation, regulatory changes and other governmental actions,
including the ability to receive regulatory approvals and the timing of
such approvals;
- new technologies that reduce the demand for certain of our products or
otherwise render them obsolete;
- changes in distribution channels or competitive conditions in the markets
and countries where we operate;
- capital availability or costs, including changes in interest rates,
market perceptions of the industries in which we operate or ratings of
securities;
- increases in the cost of compliance with regulations, including
environmental regulations, and environmental liabilities in excess of the
amount reserved;
- changes by the Financial Accounting Standards Board or the Securities and
Exchange Commission of authoritative accounting principles generally
accepted in the United States of America;
- acts of war or terrorism, including, but not limited to, the events
taking place in the Middle East, the current military action in Iraq and
the continuing war on terrorism, as well as actions taken or to be taken
by the United States and other governments as a result of further acts or
threats of terrorism, and the impact of these acts on economic, financial
and social conditions in the countries where we operate; and
- the timing and occurrence (or non-occurrence) of transactions and events
which may be subject to circumstances beyond our control.
i
TABLE OF CONTENTS
PART I
Item 1.
Business.................................................... 1
Tenneco Inc. ............................................. 1
Contributions of Major Businesses......................... 4
Description of Our Business............................... 5
Item 1A.
Risk Factors................................................ 21
Item 1B.
Unresolved Staff Comments................................... 27
Item 2.
Properties.................................................. 27
Item 3.
Legal Proceedings........................................... 28
Item 4.
Submission of Matters to a Vote of Security Holders......... 29
Item
4.1.
Executive Officers of the Registrant........................ 29
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Repurchases of Equity Securities........ 32
Item 6.
Selected Financial Data..................................... 33
Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 37
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk........................................................ 69
Item 8.
Financial Statements and Supplementary Data................. 70
Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 127
Item 9A.
Controls and Procedures..................................... 127
Item 9B.
Other Information........................................... 127
PART III
Item 10.
Directors and Executive Officers of the Registrant.......... 128
Item 11.
Executive Compensation...................................... 128
Item 12.
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 128
Item 13.
Certain Relationships and Related Transactions.............. 129
Item 14.
Principal Accountant Fees and Services...................... 129
PART IV
Item 15.
Exhibits and Financial Statement Schedules.................. 130
ii
PART I
ITEM 1. BUSINESS.
TENNECO INC.
GENERAL
Our company, Tenneco Inc., is one of the world's leading manufacturers of
automotive emission control and ride control products and systems. Our company
serves both original equipment vehicle manufacturers ("OEMs") and the repair and
replacement markets, or aftermarket, worldwide. As used herein, the term
"Tenneco", "we", "us", "our", or the "Company" refers to Tenneco Inc. and its
consolidated subsidiaries.
Tenneco was incorporated in Delaware in 1996 under the name "New Tenneco
Inc." ("New Tenneco") as a wholly owned subsidiary of the company then known as
Tenneco Inc. ("Old Tenneco"). At that time, Old Tenneco's major businesses were
shipbuilding, energy, automotive and packaging. On December 11, 1996, Old
Tenneco completed the transfer of its automotive and packaging businesses to us,
and spun off our company to its public stockholders. In connection with the 1996
spin-off, Old Tenneco also spun off its shipbuilding division to its public
stockholders, the remaining energy company was acquired by El Paso Natural Gas
Company and we changed our name from New Tenneco to Tenneco Inc. Unless the
context otherwise requires, for periods prior to December 11, 1996, references
to "Tenneco", "we", "us", "our" or the "Company" also refer to Old Tenneco. In a
series of transactions commencing in January 1999 and culminating with the
November 4, 1999 spin off to our shareholders of the common stock of Tenneco
Packaging Inc., now known as Pactiv Corporation (the "1999 Spin-off"), we
separated our packaging businesses from our automotive business and in
connection therewith changed our name from Tenneco Inc. to Tenneco Automotive
Inc.
We recently changed our name from Tenneco Automotive Inc. back 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 and emission control products and systems for light vehicles to
automotive original equipment and aftermarket customers worldwide. Our common
stock continues to trade on the New York Stock Exchange under the symbol "TEN".
CORPORATE GOVERNANCE AND AVAILABLE INFORMATION
We have established a comprehensive corporate governance plan for the
purpose of defining responsibilities, setting high standards of professional and
personal conduct and assuring compliance with such responsibilities and
standards. As part of its annual review process, the Board of Directors monitors
developments in the area of corporate governance. In late 2003, the Securities
and Exchange Commission ("SEC") approved changes proposed by the New York Stock
Exchange ("NYSE") to its corporate governance and listing requirements. The
Board of Directors determined to voluntarily implement these changes on an
accelerated basis in 2003 and 2004, to the extent our practices were not already
in compliance. Listed below are some of the key elements of our corporate
governance plan. For more information about these matters, see our definitive
Proxy Statement for the Annual Meeting of Stockholders to be held May 9, 2006.
INDEPENDENCE OF DIRECTORS
- Nine of our eleven directors are independent under the revised NYSE
listing standards.
- Independent directors are scheduled to meet separately in executive
session after every regularly scheduled Board of Directors meeting.
- The Board of Directors has a lead independent director, Mr. Paul T.
Stecko.
1
AUDIT COMMITTEE
- All members meet the independence standards for audit committee
membership under the revised NYSE listing standards and applicable SEC
rules.
- One member of the Audit Committee, Mr. Charles Cramb, qualifies as an
"audit committee financial expert," as defined in the SEC rules, and the
remaining members of the Audit Committee satisfy the NYSE's financial
literacy requirements.
- The Audit Committee operates under a written charter which governs its
duties and responsibilities, including its sole authority to appoint,
review, evaluate and replace the Company's independent auditors.
- The Audit Committee has adopted policies and procedures governing the
pre-approval of all audit, audit-related, tax and other services provided
by the Company's independent auditors.
COMPENSATION/NOMINATING/GOVERNANCE COMMITTEE
- All members meet the independence standards for compensation and
nominating committee membership under the revised NYSE listing standards.
- The Compensation/Nominating/Governance Committee operates under a written
charter that governs its duties and responsibilities, including the
responsibility for executive compensation.
- In December 2005, an Executive Compensation Subcommittee was formed which
has the responsibility to consider and approve equity based compensation
for our executive officers which is intended to qualify as "performance
based compensation" under Section 162(m) of the Internal Revenue Code of
1986, as amended.
CORPORATE GOVERNANCE PRINCIPLES
- The Company has adopted Corporate Governance Principles, including
qualification and independence standards for directors.
STOCK OWNERSHIP GUIDELINES
- The Company has adopted Stock Ownership Guidelines to align the interests
of its executives with the interests of stockholders and promote the
Company's commitment to sound corporate governance.
- The Stock Ownership Guidelines apply to the independent directors, the
Chairman and Chief Executive Officer, all Executive Vice Presidents and
all Senior Vice Presidents. Ownership levels are determined as a multiple
of the participant's base salary or, in the case of an independent
director, his or her Board of Director's retainer fee and then converted
to a fixed number of shares.
COMMUNICATION WITH DIRECTORS
- The Audit Committee has established a process for confidential and
anonymous submission by employees of the Company, as well as submissions
by other interested parties, regarding questionable accounting or
auditing matters.
- Additionally, the Board of Directors has established a process for
stockholders to communicate with the Board of Directors, as a whole, or
any independent director.
CODES OF BUSINESS CONDUCT AND ETHICS
- Management has adopted a Code of Ethical Conduct for Financial Managers,
which applies to our Chief Executive Officer, Chief Financial Officer,
Controller and other key financial managers. This code is filed as
Exhibit 14 to this report.
- In addition, our company has operated under an omnibus Statement of
Business Principles that applies to all directors, officers and employees
and includes provisions ranging from restrictions on gifts to conflicts
of interests. All salaried employees are required to affirm in writing
their acceptance of these principles.
2
PERSONAL LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
- Our company complies with and will operate in a manner consistent with
the legislation outlawing extensions of credit in the form of a personal
loan to or for its directors or executive officers.
Our Internet address is www.tenneco.com. We make our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports, as filed with or furnished to the SEC, available free of
charge on our Internet website as soon as reasonably practicable after
submission to the SEC. Securities ownership reports on Forms 3, 4 and 5 are also
available free of charge on our website as soon as reasonably practicable after
submission to the SEC. The contents of our website are not, however, a part of
this report.
Our Audit Committee Charter, Compensation/Nominating/Governance Committee
and Executive Compensation Subcommittee Charters, Corporate Governance
Principles, Stock Ownership Guidelines, Audit Committee policy regarding
accounting complaints, Code of Ethical Conduct for Financial Managers, Statement
of Business Principles, policy for communicating with the Board of Directors and
Audit Committee policy regarding the pre-approval of audit, non-audit, tax and
other services are available free of charge on our website at www.tenneco.com.
In addition, we will make a copy of any of these documents available to any
person, without charge, upon written request to Tenneco Inc., 500 North Field
Drive, Lake Forest, Illinois 60045, Attn: General Counsel. We intend to satisfy
the disclosure requirements under Item 5.05 of Form 8-K and applicable NYSE
rules regarding amendments to or waivers of our Code of Ethical Conduct for
Financial Managers and Statement of Business Principles by posting this
information on our website at www.tenneco.com.
CEO AND CFO CERTIFICATIONS
In 2005 our chief executive officer provided to the NYSE, the Pacific Stock
Exchange and the Chicago Stock Exchange the annual CEO certification regarding
our compliance with the corporate governance listing standards of those
exchanges. In addition, our chief executive officer and chief financial officer
filed with the Securities and Exchange Commission all required certifications
regarding the quality of our disclosures in our fiscal 2005 SEC reports. There
were no qualifications to these certifications.
3
CONTRIBUTIONS OF MAJOR BUSINESSES
For information concerning our operating segments, geographic areas and
major products or groups of products, see Note 11 to the consolidated financial
statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8. The
following tables summarize for each of our operating segments for the periods
indicated: (i) net sales and operating revenues; (ii) earnings before interest
expense, income taxes and minority interest ("EBIT"); and (iii) expenditures for
plant, property and equipment. You should also read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7
for information about certain costs and charges included in our results. You
should also read Note 4 to the consolidated financial statements included in
Item 8 for a discussion of the changes in our results due to the change in our
method for valuing inventory.
NET SALES AND OPERATING REVENUES:
2005 2004 2003
------------ ------------ ------------
(DOLLAR AMOUNTS IN MILLIONS)
North America.................................... $2,034 46% $1,966 47% $1,887 50%
Europe, South America and India.................. 2,110 48 1,940 46 1,611 43
Asia Pacific..................................... 371 8 380 9 322 8
Intergroup sales................................. (74) (2) (73) (2) (54) (1)
------ --- ------ --- ------ ---
Total.......................................... $4,441 100% $4,213 100% $3,766 100%
====== === ====== === ====== ===
EBIT:
2005 2004 2003
---------- ---------- ----------
(DOLLAR AMOUNTS IN MILLIONS)
North America......................................... $145 67% $133 76% $129 74%
Europe, South America and India....................... 54 25 21 12 22 13
Asia Pacific.......................................... 16 8 20 12 23 13
---- --- ---- --- ---- ---
Total............................................... $215 100% $174 100% $174 100%
==== === ==== === ==== ===
EXPENDITURES FOR PLANT, PROPERTY AND EQUIPMENT:
2005 2004 2003
---------- ---------- ----------
(DOLLAR AMOUNTS IN MILLIONS)
North America......................................... $ 74 51% $ 55 43% $ 54 42%
Europe, South America and India....................... 54 38 59 45 61 47
Asia Pacific.......................................... 16 11 16 12 15 11
---- --- ---- --- ---- ---
Total............................................... $144 100% $130 100% $130 100%
==== === ==== === ==== ===
Interest expense, income taxes, and minority interest that were not
allocated to our operating segments are:
2005 2004 2003
---- ---- ----
(MILLIONS)
Interest expense (net of interest capitalized).............. $130 $179 $149
Income tax expense (benefit)................................ 25 (24) (7)
Minority interest........................................... 2 4 6
4
DESCRIPTION OF OUR BUSINESS
With 2005 revenues of over $4.4 billion, we are one of the world's largest
producers of automotive emission control and ride control systems and products.
We serve both original equipment manufacturers and replacement markets worldwide
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.
As an automotive parts supplier, we design, engineer, manufacture, market
and sell individual component parts for vehicles as well as groups of components
that are combined as modules or systems within vehicles. These parts, modules
and systems are sold globally to most leading OEMs and throughout all
aftermarket distribution channels.
OVERVIEW OF AUTOMOTIVE PARTS INDUSTRY
The automotive parts industry is generally separated into two categories:
(1) "original equipment" or "OE" sales, in which parts are sold in large
quantities directly for use by OEMs; and (2) "aftermarket" sales, in which parts
are sold as replacement parts in varying quantities to a wide range of
wholesalers, retailers and installers. In the OE market, parts suppliers are
generally divided into tiers -- "Tier 1" suppliers, who provide their products
directly to OEMs, and "Tier 2" or "Tier 3" suppliers, who sell their products
principally to other suppliers for combinations into the other suppliers' own
product offerings.
Demand for automotive parts in the OE market is generally a function of the
number of new vehicles produced, which in turn is a function of prevailing
economic conditions and consumer preferences. In 2005, the number of light
vehicles (i.e. passenger cars and light trucks) produced was 15.7 million in
North America, 26.6 million in Europe, South America and India and 21.3 million
in Asia Pacific. Worldwide new light vehicle production is forecasted to
increase to over 69.1 million units in 2008 from approximately 63.6 million
units in 2005. Although OE demand is tied to planned vehicle production, parts
suppliers also have the opportunity to grow through increasing their product
content per vehicle, by further penetrating business with existing customers and
by gaining new customers and markets. Companies with global presence and
advanced technology, engineering, manufacturing and support capabilities, such
as our company, are, we believe, well positioned to take advantage of these
opportunities.
Demand for aftermarket products is driven by the quality of OE parts, the
number of vehicles in operation, the average age of the vehicle fleet, vehicle
usage and the average useful life of vehicle parts. Although more vehicles are
on the road than ever before, the aftermarket has experienced longer replacement
cycles due to improved quality of OE parts and increases in average useful lives
of automotive parts as a result of technological innovation. Suppliers are
increasingly being required to deliver innovative aftermarket products that
upgrade the performance or safety of a vehicle's original components to drive
aftermarket demand.
INDUSTRY TRENDS
Currently, we believe several significant existing and emerging trends are
dramatically impacting the automotive industry. As the dynamics of the
automotive industry change, so do the roles, responsibilities and relationships
of its participants. Key trends that we believe are affecting automotive parts
suppliers include:
OUTSOURCING AND DEMAND FOR SYSTEMS AND MODULES
OE manufacturers are increasingly moving towards outsourcing automotive
parts and systems to simplify the vehicle assembly process, lower costs and
reduce vehicle development time. Outsourcing allows OE manufacturers to take
advantage of the lower cost structure of the automotive parts suppliers and to
benefit from multiple suppliers engaging in simultaneous development efforts.
Furthermore, development of advanced electronics has enabled formerly
independent vehicle components to become "interactive," leading to a shift in
demand from individual parts to fully integrated systems. As a result,
5
automotive parts suppliers offer OE manufacturers component products
individually, as well as in a variety of integrated forms such as modules and
systems:
- "Modules" are groups of component parts arranged in close physical
proximity to each other within a vehicle. Modules are often assembled by
the supplier and shipped to the OEM for installation in a vehicle as a
unit. Seats, instrument panels, axles and door panels are examples.
- "Systems" are groups of component parts located throughout a vehicle
which operate together to provide a specific vehicle function. Anti-lock
braking systems, safety restraint systems, roll control systems, emission
control systems and powertrain systems are examples.
This shift in demand towards fully integrated systems has created the role
of the Tier 1 systems integrator. These systems integrators increasingly have
the responsibility to execute a number of activities, such as design, product
development, engineering, testing of component systems and purchasing from Tier
2 suppliers. We are an established Tier 1 supplier with more than ten years of
product integration experience. We have modules or systems for 75 vehicle
platforms in production worldwide and modules or systems for 26 additional
platforms under development. For example, we supply ride control modules for the
DaimlerChrysler Caravan, the Nissan Pathfinder, the VW Transporter and the
Peugeot 1007 and the emission control system for the Porsche Boxster, Nissan
Xterra, Ford Transit, DaimlerChrysler DR Ram and Jaguar XJ Type.
GLOBAL CONSOLIDATION OF OE CUSTOMERS
Given the trend in business combinations among vehicle
manufacturers -- such as the DaimlerChrysler merger and General Motors'
acquisition of Daewoo -- as well as the global OE expansion over the last
decade, OEMs are increasingly requesting suppliers to provide parts on a global
basis. As the customer base of OEMs has consolidated and emerging markets have
become more important to achieving growth, suppliers must be prepared to provide
products any place in the world.
- Growing Importance of Emerging Markets: Because the North American and
Western European automotive markets are relatively mature, OE
manufacturers are increasingly focusing on emerging markets for growth
opportunities, particularly China, Eastern Europe, India and Latin
America. This increased OE focus has, in turn, increased the growth
opportunities in the aftermarkets in these regions.
- Governmental Tariffs and Local Parts Requirements: Many governments
around the world require that vehicles sold within their country contain
specified percentages of locally produced parts. Additionally, some
governments place high tariffs on imported parts.
- Location of Production Closer to End Markets: OE manufacturers and parts
suppliers have relocated production globally on an "onsite" basis that is
closer to end markets. This international expansion allows suppliers to
pursue sales in developing markets and take advantage of relatively lower
labor costs.
With facilities around the world, including the key regions of North
America, South America, Europe and Asia, we can supply our customers on a global
basis.
GLOBAL RATIONALIZATION OF OE VEHICLE PLATFORMS
OE manufacturers are increasingly designing "global platforms." A global
platform is a basic mechanical structure of a vehicle that can accommodate
different features and is in production and/or development in more than one
region. Thus, OE manufacturers can design one platform for a number of similar
vehicle models. This allows manufacturers to realize significant economies of
scale through limiting variations across items such as steering columns, brake
systems, transmissions, axles, exhaust systems, support structures and power
window and door lock mechanisms. We believe that this shift towards
standardization will have a large impact on automotive parts suppliers, who
should experience a reduction in production costs as OE manufacturers reduce
variations in components. We also expect parts suppliers
6
to experience higher production volumes per unit and greater economies of scale,
as well as reduced total investment costs for molds, dies and prototype
development. Light vehicle platforms of over one million units are expected to
grow from 25 percent to 38 percent of global OE production from 2005 to 2010.
INCREASING TECHNOLOGICALLY SOPHISTICATED CONTENT
As consumers continue to demand competitively priced vehicles with
increased performance and functionality, the number of sophisticated components
utilized in vehicles is increasing. By replacing mechanical functions with
electronics and by integrating mechanical and electronic functions within a
vehicle, OE manufacturers are achieving improved emission control, improved
safety and more sophisticated features at lower costs.
Automotive parts customers are increasingly demanding technological
innovation from suppliers to address more stringent emission and other
regulatory standards and to improve vehicle performance. To develop innovative
products, systems and modules, we have invested $83 million for 2005, $76
million for 2004 and $67 million for 2003, net of customer reimbursements, into
engineering, research and development and we continuously seek to take advantage
of our technology investments and brand strength by extending our products into
new markets and categories. For example, we were the first supplier to develop
and commercialize a diesel particulate filter that can virtually eliminate
carbon and hydrocarbon emissions with minimal impact on engine performance.
We have expanded our competence in diesel particulate filters in Europe and
are winning business in North America on these same applications. In addition,
we supply Volvo and Audi with a computerized electronic suspension system that
we co-developed with Ohlins Racing AB. As another example, in 2002 we extended
our stability improvement valve technology to Europe which is similar to our
acceleration sensitive damping technology used on our Monroe Reflex(R) premium
aftermarket shock originally launched in North America in 1999.
Our customers reimburse us for engineering, research, and development costs
on some platforms when we prepare prototypes and incur costs before platform
awards. Our engineering, research and development expense for 2005, 2004, and
2003 has been reduced by $51 million, $46 million, and $38 million,
respectively, for these reimbursements.
INCREASING ENVIRONMENTAL STANDARDS
Automotive parts suppliers and OE manufacturers are designing products and
developing materials to respond to increasingly stringent environmental
requirements, a growing diesel market, the demand for better fuel economy and
safety concerns. Government regulations adopted over the past decade require
substantial reductions in automobile tailpipe emission, longer warranties on
parts of an automobile's pollution control equipment and additional equipment to
control fuel vapor emission. Some of these regulations also mandate more
frequent emission and safety inspections for the existing fleet of vehicles.
Manufacturers have responded by focusing their efforts towards technological
development to minimize pollution. As a leading supplier of emission control
systems with strong technical capabilities, we believe we are well positioned to
benefit from more rigorous environmental standards. For example, we developed
the diesel particulate filter to meet stricter air quality regulations in
Europe. We also have development contracts with a European heavy duty truck
manufacturer for our combined particulate filter and De-NOx converter, which can
reduce particulate emissions by up to 90 percent and nitrogen oxide emissions by
up to 70 percent.
EXTENDED PRODUCT LIFE OF AUTOMOTIVE PARTS
The average useful life of automotive parts -- both OE and
replacement -- has been steadily increasing in recent years due to innovations
in products and technologies. The longer product lives allow vehicle owners to
replace parts of their vehicles less often. As a result, although more vehicles
are on the road than ever before, the global aftermarket has not grown as fast
as the number of vehicles on the road. Accordingly, a supplier's future
viability in the aftermarket will depend, in part, on its ability to reduce
costs and leverage its advanced technology and recognized brand names to
maintain or achieve additional
7
sales. As a Tier 1 OE supplier, we believe we are well positioned to leverage
our products and technology into the aftermarket.
CHANGING AFTERMARKET DISTRIBUTION CHANNELS
From 1995 to 2005, the number of retail automotive parts stores increased
50 percent while the number of jobber stores declined more than 18 percent in
North America. Major automotive aftermarket retailers, such as AutoZone and
Advance Auto Parts, are attempting to increase their commercial sales by selling
directly to automotive parts installers in addition to individual consumers.
These installers have historically purchased from their local warehouse
distributors and jobbers, who are our more traditional customers. This enables
the retailers to offer the option of a premium brand, which is often preferred
by their commercial customers, or a standard product, which is often preferred
by their retail customers. We believe we are well positioned to respond to this
trend in the aftermarket because of our focus on cost reduction and
high-quality, premium brands.
SUPPLIER CONSOLIDATION
Over the past few years, automotive suppliers have been consolidating in an
effort to become more global, have a broader, more integrated product offering
and gain scale economies in order to remain competitive amidst growing pricing
pressures and increased outsourcing demands from the OEMs. Industry forecasters
estimate that consolidation will drive the number of North American based
automotive parts suppliers from more than 10,000 in 2000 to around 5,000 in
2010. A supplier's viability in this consolidating market will depend, in part,
on its ability to maintain and increase operating efficiencies and provide
value-added services.
SAFETY
Vehicle safety continues to gain increased industry attention and play a
critical role in consumer purchasing decisions. As such, OEMs are seeking out
suppliers with new technologies, capabilities and products that have the ability
to advance vehicle safety. Continued research and development by select
automotive suppliers in rollover protection systems, smart airbag systems,
braking electronics and safer, more durable materials has dramatically advanced
the market for safety products and its evolving functional demands. Those
suppliers are able to enhance vehicle safety through innovative products and
technologies and have a distinct competitive advantage with the consumer, and
thus their OEM customers.
8
ANALYSIS OF REVENUES
The following table provides, for each of the years 2005 through 2003,
information relating to our net sales and operating revenues, by primary product
lines and customer categories:
NET SALES
AND OPERATING REVENUES
YEARS ENDED DECEMBER 31,
------------------------
2005 2004 2003
------ ------ ------
(MILLIONS)
EMISSION CONTROL SYSTEMS & PRODUCTS
Aftermarket............................................... $ 368 $ 365 $ 350
OE market................................................. 2,390 2,287 2,037
------ ------ ------
2,758 2,652 2,387
------ ------ ------
RIDE CONTROL SYSTEMS & PRODUCTS
Aftermarket............................................... 653 630 579
OE market................................................. 1,030 931 800
------ ------ ------
1,683 1,561 1,379
------ ------ ------
Total.................................................. $4,441 $4,213 $3,766
====== ====== ======
BRANDS
In each of our operating segments, we manufacture and market leading brand
names. Monroe(R) ride control products and Walker(R) exhaust products are two of
the most recognized brand names in the automotive parts industry. We emphasize
product value differentiation with these and other key brands such as Monroe
Sensa-Trac(R) and Reflex(R) (shock absorbers and struts), Quiet-Flow(R)
(mufflers), DynoMax(R) (performance exhaust products), Rancho(R) (ride control
products for the high performance light truck market) and Clevite(R) Elastomers
(elastomeric vibration control components), and DNX(TM) (ride control and
exhaust brand for the sport tuner market). In Europe, our Gillet(TM) brand is
recognized as a leader in developing highly engineered exhaust systems for OE
customers.
CUSTOMERS
We have developed long-standing business relationships with our customers
around the world. In each of our operating segments, we work together with our
customers in all stages of production, including design, development, component
sourcing, quality assurance, manufacturing and delivery. With a balanced mix of
OE and aftermarket products and facilities in major markets worldwide, we
believe we are well-positioned to meet customer needs. We believe we have a
strong, established reputation with customers for providing high-quality
products at competitive prices, as well as for timely delivery and customer
service.
Worldwide we serve more than 30 different OE manufacturers, and our
products or systems are included on 9 of the top 10 passenger car models
produced for sale in Western Europe and all of the top 10 light truck models
produced for sale in North America for 2005. During 2005, our OE customers
included:
9
NORTH AMERICA EUROPE ASIA
AM General BMW BMW
Caterpillar Daimler Chrysler Daimler Chrysler
Club Car Fiat First Auto Works
Daimler Ford Ford
Chrysler/Freightliner General Motors Gold Cup
E-Z Go Golf Car Nissan Isuzu
Ford Paccar Mitsubishi
General Motors Porsche Nissan
Harley-Davidson PSA Peugeot Citroen PSA Peugeot Citroen
Honda Renault Renault
Mazda (Auto Alliance) Scania Shanghai Automotive
Motor Coach Industries Suzuki (SAIC)
Navistar Toyota Volkswagen
Nissan Volkswagen
Paccar Volvo Truck INDIA
Toyota Club Car
Volkswagen AUSTRALIA E-Z Go Golf Car
Volvo Truck Club Car General Motors
Ford Mahindra & Mahindra
SOUTH AMERICA General Motors Suzuki
Daimler Chrysler Mazda TATA Motors
Fiat Mitsubishi Toyota
Ford Nissan TVS Motors
General Motors Toyota
PSA Peugeot Citroen
Renault
Scania
Toyota
Volkswagen
During 2005, our aftermarket customers were comprised of full-line and
specialty warehouse distributors, retailers, jobbers, installer chains and car
dealers. These customers included such wholesalers and retailers as National
Auto Parts Association (NAPA), Advance Auto Parts, Uni-Select and O'Reilly
Automotive in North America and Temot, Group Auto Union, Kwik-Fit Europe and
Auto Distribution International in Europe. We believe we have a balanced mix of
aftermarket customers, with our top 10 aftermarket customers accounting for 37
percent of our total net aftermarket sales and only 9 percent of our total net
sales for 2005.
General Motors accounted for approximately 17 percent, 18 percent and 19
percent of our net sales in 2005, 2004 and 2003, respectively; Ford accounted
for approximately 12 percent, 12 percent and 14 percent of our net sales in
2005, 2004 and 2003, respectively; Volkswagen accounted for approximately 9
percent, 11 percent and 11 percent of our net sales in 2005, 2004 and 2003,
respectively; and Daimler Chrysler accounted for approximately 9 percent, 8
percent and 9 percent of our net sales in 2005, 2004 and 2003, respectively. No
other customer accounted for more than 10 percent of our net sales for any of
those years.
COMPETITION
In North America, Europe, South America and India and Asia Pacific, we
operate in highly competitive markets. Customer loyalty is a key element of
competition in these markets and is developed
10
through long-standing relationships, customer service, high quality value-added
products and timely delivery. Product pricing and services provided are other
important competitive factors.
In both the OE market and aftermarket, we compete with the vehicle
manufacturers, some of which are also customers of ours, and numerous
independent suppliers. In the OE market, we believe that we are among the top
two suppliers in the world for both emission control and ride control products
and systems for light vehicles. In the aftermarket, we believe that we are the
market share leader in the supply of both emission control and ride control
products for light vehicles in the markets we serve throughout the world.
SEASONALITY
Our business is somewhat seasonal. OE manufacturers' production
requirements have historically been higher in the first two quarters of the year
as compared to the last two quarters. Production requirements tend to decrease
in the third quarter due to plant shutdowns for model changeovers. In addition,
we believe this seasonality is due, in part, to consumer demand for new vehicles
softening during the holiday season and as a result of the winter months in
North America and Europe. Also, the major North American OE manufacturers
generally close their production facilities for the last two weeks of the year.
Our aftermarket business also experiences seasonality. Demand for aftermarket
products increases during the spring as drivers prepare for the summer driving
season. Although seasonality does impact our business, actual results may vary
from the above trends due to timing of platform launches and other production
related events.
EMISSION CONTROL SYSTEMS
Vehicle emission control products and systems play a critical role in
safely conveying noxious exhaust gases away from the passenger compartment and
reducing the level of pollutants and engine exhaust noise to an acceptable
level. Precise engineering of the exhaust system -- from the manifold that
connects an engine's exhaust ports to an exhaust pipe, to the catalytic
converter that eliminates pollutants from the exhaust, to the muffler -- leads
to a pleasant, tuned engine sound, reduced pollutants and optimized engine
performance.
We design, manufacture and distribute a variety of products and systems
designed to optimize engine performance, acoustic tuning and weight, including
the following:
- Mufflers and resonators -- Devices to provide noise elimination and
acoustic tuning;
- Catalytic converters -- Devices -- consisting of a substrate coated with
precious metals enclosed in a steel casing -- used to convert harmful
gaseous emission, such as carbon monoxide, from a vehicle's exhaust
system into harmless components such as water vapor and carbon dioxide;
- Exhaust manifolds -- Components that collect gases from individual
cylinders of a vehicle's engine and direct them into a single exhaust
pipe;
- Pipes -- Utilized to connect various parts of both the hot and cold ends
of an exhaust system;
- Hydroformed tubing -- Forms into various geometric shapes, such as
Y-pipes or T-pipes, which provides optimization in both design and
installation as compared to conventional pipes;
- Hangers and isolators -- Used for system installation and noise
elimination; and
- Diesel Particulate Filters -- Devices to eliminate particulate matter
emitted from diesel engines.
We entered this product line in 1967 with the acquisition of Walker
Manufacturing Company, which was founded in 1888. With the acquisition of
Heinrich Gillet GmbH & Co. in 1994, we also became one of Europe's leading OE
emission control systems suppliers. When the term "Walker" is used in this
document, it refers to our subsidiaries and affiliates that produce emission
control products and systems.
11
We supply our emission control offerings to over 30 vehicle-makers for use
on over 165 vehicle models, including 7 of the top 10 passenger cars produced
for sale in Western Europe and 7 of the top 10 light trucks produced for sale in
North America in 2005.
With respect to catalytic converters, we buy the substrate coated with
precious metals, or sometimes the completed catalytic converter, from third
parties, use them in our manufacturing process and sell them as part of the
completed system. This often occurs at the direction of the OE customers. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for more information on our sales of these products.
In the aftermarket, we manufacture, market and distribute replacement
mufflers for virtually all North American, European, and Asian makes of light
vehicles under brand names including Quiet-Flow(R), TruFit(R) and Aluminox
Pro(TM), in addition to offering a variety of other related products such as
pipes and catalytic converters (Walker Perfection(R)). We also serve the
specialty exhaust aftermarket, where our key offerings include Mega-Flow(TM)
exhaust products for heavy-duty vehicle applications and DynoMax(R) high
performance exhaust products. We continue to emphasize product value
differentiation with other aftermarket brands such as Thrush(R) and Fonos(TM.)
The following table provides, for each of the years 2005 through 2003,
information relating to our sales of emission control products and systems for
certain geographic areas:
PERCENTAGE OF NET SALES
YEARS ENDED DECEMBER 31,
-------------------------
2005 2004 2003
----- ----- -----
UNITED STATES
Aftermarket............................................... 18% 18% 19%
OE market................................................. 82 82 81
--- --- ---
100% 100% 100%
=== === ===
FOREIGN SALES
Aftermarket............................................... 11% 11% 12%
OE market................................................. 89 89 88
--- --- ---
100% 100% 100%
=== === ===
TOTAL SALES BY GEOGRAPHIC AREA(A)
United States............................................. 33% 33% 36%
European Union............................................ 46 45 42
Canada.................................................... 7 8 10
Other areas............................................... 14 14 12
--- --- ---
100% 100% 100%
=== === ===
---------------
(a) See Note 11 to the consolidated financial statements included under Item 8
for information about our foreign and domestic operations. See Item 1A,
"Risk Factors -- We are subject to risks related to our international
operations" and "-- Exchange rate fluctuations could cause a decline in our
financial conditions and results of operations" for information about the
risks associated with foreign operations.
RIDE CONTROL SYSTEMS
Superior ride control is governed by a vehicle's suspension system,
including its shock absorbers and struts. Shock absorbers and struts help
maintain vertical loads placed on a vehicle's tires to help keep the tires in
contact with the road. A vehicle's ability to steer, brake and accelerate
depends on the contact between the vehicle's tires and the road. Worn shocks and
struts can allow excess weight transfer from side to side, which is called
"roll," from front to rear, which is called "pitch," and up and down, which is
12
called "bounce." Variations in tire-to-road contact can affect a vehicle's
handling and braking performance and the safe operation of a vehicle. Shock
absorbers are designed to control vertical loads placed on tires by providing
resistance to vehicle roll, pitch and bounce. Thus, by maintaining the tire to
road contact, ride control products are designed to function as safety
components of a vehicle, in addition to providing a comfortable ride.
We design, manufacture and distribute a variety of ride control products
and systems. Our ride control offerings include:
- Shock absorbers -- A broad range of mechanical shock absorbers and
related components for light-and heavy-duty vehicles. We supply both
twin-tube and monotube shock absorbers to vehicle manufacturers and the
aftermarket;
- Struts -- A complete line of struts and strut assemblies for light
vehicles;
- Vibration control components (Clevite(R) Elastomers) -- Generally
rubber-to-metal bushings and mountings to reduce vibration between metal
parts of a vehicle. Our offerings include a broad range of suspension
arms, rods and links for light- and heavy-duty vehicles;
- Kinetic(R) Suspension Technology -- A suite of roll control, near equal
wheel loading systems ranging from simple mechanical systems to complex
hydraulic systems featuring proprietary and patented technology. The
Kinetic(R) Suspension Technology was incorporated on the Citroen World
Rally Car that was featured in the World Rally Championship 2003, 2004
and 2005. Additionally, the Kinetic(R) Suspension Technology was
incorporated on the Lexus GX 470 sport utility vehicle which resulted in
winning the PACE Award;
- Advanced suspension systems -- Electronically adjustable shock absorbers
and suspension systems that change performance based on vehicle inputs
such as steering and braking; and
- Other -- We also offer other ride control products such as load assist
products, springs, steering stabilizers, adjustable suspension systems,
suspension kits and modular assemblies.
We supply our ride control offerings to over 35 vehicle-makers for use on
over 140 vehicle models, including 9 of the top 10 light truck models produced
for sale in North America for 2005. We also supply OE ride control products and
systems to a range of heavy-duty and specialty vehicle manufacturers including
Volvo Truck, Scania, International Truck and Engine (Navistar), PACCAR and
Harley-Davidson.
In the ride control aftermarket, we manufacture, market and distribute
replacement shock absorbers for virtually all North American, European and Asian
makes of light vehicles under several brand names including Gas Matic(R),
Sensa-Trac(R), Monroe Reflex(R) and Monroe Adventure(R), as well as Clevite(R)
Elastomers for elastomeric vibration control components. We also sell ride
control offerings for the heavy duty, off-road and specialty aftermarket, such
as our Gas-Magnum(R) shock absorbers for the North American heavy-duty category.
We entered the ride control product line in 1977 with the acquisition of
Monroe Auto Equipment Company, which was founded in 1916 and introduced the
world's first modern tubular shock absorber in 1930. When the term "Monroe" is
used in this document it refers to our subsidiaries and affiliates that produce
ride control products and systems.
13
The following table provides, for each of the years 2005 through 2003,
information relating to our sales of ride control equipment for certain
geographic areas:
PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 2003
----- ----- -----
UNITED STATES
Aftermarket............................................... 46% 47% 43%
OE market................................................. 54 53 57
--- --- ---
100% 100% 100%
=== === ===
FOREIGN SALES
Aftermarket............................................... 33% 35% 41%
OE market................................................. 67 65 59
--- --- ---
100% 100% 100%
=== === ===
TOTAL SALES BY GEOGRAPHIC AREA(A)
United States............................................. 42% 43% 47%
European Union............................................ 32 34 32
Canada.................................................... 4 4 4
Other areas............................................... 22 19 17
--- --- ---
100% 100% 100%
=== === ===
---------------
(a) See Note 11 to the consolidated financial statements included under Item 8
for information about our foreign and domestic operations. See Item 1A,
"Risk Factors -- We are subject to risks related to our international
operations" and "-- Exchange rate fluctuations could cause a decline in our
financial conditions and results of operations" for information about the
risks associated with foreign operations.
SALES, MARKETING AND DISTRIBUTION
We have separate and distinct sales and marketing efforts for our OE and
aftermarket businesses.
For OE sales, our sales and marketing team is an integrated group of
professionals, including skilled engineers and program managers that are
organized by customer and product type (e.g., ride control and emission
control). Our sales and marketing team provides the appropriate mix of
operational and technical expertise needed to interface successfully with the
OEMs. Our new business "capture process" involves working closely with the OEM
platform engineering and purchasing team. Bidding on OE automotive platforms
typically encompasses many months of engineering and business development
activity. Throughout the process, our sales team, program managers and product
engineers assist the OE customer in defining the project's technical and
business requirements. A normal part of the process includes our engineering and
sales personnel working on customers' integrated product teams, and assisting
with the development of component/system specifications and test procedures.
Given that the OE business involves long-term production contracts awarded on a
platform-by-platform basis, our strategy is to leverage our engineering
expertise and strong customer relationships to obtain platform awards and
increase operating margins.
For aftermarket sales and marketing, our sales force is generally organized
by customer and region and covers multiple product lines. We sell aftermarket
products through five primary channels of distribution: (1) the traditional
three-step distribution system: full line warehouse distributors, jobbers and
installers; (2) the specialty two-step distribution system: specialty warehouse
distributors that carry only specified automotive product groups and installers;
(3) direct sales to retailers; (4) direct sales to installer chains; and (5)
direct sales to car dealers. Our aftermarket sales and marketing representatives
cover all levels of the distribution channel, stimulating interest in our
products and helping our products move
14
through the distribution system. Also, to generate demand for our products from
end-users, we run print and television advertisements and offer pricing
promotions. We were one of the first parts manufacturers to offer
business-to-business services to customers with TA-Direct, an on-line order
entry and customer service tool. In addition, we maintain detailed web sites for
each of the Walker(R), Monroe(R), Rancho(R) and DynoMax(R) brands and our heavy
duty products.
MANUFACTURING AND ENGINEERING
We focus on achieving superior product quality at the lowest operating
costs possible and generally use state-of-the-art manufacturing processes to
achieve that goal. Our manufacturing strategy centers on a lean production
system designed to reduce overall costs -- especially indirect costs -- while
maintaining quality standards and reducing manufacturing cycle time. In
addition, we have implemented Six Sigma in our processes to minimize product
defects and improve operational efficiencies. We deploy new technology where it
makes sense to differentiate our processes from our competitors' or to achieve
balance in one-piece flow through production lines.
EMISSION CONTROL
Our consolidated businesses operate 13 emission control manufacturing
facilities in the U.S. and 35 emission control manufacturing facilities outside
of the U.S. We operate six of these international facilities through joint
ventures in which we own a controlling interest. We also operate four additional
manufacturing facilities outside of the U.S. through four joint ventures in
which we hold a noncontrolling interest. We operate four emission control
engineering and technical facilities worldwide and share two other such
facilities with our ride control operations.
Within each of our emission control manufacturing facilities, operations
are organized by component (muffler, catalytic converter, pipe, resonator and
manifold). Our manufacturing systems incorporate cell-based designs, allowing
work-in-process to move through the operation with greater speed and
flexibility. We continue to invest in plant and equipment to stay on top of the
industry. For instance, in our Harrisonburg, Virginia, aftermarket manufacturing
facility, we have developed a completely automated production process that
handles all facets of pipe production from tube milling to pipe bending.
In an effort to further improve our OE customer service and position
ourselves as a Tier-1 OE systems supplier, we have been developing some of our
emission control manufacturing operations into "just-in-time" or "JIT" systems.
In this system, a JIT facility located close to our OE customer's manufacturing
plant receives product components from both our manufacturing operations and
independent suppliers, assembles and then ships products to the OEMs on an
as-needed basis. To manage the JIT functions and material flow, we have advanced
computerized material requirements planning systems linked with our customers'
and supplier partners' resource management systems. We have three emission
control JIT assembly facilities in the United States and 16 in the rest of the
world, including three that are operated through non-controlled joint ventures.
During the 1990's, we expanded our converter and emission system design,
development, test and manufacturing capabilities. Our engineering capabilities
now include advanced predictive design tools, advanced prototyping processes and
state-of-the-art testing equipment. This expanded technological capability makes
us a "full system" integrator, supplying complete emission control systems from
the manifold to the tailpipe, to provide full emission and noise control. It
also allows us to provide JIT delivery and, when feasible, sequence delivery of
emission control systems to meet customer production requirements. For 2003, we
introduced our new Tubular Integrated (catalytic) Converter ("TIC") to major
vehicle manufacturers in North America. The TIC shortens production time,
reduces manufacturing cost by up to 25 percent and reduces weight by up to 20
percent using a new cold-formed, weld-free production process.
15
RIDE CONTROL
Our consolidated businesses operate nine ride control manufacturing
facilities in the U.S. and 22 ride control manufacturing facilities outside the
U.S. We operate three of these international facilities through joint ventures
in which we own a controlling interest. We operate seven engineering and
technical facilities worldwide and share two other such facilities with our
emission control operations.
Within each of our ride control manufacturing facilities, operations are
organized by product (shocks, struts and vibration control products) and include
computer numerically controlled and conventional machine centers; tube milling
and drawn-over-mandrel manufacturing equipment; metal inert gas and resistance
welding; powdered metal pressing and sintering; chrome plating; stamping; and
assembly/test capabilities. Our manufacturing systems incorporate cell-based
designs, allowing work-in-process to move through the operation with greater
speed and flexibility.
As in the emission control business, in an effort to further improve our OE
customer service and position us as a Tier 1 OE module supplier, we have been
developing some of our manufacturing operations into JIT systems. We have two
JIT ride control assembly facilities in the United States and five additional
JIT ride control facilities in the rest of the world.
In designing our shock absorbers and struts, we use advanced engineering
and test capabilities to provide product reliability, endurance and performance.
Our engineering capabilities feature advanced computer aided design equipment
and testing facilities. Our dedication to innovative solutions has led to such
technological advances as:
- Adaptive damping systems -- adapts to the vehicle's motion to better
control undesirable vehicle motions;
- Electronically adjustable suspensions -- changes suspension performance
based on a variety of inputs such as steering, braking, vehicle height,
and velocity; and
- Air leveling systems -- manually or automatically adjust the height of
the vehicle.
Conventional shock absorbers and struts generally compromise either ride
comfort or vehicle control. Our innovative grooved-tube, gas-charged shock
absorbers and struts provide both ride comfort and vehicle control, resulting in
improved handling, reduced vibration and a wider range of vehicle control. This
technology can be found in our premium quality Sensa-Trac(R)shock absorbers. In
late 1997, we further enhanced this technology by adding the SafeTech(TM) fluon
banded piston, which improves shock absorber performance and durability. In
1999, we introduced the Monroe Reflex(R) shock absorber, which incorporates our
Impact Sensor(TM) device. This technology permits the shock absorber to
automatically switch in milliseconds between firm and soft compression damping
when the vehicle encounters rough road conditions, thus maintaining better
tire-to-road contact and improving handling and safety. We supply Volvo with an
innovative computerized electronic suspension system, which features dampers
developed by Tenneco and electronic valves designed by Ohlins Racing AB. The
continuously controlled electronic suspension ("CES") ride control system is
featured on Volvo's new S60R, V70R, and S80R (4C-2WD) passenger cars. CES is
also available as an option on the Volvo S60, V70, S80 and XC70. In 2005, Audi
began offering CES as an option on the Audi A6 and the A6 Avant.
QUALITY CONTROL
Quality control is an important part of our production process. Our quality
engineers establish performance and reliability standards in the product's
design stage, and use prototypes to confirm the component/system can be
manufactured to specifications. Quality control is also integrated into the
manufacturing process, with shop operators being responsible for quality control
of their specific work product. In addition, our inspectors test
work-in-progress at various stages to ensure components are being fabricated to
meet customers' requirements.
We believe our commitment to quality control and sound management practices
and policies is demonstrated by our successful participation in the
International Standards Organization/Quality
16
Management Systems certification process ("ISO/TS"). ISO/TS certifications are
semi-annual or annual audits that certify that a company's facilities meet
stringent quality and business systems requirements. Without TS or ISO
certification, we would not be able to supply our products for the aftermarket
or the OE market, respectively, either locally or globally. Of those
manufacturing facilities where we have determined that TS certification is
required to service our customers or would provide us with an advantage in
securing additional business, 89 percent have achieved TS 16949:2002
certification. We plan to complete the certification of the remaining 11 percent
of these plants by year end 2006. Of those manufacturing facilities where we
have determined that ISO 9000 certification is required or would provide us with
an advantage in securing additional business, 100 percent have achieved ISO 9000
certification.
BUSINESS STRATEGY
Our objective is to enhance profitability by leveraging our global position
in the manufacture of emission control and ride control products and systems. We
intend to apply our competitive strengths and balanced mix of products, markets,
customers and distribution channels to capitalize on many of the significant
existing and emerging trends in the automotive and specialty industries. The key
components of our business strategy are described below.
LEVERAGE GLOBAL ENGINEERING AND ADVANCED SYSTEM CAPABILITIES
We continue to focus on the development of highly engineered systems and
complex assemblies and modules, which are designed to provide value-added
solutions to customers and generally increase vehicle content and carry higher
profit margins than individualized components. We have developed integrated,
electronically linked global engineering and manufacturing facilities, which we
believe help us to maintain our presence on top-selling vehicles. We have more
than 10 years of experience in integrating systems and modules. In addition, our
JIT and in-line sequencing manufacturing and distribution capabilities have
enabled us to better respond to our customers needs. We operate 26 JIT
facilities worldwide.
"OWN" THE PRODUCT LIFE CYCLE
We seek to leverage our aftermarket expertise, which provides us with
valuable consumer demand information, to strengthen our competitive position
with OEMs. Our market knowledge, coupled with our leading aftermarket presence,
strengthens our ties with our OE customer base and drives OE acceptance of our
aftermarket products and technologies for use in original equipment vehicle
manufacturing.
COMMERCIALIZE INNOVATIVE, VALUE-ADDED PRODUCTS
To differentiate our offerings from those of our competitors, we focus on
commercializing innovative, value-added products, both on our own and through
strategic alliances, with emphasis on highly engineered systems and complex
assemblies and modules. We seek to continually identify and target new,
fast-growing niche markets and commercialize our new technologies for these
markets, as well as our existing markets. For example, our exclusive Kinetic(R)
Dynamic Suspension System, a version of the Kinetic(R) Reversible Function
Stabilizer Technology, is featured as an option on the Lexus GX470 sports
utility vehicle through a licensing arrangement between us and Lexus.
EXPAND OUR AFTERMARKET BUSINESS
We manufacture and market leading brand name products. Monroe(R) ride
control products and Walker(R) emission control products, which have been
offered to consumers for over 50 years, are two of the most recognized brand
name products in the automotive parts industry. We continue to emphasize product
value differentiation with these brands and our other primary brands, including:
- The Monroe Reflex(R) shock absorber which features an Impact Sensor(TM)
device to maintain better tire-to-road contact and improve handling and
safety under rough road conditions;
17
- The Monroe Sensa-Trac(R) line of shock absorbers, that has been enhanced
by the SafeTech(TM) system technology which incorporates a fluon banded
piston to improve performance and durability;
- Walker's Quiet-Flow(R) muffler, which features an open flow design that
increases exhaust flow, improves sound quality and significantly reduces
exhaust back pressure when compared to other replacement mufflers;
- Rancho(R) ride control products for the high-performance light truck
market;
- DynoMax(R) high-performance emission control systems;
- Walker Perfection(TM) catalytic converters;
- Clevite(R) Elastomers elastomeric vibration control components, which are
primarily rubber products used to reduce vibration through "cushioning" a
connection or contact point;
- DNX(TM) sport tunes cars with performance exhaust and adjustable
suspension systems; and
- In European markets, Walker(TM) and Aluminox Pro(TM) mufflers.
We are capitalizing on our brand strength by incorporating newly acquired
product lines within existing product families. We believe brand equity is a key
asset in a time of customer consolidation and merging channels of distribution.
Our plans to expand our aftermarket business are focused on four key
marketing initiatives: new product introductions; building customer and industry
awareness of the maintenance, performance and other benefits of ensuring that a
vehicle's ride control systems are in good working condition; adding coverage to
current brands; and extending our brands and aftermarket penetration to new
product segments. For example, we are extending our line of car appearance
products -- which we introduced in 2004 under the DuPont(TM) brand pursuant to a
development, manufacturing and sales agreement with DuPont -- to include new
exterior and interior surface protection products and will introduce these
products in 2006. In addition, Monroe(R)Dyanmics and Ceramic Disc brake pads
were introduced regionally in 2005, and are being expanded nationally in 2006.
Monroe also introduced our first Reflex Mono-tube for light trucks in the second
half of 2005. These provided OE style coverage for many high profile light truck
and SUV's that are equipped by OEMs with mono-tube product. We also created the
Monroe(R) 50,000 mile replacement campaign to help increase customer and
industry awareness. The campaign is being advertised via radio and outdoor
billboards throughout the United States and Canada stating "Monroe(R) Recommends
Replacing Your Shocks and Struts at 50,000 Miles." We will continue to carry
that message to consumers and the trade in 2006, again utilizing billboards,
radio spots and ads in both trade and consumer magazines. We are exploring a
number of opportunities to extend our existing well-known brands, such as
Monroe(R), and our product line generally, to aftermarket product segments not
previously served. We believe that, when combined with our expansive customer
service network, these initiatives will yield incremental aftermarket revenues.
ACHIEVE GREATER CONTENT PER VEHICLE
As a result of increasing emissions standards and the introduction of
multiple catalytic converters and heat exchangers per vehicle, we believe that
available emission control content per light vehicle will rise over the next
several years. We believe that consumers' greater emphasis on automotive safety
could also allow available ride control content per light vehicle to rise. In
addition, advanced technologies and modular assemblies represent an opportunity
to increase vehicle content. For example, our innovative CES system, which we
supply on several Volvo and Audi passenger cars, increases our content revenues
five-fold compared to a standard shock offering. We plan to take advantage of
these trends by leveraging our existing position on many top-selling vehicle
platforms and by continuing to enhance our modular/systems capabilities.
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EXECUTE FOCUSED TRANSACTIONS
In the past, we have been successful in identifying and capitalizing on
strategic acquisitions and alliances to achieve growth. Through these
acquisitions and alliances, we have (1) expanded our product portfolio; (2)
realized incremental business with existing customers; (3) gained access to new
customers; and (4) achieved leadership positions in new geographic markets.
We have developed a strategic alliance with Futaba, a leading exhaust
manufacturer in Japan that also includes a joint venture operation in Burnley,
England. We also have an alliance with Hitachi (as successor to Tokico Ltd.
following its acquisition of Tokico), a leading Japanese ride control
manufacturer. These alliances help us grow our business with Japan-based OEMs by
leveraging the geographical presence of each partner to serve Japan-based global
platforms. We have established a presence in Thailand through a joint venture
that supplies exhaust components for GMIsuzu. Our joint venture operations in
Dalian and Shanghai, China have established us as one of the leading exhaust
suppliers in the rapidly growing Chinese automotive market. We also operate
joint ventures with Eberspacher International GmbH to supply emission control
products and systems for luxury cars produced by BMW and Audi in China, and with
Chengdu Lingchuan Mechanical Plant to supply emission control products and
systems for various Ford platforms produced in China.
We recently announced that we are expanding our operations in China with
investment in both manufacturing and engineering facilities. We are scheduled to
open our first solely-owned operation in China, an elastomer manufacturing
facility in Suzhou, in June 2006. In addition, we are extending our joint
venture with Shanghai Tractor and Engine Company, a subsidiary of Shanghai
Automotive Industry Corp., by establishing an engineering center to develop
automotive exhaust products. The engineering center is scheduled to open at the
end of 2006. Finally, we have agreed to increase our ownership stake in the
Beijing Monroe Shock Absorber Co. Ltd. (a joint venture with Beijing Automotive
Industry Corp.) from its current 51 percent to 65 percent. This increased
investment is subject to governmental approval.
In February 2005, we acquired substantially all the exhaust assets, and
assumed certain related liabilities of, Gabilan Manufacturing Inc., a
manufacturer of exhaust systems for Harley-Davidson Motorcycles. The
acquisition, our first in over five years, represents an example of our strategy
to grow through niche opportunities.
Where appropriate, we intend to continue to pursue strategic alliances,
joint ventures, acquisitions and other transactions that complement or enhance
our existing products, technology, systems development efforts, customer base
and/or domestic or international presence. We strive to align with strong local
partners to help us further develop our leadership in systems integration and to
penetrate international markets. In addition, we align with companies that have
proven products, proprietary technology, research capabilities and/or market
penetration to help us achieve further leadership in product offerings, customer
relationships, and systems integration and overall presence.
GROWTH IN ADJACENT MARKETS
One of our goals is to apply our existing design, engineering and
manufacturing capabilities to penetrate a variety of adjacent markets and to
achieve growth in higher-margin businesses. For example, we are aggressively
leveraging our technology and engineering leadership in emission and ride
control into adjacent markets, such as the heavy-duty market for trucks, buses,
agricultural equipment, construction machinery and other commercial vehicles. As
an established leading supplier of heavy-duty ride control and elastomer
products, we are already serving customers like Volvo Truck, Mack, Navistar
International, Freightliner and Scania. We also see tremendous opportunity to
expand our presence in the heavy-duty market with our emission control products
and systems, having recently entered this market in both North America and
Europe with diesel technologies that will help customers meet environmental
requirements.
19
IMPROVE EFFICIENCY AND REDUCE COSTS
We are a process-oriented company and have implemented and are continuing
to implement several programs designed to improve efficiency and reduce costs,
including:
- In February 2006, we announced a workforce reduction at certain of our
global locations as part of our ongoing effort to reduce our cost
structure. The plan contemplates a reduction in force of approximately
100 employees during the first quarter of 2006. We expect to record a
pre-tax charge of approximately $4 million to $5 million during the first
quarter of 2006 for severance and other benefits related to these
reductions in force, substantially all of which will be paid in cash.
These charges are in addition to other customary quarterly restructuring
charges that we may incur during the quarter.
- We are successfully completing the workforce reduction announced in
October 2004 which will eliminate up to 250 salaried positions worldwide.
The majority of the eliminated positions are at the middle and senior
management levels. As of December 31, 2005, we have incurred $23 million
in severance costs. We anticipate incurring an additional $2 million of
costs associated with this action. Of the total $23 million in severance
costs incurred to date, $21 million represents cash payments with the
remainder accrued in other short-term liabilities.
- We have successfully completed Project Genesis, our primary initiative
for improving global manufacturing and distribution efficiency. Since
launching Project Genesis in December 2001, we have reduced excess
manufacturing capacity and costs. We have closed eight facilities and
improved workflow at 20 plants worldwide.
- We anticipate long-term savings through our Six Sigma program, a
methodology and approach designed to minimize product defects and improve
operational efficiencies.
- We have implemented a Lean manufacturing program to reduce costs,
inventories and customer lead times while improving delivery.
- We have adopted the Business Operating System ("BOS"), a disciplined
system to promote and manage continuous improvement. BOS focuses on the
assembly and analysis of data for quick and effective problem resolution
to create more efficient and profitable operations.
- We are using Economic Value Added ("EVA(R)(1)"), a financial tool that
more effectively measures how efficiently we employ our capital
resources, and have linked the successful application of this management
discipline to our incentive compensation program.
In addition, we continue to work to reduce costs by standardizing products
and processes throughout our operations; further developing our global supply
chain management capabilities; improving our information technology; increasing
efficiency through employee training; investing in more efficient machinery; and
enhancing the global coordination of costing and quoting procedures, along with
other steps to reduce administrative and operational costs and improve cost
management.
REDUCE BORROWINGS AND IMPROVE CASH FLOW
We are focused on a core set of goals designed to reduce borrowings and
improve cash flow: (i) continuing to reduce selling, general and administrative
expenses plus engineering, research and development costs ("SGA&E") as a
percentage of sales, while continuing to invest in sales and engineering; (ii)
extracting significant cash flow from working capital initiatives; (iii)
offsetting to the greatest extent possible pressures on overall gross margins in
a challenging economic environment; and (iv) strengthening existing customer
relationships and winning new long-term OE business.
---------------
1 EVA is a registered trademark of Stern Stewart & Co.
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ENVIRONMENTAL MATTERS
We estimate that we and our subsidiaries will make expenditures for plant,
property and equipment for environmental matters of approximately $7 million in
2006 and approximately $3 million in 2007.
For additional information regarding environmental matters, see Item 3,
"Legal Proceedings," Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental and Other Matters," and
Note 12 to the financial statements of Tenneco Inc. and Consolidated
Subsidiaries included under Item 8.
EMPLOYEES
As of December 31, 2005, we had approximately 19,000 employees of which
approximately 52 percent are covered by collective bargaining agreements.
Approximately 23 percent of our employees that are covered by collective
bargaining agreements are also governed by European works councils. Several of
our existing labor agreements in the United States and Mexico are scheduled for
renegotiation in 2006, in addition to five agreements expiring in Europe
covering plants in the Czech Republic, France, Belgium, Germany, and the United
Kingdom. We regard our employee relations as generally satisfactory.
OTHER
The principal raw material utilized by us is steel. We obtain steel from a
number of sources pursuant to various contractual and other arrangements. We
believe that an adequate supply of steel can presently be obtained from a number
of different domestic and foreign suppliers. However, we are actively addressing
higher steels costs which are expected to continue through 2006.
We hold a number of domestic and foreign patents and trademarks relating to
our products and businesses. We manufacture and distribute our products
primarily under the Walker(R) and Monroe(R) brand names, which are
well-recognized in the marketplace and are registered trademarks. The patents,
trademarks and other intellectual property owned by or licensed to us are
important in the manufacturing, marketing and distribution of our products.
ITEM 1A. RISK FACTORS.
CHANGES IN CONSUMER DEMAND AND PRICES COULD MATERIALLY AND ADVERSELY IMPACT
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Demand for and pricing of our products are subject to economic conditions
and other factors present in the various domestic and international markets
where the products are sold. Demand for our OE products is subject to the level
of consumer demand for new vehicles that are equipped with our parts. The level
of new car purchases is cyclical, affected by such factors as interest rates,
consumer confidence, patterns of consumer spending, fuel cost and the automobile
replacement cycle. For example, we believe a key strength for our company is our
supply of parts for many North American light trucks and SUVs, which are
currently top sellers, but which consumers may not continue to prefer. Demand
for our aftermarket, or replacement, products varies based upon such factors as
the level of new vehicle purchases, which initially displaces demand for
aftermarket products, the severity of winter weather, which increases the demand
for certain aftermarket products, and other factors, including the average
useful life of parts and number of miles driven. Further decreases in demand for
automobiles and automotive products generally, or in the demand for our products
in particular, could materially and adversely impact our financial condition and
results of operations.
WE MAY BE UNABLE TO REALIZE SALES REPRESENTED BY OUR AWARDED BUSINESS, WHICH
COULD MATERIALLY AND ADVERSELY IMPACT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The realization of future sales from awarded business is inherently subject
to a number of important risks and uncertainties, including the number of
vehicles that our OE customers will actually produce, the timing of that
production and the mix of options that our OE customers and consumers may
choose.
21
Substantially all of our North American vehicle manufacturer customers have
slowed or maintained at flat levels new vehicle production during the past
several years. For example, production rates for 2003 were down three percent
from 2002 and production rates for 2004 were down one percent from 2003.
Production rates for 2005 were the same as for 2004. We remain cautious
regarding production volumes for 2006 due to rising interest rates, oil and
steel prices, current OE manufacturers' inventory levels and uncertainty
regarding the willingness of OE manufacturers to continue to support vehicle
sales through incentives. Given current economic conditions, we expect the North
American light vehicle build to be approximately 15.8 million units in 2006,
which is equal to 2005 levels. We also expect the European light vehicle
production to remain relatively flat in 2006. In addition, our customers
generally have the right to replace us with another supplier at any time for a
variety of reasons and have increasingly demanded price decreases over the life
of awarded business. Accordingly, we cannot assure you that we will in fact
realize any or all of the future sales represented by our awarded business. Any
failure to realize these sales could have a material adverse effect on our
financial condition and results of operations.
In many cases, we must commit substantial resources in preparation for
production under awarded OE business well in advance of the customer's
production start date. In certain instances, the terms of our OE customer
arrangements permit us to recover these pre-production costs if the customer
cancels the business through no fault of our company. Although we have been
successful in recovering these costs under appropriate circumstances in the
past, we can give no assurance that our results of operations will not be
materially impacted in the future if we are unable to recover these types of
pre-production costs related to OE cancellation of awarded business.
WE ARE DEPENDENT ON LARGE CUSTOMERS FOR FUTURE REVENUE. THE LOSS OF ANY OF
THESE CUSTOMERS OR THE LOSS OF MARKET SHARE BY THESE CUSTOMERS COULD HAVE A
MATERIAL ADVERSE IMPACT ON US.
We depend on major vehicle manufacturers for a substantial portion of our
net sales. For example, during 2005, General Motors, Ford, Volkswagen, and
DaimlerChrysler accounted for 17 percent, 12 percent, 9 percent, and 9 percent
of our net sales, respectively. The loss of all or a substantial portion of our
sales to any of our large-volume customers could have a material adverse effect
on our financial condition and results of operations by reducing cash flows and
our ability to spread costs over a larger revenue base. We may make fewer sales
to these customers for a variety of reasons, including: (1) loss of awarded
business; (2) reduced or delayed customer requirements; or (3) strikes or other
work stoppages affecting production by the customers. Ford recently announced a
plan to significantly reduce the number of its global suppliers. While we
currently believe that our relationship with Ford will not be impacted by this
plan, any significant reduction in sales to Ford could have a material adverse
effect on us.
During the past several years, General Motors, Ford and Daimler Chrysler
have lost market share in the United States, primarily to Asian competitors.
While revenue from Japanese automakers represented approximately 20 percent of
our North American original equipment sales in 2005 and we are actively
targeting Korean automakers, any further market share loss by these North
American- and European-based automakers could, if we are unable to achieve
increased sales to the Asian OE manufacturers, have a material adverse effect on
our business.
FINANCIAL DIFFICULTIES FACING OTHER AUTOMOTIVE COMPANIES MAY HAVE AN ADVERSE
IMPACT ON US.
A number of companies in the automotive industry are, and over the last
several years have been, facing severe financial difficulties. As a result,
there have been numerous recent bankruptcies of companies in the automotive
industry, including the fall of 2005 bankruptcy of Delphi Corporation, one of
the world's largest automotive parts suppliers. In addition, Dana Corporation
filed bankruptcy in March 2006. Severe financial difficulties at any major
automotive company could have a significantly disruptive effect on the
automotive industry in general, including by leading to labor unrest, supply
chain disruptions and weakness in demand. In particular, severe financial
difficulties at any of our major suppliers could have a material adverse effect
on us if we are unable to obtain on a timely basis the quantity and quality of
components we require to produce our products. In addition, such financial
difficulties at any of our major customers
22
could have a material adverse impact on us if such customer was unable to pay
for the products we provide or we experienced a loss of, or material reduction
in, business from such customer.
THE HOURLY WORKFORCE IN THE AUTOMOTIVE INDUSTRY IS HIGHLY UNIONIZED AND OUR
BUSINESS COULD BE ADVERSELY AFFECTED BY LABOR DISRUPTIONS.
Although we consider our current relations with our employees to be good,
if major work disruptions were to occur, our business could be adversely
affected by, for instance, a loss of revenues, increased costs or reduced
profitability. We have not experienced a material labor disruption in our
workforce in the last ten years, but there can be no assurance that we will not
experience a material labor disruption at one of our facilities in the future in
the course of renegotiation of our labor arrangements or otherwise. In addition,
substantially all of the hourly employees of North American vehicle
manufacturers and many of their other suppliers are represented by the United
Automobile, Aerospace and Agricultural Implement Workers of America under
collective bargaining agreements and vehicle manufacturers and such suppliers
and their employees in other countries are also subject to labor agreements. A
work stoppage or strike at the production facilities of a significant customer,
at our facilities or at a significant supplier of ours or any of our customers
could have an adverse impact on us by disrupting demand for our products and/or
our ability to manufacture our products.
WE HAVE EXPERIENCED SIGNIFICANT INCREASES IN RAW MATERIALS PRICING, AND
FURTHER CHANGES IN THE PRICES OF RAW MATERIALS COULD HAVE A MATERIAL ADVERSE
IMPACT ON US.
Significant increases in the cost of certain raw materials used in our
products, to the extent they are not timely reflected in the price we charge our
customers or otherwise mitigated, could materially and adversely impact our
results. For example, since 2004, we have experienced significant increases in
processed metal and steel prices. High steel prices are expected to continue
into the foreseeable future. We worked hard in 2005 and continue to work hard to
address this issue by evaluating alternative materials and processes, reviewing
material substitution opportunities, increasing component and assembly
outsourcing to low cost countries and aggressively negotiating with our
customers to allow us to recover these higher costs from them. In addition to
these actions, we continue to pursue productivity initiatives and review
opportunities to reduce costs through restructuring activities. The situation
remains fluid as we continue to pursue these actions and, at this point, we
cannot assure you that these actions and recent increases in new business awards
will be effective in containing margin pressures from these significant raw
materials price increases. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Outlook" included in Item 7
for more information.
THE CYCLICALITY OF AUTOMOTIVE PRODUCTION AND SALES COULD CAUSE A DECLINE IN
OUR FINANCIAL CONDITION AND RESULTS.
A decline in automotive sales and production would likely cause a decline
in our sales to vehicle manufacturers, and could result in a decline in our
results of operations and financial condition. The automotive industry has been
characterized historically by periodic fluctuations in overall demand for
vehicles due to, among other things, changes in general economic conditions and
consumer preferences. These fluctuations generally result in corresponding
fluctuations in demand for our products. Ford is forecast to produce 1.74
million vehicles in North America during the first six months of 2006,
approximately 4.5 percent fewer than it produced in North America during the
first six months of 2005. The highly cyclical nature of the automotive industry
presents a risk that is outside our control and that cannot be accurately
predicted.
WE MAY BE UNABLE TO REALIZE OUR BUSINESS STRATEGY OF IMPROVING OPERATING
PERFORMANCE AND GENERATING SAVINGS AND IMPROVEMENTS TO HELP OFFSET PRICING
PRESSURES FROM OUR SUPPLIERS AND CUSTOMERS.
We have either implemented or plan to implement strategic initiatives
designed to improve our operating performance. The failure to achieve the goals
of these strategic initiatives could have a material adverse effect on our
business, particularly since we rely on these initiatives to offset pricing
pressures from
23
our suppliers and our customers, as described above. We cannot assure you that
we will be able to successfully implement or realize the expected benefits of
any of these initiatives or that we will be able to sustain improvements made to
date.
WE MAY INCUR MATERIAL COSTS RELATED TO PRODUCT WARRANTIES, ENVIRONMENTAL AND
REGULATORY MATTERS AND OTHER CLAIMS, WHICH COULD HAVE A MATERIAL ADVERSE
IMPACT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
From time to time, we receive product warranty claims from our customers,
pursuant to which we may be required to bear costs of repair or replacement of
certain of our products. Vehicle manufacturers are increasingly requiring their
outside suppliers to guarantee or warrant their products and to be responsible
for the operation of these component products in new vehicles sold to consumers.
Warranty claims may range from individual customer claims to full recalls of all
products in the field. We cannot assure you that costs associated with providing
product warranties will not be material, or that those costs will not exceed any
amounts reserved for them in our financial statements. For a description of our
accounting policies regarding warranty reserves, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Critical
Accounting Policies" included in Item 7.
Additionally, we are subject to a variety of environmental and pollution
control laws and regulations in all jurisdictions in which we operate. Soil and
groundwater remediation activities are being conducted at certain of our current
and former real properties. We record liabilities for these activities when
environmental assessments indicate that the remedial efforts are probable and
the costs can be reasonably estimated. On this basis, we have established
reserves that we believe are adequate for the remediation activities at our
current and former real properties for which we could be held responsible.
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. In future periods, we could be subject to cash or
non-cash charges to earnings if we are required to undertake material additional
remediation efforts based on the results of our ongoing analyses of the
environmental status of our properties, as more information becomes available to
us.
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,
intellectual property matters, personal injury claims, taxes, employment matters
or commercial or contractual disputes. For example, 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. Many of these cases also involve
numerous defendants, with the number of defendants in some cases exceeding 200
defendants from a variety of industries. As major asbestos manufacturers or
other companies that used asbestos in their manufacturing processes continue to
go out of business, we may experience an increased number of these claims.
We vigorously defend ourselves in connection with all of the matters
described above. We cannot, however, assure you that the costs, charges and
liabilities associated with these matters will not be material, or that those
costs, charges and liabilities will not exceed any amounts reserved for them in
our financial statements. 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Environmental and Other Matters," included in Item 7
for further description.
WE MAY BE UNABLE TO COMPETE FAVORABLY IN THE HIGHLY COMPETITIVE AUTOMOTIVE
PARTS INDUSTRY.
The automotive parts industry is highly competitive. Although the overall
number of competitors has decreased due to ongoing industry consolidation, we
face significant competition within each of our major product areas. The
principal competitive factors include price, quality, service, product
performance, design and engineering capabilities, new product innovation, global
presence and timely delivery. As a result,
24
many suppliers have established or are establishing themselves in emerging,
low-cost markets to reduce their costs of production and be more conveniently
located for customers. Although we are also pursuing a low-cost country
production strategy and otherwise continue to seek process improvements to
reduce costs, we cannot assure you that we will be able to continue to compete
favorably in this competitive market or that increased competition will not have
a material adverse effect on our business by reducing our ability to increase or
maintain sales or profit margins.
CONSOLIDATION AMONG AUTOMOTIVE PARTS CUSTOMERS AND SUPPLIERS COULD MAKE IT
MORE DIFFICULT FOR US TO COMPETE FAVORABLY.
Our financial condition and results of operations could be adversely
affected because the customer base for automotive parts is consolidating in both
the original equipment market and aftermarket. As a result, we are competing for
business from fewer customers. Due to the cost focus of these major customers,
we have been, and expect to continue to be, requested to reduce prices as part
of our initial business quotations and over the life of vehicle platforms we
have been awarded. We cannot be certain that we will be able to generate cost
savings and operational improvements in the future that are sufficient to offset
price reductions requested by existing customers and necessary to win additional
business.
Furthermore, the trend toward consolidation among automotive parts
suppliers is resulting in fewer, larger suppliers who benefit from purchasing
and distribution economies of scale. If we cannot achieve cost savings and
operational improvements sufficient to allow us to compete favorably in the
future with these larger companies, our financial condition and results of
operations could be adversely affected due to a reduction of, or inability to
increase, sales.
WE MAY NOT BE ABLE TO SUCCESSFULLY RESPOND TO THE CHANGING DISTRIBUTION
CHANNELS FOR AFTERMARKET PRODUCTS.
Major automotive aftermarket retailers, such as AutoZone and Advance Auto
Parts, are attempting to increase their commercial sales by selling directly to
automotive parts installers in addition to individual consumers. These
installers have historically purchased from their local warehouse distributors
and jobbers, who are our more traditional customers. We cannot assure you that
we will be able to maintain or increase aftermarket sales through increasing our
sales to retailers. Furthermore, because of the cost focus of major retailers,
we have occasionally been requested to offer price concessions to them. Our
failure to maintain or increase aftermarket sales, or to offset the impact of
any reduced sales or pricing through cost improvements, could have an adverse
impact on our business and operating results.
LONGER PRODUCT LIVES OF AUTOMOTIVE PARTS ARE ADVERSELY AFFECTING AFTERMARKET
DEMAND FOR SOME OF OUR PRODUCTS.
The average useful life of automotive parts has steadily increased in
recent years due to innovations in products and technologies. The longer product
lives allow vehicle owners to replace parts of their vehicles less often. As a
result, a portion of sales in the aftermarket has been displaced. This has
adversely impacted, and will likely continue to adversely impact, our
aftermarket sales. Also, any additional increases in the average useful lives of
automotive parts would further adversely affect the demand for our aftermarket
products. Aftermarket sales represented approximately 23 percent of our net
sales for 2005, as compared to 24 percent of our net sales for 2004.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SERIOUSLY HARM OUR
FINANCIAL CONDITION.
We may, from time to time, consider acquisitions of complementary
companies, products or technologies. Acquisitions involve numerous risks,
including difficulties in the assimilation of the acquired businesses, the
diversion of our management's attention from other business concerns and
potential adverse effects on existing business relationships with current
customers and suppliers. In addition, any acquisitions could involve the
incurrence of substantial additional indebtedness. We cannot assure you that we
will be able to successfully integrate any acquisitions that we pursue or that
such acquisitions will perform as
25
planned or prove to be beneficial to our operations and cash flow. Any such
failure could seriously harm our business, financial condition and results of
operations.
WE ARE SUBJECT TO RISKS RELATED TO OUR INTERNATIONAL OPERATIONS.
We have manufacturing and distribution facilities in many regions and
countries, including Australia, China, India, North America, Europe and South
America, and sell our products worldwide. For 2005, approximately 54 percent of
our net sales were derived from operations outside North America. International
operations are subject to various risks which could have a material adverse
effect on those operations or our business as a whole, including:
- exposure to local economic conditions;
- exposure to local political conditions, including the risk of seizure of
assets by foreign government;
- exposure to local social unrest, including any resultant acts of war,
terrorism or similar events;
- exposure to local public health issues and the resultant impact on
economic and political conditions;
- currency exchange rate fluctuations;
- hyperinflation in certain foreign countries;
- controls on the repatriation of cash, including imposition or increase of
withholding and other taxes on remittances and other payments by foreign
subsidiaries; and
- export and import restrictions.
EXCHANGE RATE FLUCTUATIONS COULD CAUSE A DECLINE IN OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
As a result of our international operations, we generate a significant
portion of our net sales and incur a significant portion of our expenses in
currencies other than the U.S. dollar. To the extent we are unable to match
revenues received in foreign currencies with costs paid in the same currency,
exchange rate fluctuations in that currency could have a material adverse effect
on our business. For example, where we have significantly more costs than
revenues generated in a foreign currency, we are subject to risk if that foreign
currency appreciates against the U.S. dollar because the appreciation
effectively increases our cost in that country. From time to time, as and when
we determine it is appropriate and advisable to do so, we will seek to mitigate
the effect of exchange rate fluctuations through the use of derivative financial
instruments. We cannot assure you, however, that we will continue this practice
or be successful in these efforts.
The financial condition and results of operations of some of our operating
entities are reported in foreign currencies and then translated into U.S.
dollars at the applicable exchange rate for inclusion in our consolidated
financial statements. As a result, appreciation of the U.S. dollar against these
foreign currencies will have a negative impact on our reported revenues and
operating profit while depreciation of the U.S. dollar against these foreign
currencies will have a positive effect on reported revenues and operating
profit. For example, our European operations were positively impacted in 2002,
2003 and 2004 due to the strengthening of the Euro against the U.S. dollar.
However, in 2005, the dollar strengthened against the Euro which had a negative
effect on our results of operations. Our South American operations were
negatively impacted by the devaluation in 2000 of the Brazilian currency as well
as by the devaluation of the Argentine currency in 2002. We do not generally
seek to mitigate this translation effect through the use of derivative financial
instruments.
FURTHER SIGNIFICANT CHANGES IN OUR STOCKHOLDER COMPOSITION MAY JEOPARDIZE OUR
ABILITY TO USE SOME OR ALL OF OUR NET OPERATING LOSS CARRYFORWARDS.
As of December 31, 2005, we had a U.S. Federal tax net operating loss
("NOL") carryforwards of $566 million available to reduce taxable income in
future years, and these NOL carryforwards expire in various years through 2025.
The federal tax effect of these NOL's is $198 million and is recorded as a
26
deferred tax asset on our balance sheet as of December 31, 2005. We also have
state NOL carryforwards at December 31, 2005 of $720 million, which will expire
in varying amounts from 2006 to 2025. The tax effect of the state NOL, net of a
valuation allowance, is $27 million and is recorded as a deferred tax asset on
our balance sheet at December 31, 2005. Our ability to utilize our NOL
carryforwards could become subject to significant limitations under Section 382
of the Internal Revenue Code ("Section 382") if we undergo a majority ownership
change. We would undergo a majority ownership change if, among other things, the
stockholders who own or have owned, directly or indirectly, five percent or more
of our common stock or are otherwise treated as five percent stockholders under
Section 382 and the regulations promulgated thereunder, increase their aggregate
percentage ownership of our stock by more than 50 percentage points over the
lowest percentage of stock owned by these stockholders at any time during the
testing period, which is generally the three-year period preceding the potential
ownership change. In the event of a majority ownership change, Section 382
imposes an annual limitation on the amount of taxable income a corporation may
offset with the NOL carryforwards. Any unused annual limitation may be carried
over to later years until the applicable expiration of the respective NOL
carryforwards. If we were to undergo a majority ownership change, we would be
required to record a reserve for some or all of the asset currently recorded on
our balance sheet. As of December 31, 2005, we believe that there has not been a
significant change in our ownership during the prior three years. We cannot,
however, assure you that we will not undergo a majority ownership change in the
future. Further, because an ownership change for federal tax purposes can occur
based on trades among our existing stockholders, whether we undergo a majority
ownership change may be a matter beyond our control.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
NONE.
ITEM 2. PROPERTIES.
We lease our principal executive offices, which are located at 500 North
Field Drive, Lake Forest, Illinois, 60045.
Walker's consolidated businesses operate 13 manufacturing facilities in the
U.S. and 35 manufacturing facilities outside of the U.S., operate four
engineering and technical facilities worldwide and share two other such
facilities with Monroe. Sixteen of these manufacturing plants are JIT
facilities. Walker operates four additional manufacturing facilities outside of
the U.S. through four non-controlled joint ventures, three of which are JIT
facilities.
Monroe's consolidated businesses operate nine manufacturing facilities in
the U.S. and 22 manufacturing facilities outside the U.S., operate seven
engineering and technical facilities worldwide and share two other such
facilities with Walker. Seven of these manufacturing plants are JIT facilities.
The above-described manufacturing locations outside of the U.S. are located
in Argentina, Australia, Belgium, Brazil, Canada, China, the Czech Republic,
Denmark, France, Germany, India, Mexico, New Zealand, Poland, Portugal, Russia,
Spain, South Africa, Sweden, Thailand and the United Kingdom, We also have sales
offices located in Australia, Argentina, China, Crotia, Egypt, Greece, Hungary,
Italy, Japan, Lithuania, Singapore, Turkey and the Ukraine.
We own approximately one half of the properties described above and lease
the other half. We hold nine of the above-described international manufacturing
facilities through eight joint ventures in which we own a controlling interest.
In addition, we hold four others through four joint ventures in which we own a
non-controlling interest. We also have distribution facilities at our
manufacturing sites and at a few offsite locations, substantially all of which
we lease.
We believe that substantially all of our plants and equipment are, in
general, well maintained and in good operating condition. They are considered
adequate for present needs and, as supplemented by planned construction, are
expected to remain adequate for the near future.
27
We also believe that we have generally satisfactory title to the properties
owned and used in our respective businesses.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 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 close to zero. 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
$8 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. 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. See Note 12 to our consolidated financial
statements included under Item 8 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 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
28
for damages. As major asbestos manufacturers continue to go out of business or
file for bankruptcy, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the vote of security holders during the fourth
quarter of 2005.
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following provides information concerning the persons who serve as our
executive officers as of March 1, 2006. For periods prior to November 4, 1999,
the date of the 1999 Pactiv spin-off, references to service to "us" or "our
company" reflect services to Old Tenneco's automotive operations.
NAME (AND AGE AT
DECEMBER 31, 2005) OFFICES HELD
------------------ ---------------------------------------------
Mark P. Frissora (50)........................ Chairman of the Board of Directors, Chief
Executive Officer and President
Timothy R. Donovan (50)...................... Executive Vice President, Strategy and
Business Development, General Counsel and
Director
Hari N. Nair (45)............................ Executive Vice President and Managing
Director -- Europe, South America and India
Kenneth R. Trammell (45)..................... Executive Vice President and Chief Financial
Officer
Brent J. Bauer (50).......................... Senior Vice President and General Manager --
North American Original Equipment Emission
Control
Neal Yanos (43).............................. Senior Vice President and General Manager --
North American Original Equipment Ride
Control and North American Aftermarket
Timothy E. Jackson (48)...................... Senior Vice President -- Global Technology
and Managing Director, Asia Pacific
Richard P. Schneider (58).................... Senior Vice President -- Global
Administration
Paul Schultz (55)............................ Senior Vice President -- Global Manufacturing
and Supply Chain Management
James A. Perkins, Jr. (43)................... Vice President and Controller
MARK P. FRISSORA -- Mr. Frissora became our Chief Executive Officer in
connection with the 1999 Spin-off and has been serving as President of the
automotive operations since April 1999. In March 2000, he was also named our
Chairman of the Board of Directors. From 1996 to April 1999, he held various
positions within our automotive operations, including Senior Vice President and
General Manager of the worldwide original equipment business. Mr. Frissora
joined our company in 1996 from AeroquipVickers Corporation, where he served
since 1991 as a Vice President. In the 15 years prior to joining
AeroquipVickers, he served 10 years with General Electric and five years with
Philips Lighting Company in management roles focusing on product development and
marketing. He is a member of The Business Roundtable and the World Economic
Forum's Automotive Board of Governors. He is also a director of NCR Corporation,
where he serves on its Compensation Committee, and FMC Corporation, where he
serves on its Audit Committee. Mr. Frissora became a director of our company in
1999.
29
TIMOTHY R. DONOVAN -- Mr. Donovan was named Executive Vice President,
Strategy and Business Development in July 2005. He was promoted to Executive
Vice President in December 2001 and was named Senior Vice President and General
Counsel in August 1999. Mr. Donovan also is in charge of our worldwide
Environmental, Health and Safety Program. From October 2004 through July 2005,
Mr. Donovan served as Managing Director-Asia Pacific, with responsibility for
Australia, New Zealand, Asia and the Japanese original equipment business
worldwide. From May 2001 through October 2004, he served as Managing Director of
our International Group with responsibility for all of our operations in Asia
and South America, as well as the Japanese original equipment business
worldwide. Mr. Donovan was a partner in the law firm of Jenner & Block from 1989
until his resignation in September 1999, and from approximately 1997 through
1999 served as the Chairman of Jenner & Block's Corporate and Securities
Department and as a member of its Executive Committee. He is also a director of
John B. Sanfilippo & Son, Inc., where he is a member of its Compensation
Committee and is the Chairman of its Audit Committee. Mr. Donovan is 50 years
old and became a director of our company in March 2004.
HARI N. NAIR -- Mr. Nair was named our Executive Vice President and
Managing Director -- Europe effective June 2001. His responsibilities were
expanded to include Tenneco's South American and Indian operations during 2005.
Previously he was Senior Vice President and Managing Director -- International.
Prior to December 2000, Mr. Nair was the Vice President and Managing
Director -- Emerging Markets. Previously, Mr. Nair was the Managing Director for
Tenneco Automotive Asia, based in Singapore and responsible for all operations
and development projects in Asia. He began his career with the former Tenneco
Inc. in 1987, holding various positions in strategic planning, marketing,
business development, quality and finance. Prior to joining Tenneco, Mr. Nair
was a senior financial analyst at General Motors Corp. focusing on European
operations.
KENNETH R. TRAMMELL -- Mr. Trammell was promoted to Executive Vice
President and Chief Financial Officer in January 2006. Mr. Trammell was named
our Senior Vice President and Chief Financial Officer in September 2003, having
served as our Vice President and Controller from September 1999. From April 1997
to November 1999 he served as Corporate Controller of Tenneco Inc. He joined
Tenneco Inc. in May 1996 as Assistant Controller. Before joining Tenneco Inc.,
Mr. Trammell spent 12 years with the international public accounting firm of
Arthur Andersen LLP, last serving as a senior manager.
BRENT J. BAUER -- Mr. Bauer joined the former Tenneco Automotive in August
1996 as a Plant Manager and was named Vice President and General
Manager -- European Original Equipment Emission Control in September 1999. Mr.
Bauer was named Vice President and General Manager -- European and North
American Original Equipment Emission Control in July 2001. Currently, Mr. Bauer
serves as the Senior Vice President and General Manager -- North American
Original Equipment Emission Control. Prior to joining Tenneco, he was employed
at AeroquipVickers Corporation for 20 years in positions of increasing
responsibility serving most recently as Director of Operations.
NEAL YANOS -- Mr. Yanos was named our Senior Vice President and General
Manager -- North American Original Equipment Ride Control and North American
Aftermarket on May 8, 2003. He joined our Monroe ride control division as a
process engineer in 1988 and since that time has served in a broad range of
assignments including product engineering, strategic planning, business
development, finance, program management and marketing, including Director of
our North American original equipment GM/VW business unit and most recently as
our Vice President and General Manager -- North American Original Equipment Ride
Control from December 2000. Before joining our company, Mr. Yanos was employed
in various engineering positions by Sheller Globe Inc. from 1985 to 1988.
TIMOTHY E. JACKSON -- Mr. Jackson joined us as Senior Vice President and
General Manager -- North American Original Equipment and Worldwide Program
Management in June 1999. He served in this position until August 2000, at which
time he was named Senior Vice President -- Global Technology. From 2002 to 2005,
Mr. Jackson served as Senior Vice President -- Manufacturing, Engineering, and
Global Technology. In July 2005, Mr. Jackson was named Senior Vice
President -- Global Technology
30
and General Manager, Asia Pacific. Mr. Jackson joined us from ITT Industries
where he was President of that company's Fluid Handling Systems Division. With
over 20 years of management experience, 14 within the automotive industry, he
was also Chief Executive Officer for HiSAN, a joint venture between ITT
Industries and Sanoh Industrial Company. Mr. Jackson has also served in senior
management positions at BF Goodrich Aerospace and General Motors Corporation.
RICHARD P. SCHNEIDER -- Mr. Schneider was named as our Senior Vice
President -- Global Administration in connection with the 1999 Spin-Off and is
responsible for the development and implementation of human resources programs
and policies and employee communications activities for our worldwide
operations. Prior to the 1999 Spin-Off, Mr. Schneider served as our Vice
President -- Human Resources. He joined us in 1994 from International Paper
Company where, during his 20 year tenure, he held key positions in labor
relations, management development, personnel administration and equal employment
opportunity.
PAUL SCHULTZ -- Mr. Schultz was named our Senior Vice President -- Global
Supply Chain Management in April 2002. In July 2005, Mr. Schultz was also named
Senior Vice President of Global Manufacturing. Prior to joining the company, Mr.
Schultz was the Vice President, Supply Chain Management at Ingersoll-Rand
Company. Mr. Schultz joined Ingersoll-Rand in 1998 as Vice President, Strategic
Sourcing for their joint venture company, Ingersoll Dresser Pump. He was later
promoted to Vice President, Manufacturing Operations, where he successfully
introduced and led the Six Sigma initiative. Prior to joining Ingersoll-Rand,
Mr. Schultz was with AlliedSignal (now Honeywell International) where he served
for 25 years in staff and management positions. Most recently, he was Corporate
Director, Global Commodity Management.
JAMES A. PERKINS, JR. -- Mr. Perkins joined us as Vice President and
Controller in February of 2004. Prior to joining the company, Mr. Perkins spent
15 years with General Electric in various management positions in acquisitions
integration, finance and corporate audit. Most recently, from 2001 to 2003, he
was Director, Commercial Operations for GE Medical Systems Information
Technology, a provider of products and services for the medical industry. Prior
to that, he served as Chief Financial Officer and Vice President for GE-Fanuc
Corporation from 1999 to 2000 (manufacturing related products) and for
GE-Medical Systems Ultrasound from 1998 to 1999 (medical-related devices and
services).
31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER REPURCHASES OF EQUITY SECURITIES.
Our outstanding shares of common stock, par value $.01 per share, are
listed on the New York, Chicago, Pacific and London Stock Exchanges. The
following table sets forth, for the periods indicated, the high and low sales
prices of our common stock on the New York Stock Exchange Composite Transactions
Tape.
SALES PRICES
---------------
QUARTER HIGH LOW
------- ------ ------
2005
1st....................................................... $17.36 $12.07
2nd....................................................... 17.22 11.55
3rd....................................................... 20.06 16.30
4th....................................................... 19.95 15.70
2004
1st....................................................... $14.88 $ 6.73
2nd....................................................... 15.34 10.09
3rd....................................................... 14.51 11.95
4th....................................................... 17.49 10.93
As of February 20, 2006, there were approximately 23,610 holders of record
of our common stock, including brokers and other nominees.
The declaration of dividends on our common stock is at the discretion of
our Board of Directors. The Board has not adopted a dividend policy as such;
subject to legal and contractual restrictions, its decisions regarding dividends
are based on all considerations that in its business judgment are relevant at
the time. These considerations may include past and projected earnings, cash
flows, economic, business and securities market conditions and anticipated
developments concerning our business and operations.
We are highly leveraged and restricted with respect to the payment of
dividends under the terms of our financing arrangements. On January 10, 2001, we
announced that our Board of Directors eliminated the regular quarterly dividend
on the Company's common stock. The Board took this action in response to
then-current industry conditions, primarily greater than anticipated production
volume reductions by original equipment manufacturers in North America and
continued softness in the global aftermarket. We have not paid dividends on our
common stock since the fourth quarter of 2000. There are no current plans to
reinstate a dividend on our common stock, as the Board of Directors intends to
retain any earnings for use in our business for the foreseeable future. For
additional information concerning our payment of dividends, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
See Item 12, "Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters" for information regarding securities
authorized for issuance under our equity compensation plans.
32
ITEM 6. SELECTED FINANCIAL DATA.
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
NOTE(A)
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
STATEMENTS OF INCOME (LOSS) DATA:
Net sales and operating revenues --
North America..................... $ 2,034 $ 1,966 $ 1,887 $ 1,906 $ 1,799
Europe, South America and India... 2,110 1,940 1,611 1,367 1,444
Asia Pacific...................... 371 380 322 236 173
Intergroup sales.................. (74) (73) (54) (50) (52)
----------- ----------- ----------- ----------- -----------
$ 4,441 $ 4,213 $ 3,766 $ 3,459 $ 3,364
=========== =========== =========== =========== ===========
Income before interest expense,
income taxes, and minority
interest --
North America..................... $ 145 $ 133 $ 129 $ 129 $ 50
Europe, South America and India... 54 21 22 23 22
Asia Pacific...................... 16 20 23 17 18
----------- ----------- ----------- ----------- -----------
Total........................... 215 174 174 169 90
Interest expense (net of interest
capitalized)........................ 130 179 149 141 170
Income tax expense (benefit).......... 25 (24) (7) (7) 50
Minority interest..................... 2 4 6 4 1
Income (loss) before cumulative effect
of change in accounting principle... 58 15 26 31 (131)
Cumulative effect of change in
accounting principle, net of income
tax(b).............................. -- -- -- (218) --
----------- ----------- ----------- ----------- -----------
Net income (loss)..................... $ 58 $ 15 $ 26 $ (187) $ (131)
=========== =========== =========== =========== ===========
Average number of shares of common
stock outstanding
Basic............................... 43,088,558 41,534,810 40,426,136 39,795,481 37,779,837
Diluted............................. 45,321,225 44,180,460 41,767,959 41,667,815 38,001,248
Earnings (loss) per average share of
common stock --
Basic:
Before cumulative effect of change
in accounting principle......... $ 1.35 $ 0.37 $ 0.64 $ 0.78 $ (3.47)
Cumulative effect of change in
accounting principle(b)......... -- -- -- (5.48) --
----------- ----------- ----------- ----------- -----------
$ 1.35 $ 0.37 $ 0.64 $ (4.70) $ (3.47)
=========== =========== =========== =========== ===========
Diluted:
Before cumulative effect of change
in accounting principle......... $ 1.29 $ 0.35 $ 0.62 $ 0.74 $ (3.47)
Cumulative effect of change in
accounting principle(b)......... -- -- -- (5.48) --
----------- ----------- ----------- ----------- -----------
$ 1.29 $ 0.35 $ 0.62 $ (4.74) $ (3.47)
=========== =========== =========== =========== ===========
Cash dividends per common share....... $ -- $ -- $ -- $ -- $ --
33
NOTE(A)
----------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(MILLIONS EXCEPT RATIO AND PERCENT AMOUNTS)
BALANCE SHEET DATA:
Total assets.............................................. $2,940 $3,119 $2,852 $2,565 $2,706
Short-term debt........................................... 22 19 20 228 191
Long-term debt............................................ 1,356 1,401 1,410 1,217 1,324
Minority interest......................................... 24 24 23 19 15
Shareholders' equity...................................... 129 159 65 (86) 82
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating activities................. $ 134 $ 213 $ 289 $ 195 $ 148
Net cash used by investing activities..................... (167) (129) (135) (114) (133)
Net cash provided (used) by financing activities.......... (36) (12) (49) (73) 3
Expenditures for plant, property and equipment............ 144 130 130 138 127
OTHER DATA:
EBITDA(c)................................................. $ 392 $ 351 $ 337 $ 313 $ 243
Ratio of EBITDA to interest expense....................... 3.02 1.96 2.26 2.22 1.42
Ratio of total debt to EBITDA............................. 3.52 4.05 4.24 4.62 6.26
Ratio of earnings to fixed charges(d)..................... 1.57 0.97 1.15 1.17 0.55
Working capital as a percent of sales(e).................. 2.2% 1.2% 2.4% 4.0% 6.4%
---------------
NOTE: Our financial statements for the three years ended December 31, 2005,
which are discussed in the following notes, are included in this Form 10-K under
Item 8.
(a) For a discussion of the significant items affecting comparability of the
financial information for the years ended 2005, 2004 and 2003, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Prior to the first quarter of 2005, inventories in the U.S.
based operations (17 percent and 19 percent of our total consolidated
inventories at December 31, 2004 and 2003, respectively) were valued using
the last-in, first-out ("LIFO") method and all other inventories were
valued using the first-in, first-out ("FIFO") or average cost methods at
the lower of cost or market value. Effective January 1, 2005, we changed
our accounting method for valuing inventory for our U.S. based operations
from the LIFO method to the 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 restating prior year's
financial statements. The effect of the change on our financial position
and results of operations are presented below.
AS OF DECEMBER 31,
-------------------------
2004 2003 2002 2001
---- ---- ---- ----
(MILLIONS)
INCREASE (DECREASE)
Inventories................................................. $14 $11 $13 $13
Deferred income tax assets (noncurrent)..................... $(5) $(4) $(5) $(5)
Shareholders' equity........................................ $ 9 $ 7 $ 8 $ 8
34
INCREASE (DECREASE)
YEARS ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002 2001
------ ------- --------- -------
(MILLIONS EXCEPT PER SHARE AMOUNTS)
Income (loss) before interest expense, income
taxes and minority interest..................... $ 3 $ (2) $ -- $ (2)
Income tax expense (benefit)...................... 1 (1) -- (1)
----- ------ -------- ------
Income (loss) before cumulative effect of change
in accounting principle and net income (loss)... $ 2 $ (1) $ -- $ (1)
===== ====== ======== ======
Basic earnings (loss) per share of common stock... $0.04 $(0.03) $ -- $(0.04)
===== ====== ======== ======
Diluted earnings (loss) per share of common
stock........................................... $0.04 $(0.03) $ -- $(0.04)
===== ====== ======== ======
You should also read Note 4 to the consolidated financial statements
included in Item 8 for a discussion of the changes in our results due to
the change in our method for valuing inventory.
For all years presented, we have also reclassed tax related contingency
reserves between deferred tax liability and other noncurrent liabilities.
This reclass resulted in an additional reclass between noncurrent
liabilities and noncurrent assets for reporting purposes. In October 2004
and July 2005, we announced a change in the structure of our organization
which changed the components of our reportable segments. The European
segment now includes our South American and Indian operations. While this
has no impact on our consolidated results, it changes our segment results.
(b) In 2002, we adopted SFAS No. 142 which changed the accounting for purchased
goodwill from an amortization method to an impairment-only approach. You
should also read the notes to the financial statements of Tenneco Inc. and
Consolidated Subsidiaries, appearing in Item 8, for additional information.
(c) EBITDA represents income before extraordinary item, cumulative effect of
change in accounting principle, interest expense, income taxes, minority
interest and depreciation and amortization. EBITDA is not a calculation
based upon generally accepted accounting principles. The amounts included
in the EBITDA calculation, however, are derived from amounts included in
the historical statements of income data. In addition, EBITDA should not be
considered as an alternative to net income or operating income as an
indicator of our operating performance, or as an alternative to operating
cash flows as a measure of liquidity. We have reported EBITDA because we
regularly review EBITDA as a measure of our company's performance. In
addition, we believe our debt holders utilize and analyze our EBITDA for
similar purposes. We also believe EBITDA assists investors in comparing a
company's performance on a consistent basis without regard to depreciation
and amortization, which can vary significantly depending upon many factors.
However, the EBITDA measure presented in this document may not always be
comparable to similarly titled measures reported by other companies due to
differences in the components of the calculation. EBITDA is derived from
the statements of income (loss) as follows:
NOTE(A)
YEARS ENDED DECEMBER 31,
----------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ----- -----
(MILLIONS)
Net income (loss)............................... $ 58 $ 15 $ 26 $(187) $(131)
Cumulative effect of change in accounting
principle, net of income tax.................. -- -- -- 218 --
Minority interest............................... 2 4 6 4 1
Income tax expense (benefit).................... 25 (24) (7) (7) 50
Interest expense, net of interest capitalized... 130 179 149 141 170
Depreciation and amortization of other
intangibles................................... 177 177 163 144 153
---- ---- ---- ----- -----
Total EBITDA.................................... $392 $351 $337 $ 313 $ 243
==== ==== ==== ===== =====
(d) For purposes of computing this ratio, earnings generally consist of income
before income taxes and fixed charges excluding capitalized interest. Fixed
charges consist of interest expense, the portion of rental expense
considered representative of the interest factor and capitalized interest.
For the years ended December 31, 2004 and 2001 earnings were insufficient
by $6 million and $82 million, respectively, to cover fixed charges. See
Exhibit 12 to this Form 10-K for the calculation of this ratio.
(e) For purposes of computing working capital as a percentage of sales, we
exclude cash and the current portion of long term debt from the
calculation. We exclude these items because we manage our working capital
activity
35
through cash and short term debt. To include these items in the calculation
would distort actual working capital changes. Our calculation of working
capital as a percentage of sales is as follows:
NOTE(A)
YEARS ENDED DECEMBER 31,
------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(DOLLAR AMOUNT IN MILLIONS
EXCEPT PERCENTAGE AMOUNTS)
Current Assets:
Receivables -- Customer notes and
accounts, net........................ $ 515 $ 458 $ 427 $ 394 $ 380
Receivables -- Other.................... 28 30 15 15 15
Inventories............................. 360 396 354 365 339
Deferred income taxes................... 43 70 63 56 66
Prepayments and other................... 110 124 104 95 101
------ ------ ------ ------ ------
$1,056 $1,078 $ 963 $ 925 $ 901
Current Liabilities:
Trade payables.......................... $ 651 $ 696 $ 621 $ 505 $ 401
Accrued taxes........................... 31 24 19 40 35
Accrued interest........................ 38 35 42 23 25
Accrued liabilities..................... 208 226 162 172 148
Other accruals.......................... 29 47 29 48 76
------ ------ ------ ------ ------
$ 957 $1,028 $ 873 $ 788 $ 685
Working Capital (Current assets less
current liabilities).................... $ 99 $ 50 $ 90 $ 137 $ 216
Net sales and operating revenues.......... $4,441 $4,213 $3,766 $3,459 $3,364
Working capital as a percent of sales..... 2.2% 1.2% 2.4% 4.0% 6.4%
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As you read the following review of our financial condition and results of
operations, you should also read our financial statements and related notes
beginning on page 70.
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 nine of the top 10 passenger car models produced for sale in
Western Europe and all of the top 10 light truck models produced for sale in
North America for 2005. During 2005, 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 19,000 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 $1.237 billion as of December 31, 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 2005 were $4.4 billion, a five percent increase over
2004. Higher aftermarket sales in North America and Europe as well as the
company's position on strong selling OE platforms globally 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 2005 was 19.3 percent,
down 0.8 percent from 20.1 percent in 2004. Higher gross steel costs of $135
million, fuel surcharges on transportation costs, 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 2005 of 10.5 percent of revenues, as compared to 11.7 percent of
revenues for 2004. The improvement was driven by restructuring savings, Six
Sigma programs and tight discretionary spending controls. Earnings before
interest and taxes ("EBIT") was $215 million for 2005, up $41 million from the
$174 million reported in 2004. Stronger global volumes, lower selling, general,
administrative 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.
37
In October 2004 and July 2005, we announced changes in the structure of our
organization which changed the components of our reportable segments. The
European segment now includes our South American and Indian operations. The Asia
Pacific segment includes our other Asian and Australian operations. While this
had no impact on our consolidated results, it changed our segment results. These
changes in segment reporting have been reflected in this Management's Discussion
and Analysis, and the accompanying consolidated financial statements, for all
periods presented.
In February 2005, we acquired substantially all the exhaust assets, and
assumed certain related liabilities 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. Gabilan generated
approximately $37 million in revenue for the eleven month period ended December
31, 2005.
In December 2005, we completed the acquisition of the minority interest of
the joint venture partner for our Indian ride control operations. We purchased
the minority owned interest for approximately $5 million in cash and property.
38
YEARS 2005 AND 2004
NET SALES AND OPERATING REVENUES
The following tables reflect our revenues for the years 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, substrate sales (previously referred to as "pass-through"
catalytic converter sales) include precious metals pricing, which may be
volatile. These substrate sales occur when, at the direction of our OE
customers, we purchase catalytic converters or components thereof 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 substrate 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
these factors. We believe investors find this information useful in
understanding period to period comparisons in our revenues.
YEAR ENDED DECEMBER 31, 2005
----------------------------------------------------------
SUBSTRATE REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY SUBSTRATE
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control.................... $ 495 $-- $ 495 $ -- $ 495
Emission Control................ 1,011 9 1,002 272 730
------ --- ------ ---- ------
Total North America Original
Equipment.................. 1,506 9 1,497 272 1,225
North America Aftermarket
Ride Control.................... 361 -- 361 -- 361
Emission Control................ 161 -- 161 -- 161
------ --- ------ ---- ------
Total North America
Aftermarket................ 522 -- 522 -- 522
Total North America........ 2,028 9 2,019 272 1,747
Europe Original Equipment
Ride Control.................... 378 11 367 -- 367
Emission Control................ 1,078 (2) 1,080 326 754
------ --- ------ ---- ------
Total Europe Original
Equipment.................. 1,456 9 1,447 326 1,121
Europe Aftermarket
Ride Control.................... 169 -- 169 -- 169
Emission Control................ 195 (1) 196 -- 196
------ --- ------ ---- ------
Total Europe Aftermarket..... 364 (1) 365 -- 365
South America & India............. 233 25 208 18 190
Total Europe, South America
and India............... 2,053 33 2,020 344 1,676
Asia.............................. 149 -- 149 43 106
Australia......................... 211 7 204 19 185
------ --- ------ ---- ------
Total Asia Pacific......... 360 7 353 62 291
------ --- ------ ---- ------
Total Tenneco..................... $4,441 $49 $4,392 $678 $3,714
====== === ====== ==== ======
39
YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------
SUBSTRATE REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY SUBSTRATE
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control.................... $ 455 $ -- $ 455 $ -- $ 455
Emission Control................ 1,001 -- 1,001 320 681
------ ----- ------ ---- ------
Total North Original
Equipment............... 1,456 -- 1,456 320 1,136
North America Aftermarket
Ride Control.................... 342 -- 342 -- 342
Emission Control................ 161 -- 161 -- 161
------ ----- ------ ---- ------
Total North America
Aftermarket................ 503 -- 503 -- 503
Total North America........ 1,959 -- 1,959 320 1,639
Europe Original Equipment
Ride Control.................... 356 -- 356 -- 356
Emission Control................ 1,005 -- 1,005 321 684
------ ----- ------ ---- ------
Total Europe Original
Equipment.................. 1,361 -- 1,361 321 1,040
Europe Aftermarket
Ride Control.................... 169 -- 169 -- 169
Emission Control................ 190 -- 190 -- 190
------ ----- ------ ---- ------
Total Europe Aftermarket..... 359 -- 359 -- 359
South America & India............. 171 -- 171 15 156
Total Europe, South America
& India................. 1,891 -- 1,891 336 1,555
Asia.............................. 158 -- 158 54 104
Australia......................... 205 -- 205 16 189
------ ----- ------ ---- ------
Total Asia Pacific......... 363 -- 363 70 293
------ ----- ------ ---- ------
Total Tenneco..................... $4,213 $ -- $4,213 $726 $3,487
====== ===== ====== ==== ======
Revenues from our North American operations increased $69 million in 2005
compared to the same period last year reflecting higher sales from both OE and
aftermarket businesses. Total North American OE revenues increased three percent
to $1,506 million in 2005. OE emission control revenues were up one percent to
$1,011 million from $1,001 million in the prior year. Substrate emission control
sales decreased 15 percent to $272 million in 2005. Adjusted for substrate sales
and currency, OE emission control sales were up seven percent from the prior
year. OE ride control revenues for 2005 increased nine percent from the prior
year driven primarily by higher sales to heavy-duty vehicle manufacturers. Total
OE revenues, excluding substrate sales and currency, increased eight percent in
2005, while North American light vehicle production remained flat compared to a
year ago. We experienced this improvement despite the flat build rate primarily
due to favorable light vehicle platform mix, highlighted by a 10 percent
increase in sales to the Japanese OEMs, as well as higher heavy-duty volumes. In
addition, our February 2005 acquisition of the exhaust business for
Harley-Davidson provided a $37 million revenue contribution. Aftermarket
revenues for North America were $522 million in 2005, representing an increase
of four percent compared to the same period in the prior year despite general
market softness as higher gas prices tempered consumer spending for routine car
maintenance. Aftermarket ride control revenues increased $19 million or six
percent in 2005, primarily due to increased sales to new and existing customers.
40
Aftermarket emission control revenues were $161 million in 2005, flat compared
to prior year. Price increases driven by higher steel costs helped offset lower
emission volumes.
Our European, South American and Indian segment's revenues increased $162
million or nine percent in 2005 compared to last year. Total Europe OE revenues
were $1,456 million, up seven percent from last year. OE emission control
revenues increased seven percent to $1,078 million from $1,005 million in the
prior year. Excluding a $5 million increase in substrate sales and $2 million of
unfavorable currency, OE emission control revenues increased 10 percent over
2004. We experienced this revenue increase despite the relatively flat European
light vehicle build rate due to the ramp up of platforms that launched in late
2004 and early 2005. OE ride control revenues increased by $22 million in 2005,
up six percent from $356 million a year ago. This increase was greater than the
European light vehicle production level, which was flat compared to prior year
levels. Our increase was greater than the market as a result of the expansion of
our electronic suspension business as well as a ramp up of business and new
launches with Nissan, Suzuki, Dacia, Toyota, Mazda and Audi. 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 2004 revenues in the same
manner, they would have been lower by $42 million. Excluding an $11 million
benefit from currency appreciation, OE ride control revenues increased three
percent. European aftermarket sales were $364 million in 2005 compared to $359
million last year. Excluding $1 million of unfavorable currency, European
aftermarket revenues increased two percent in 2005 compared to last year. Ride
control aftermarket revenues, excluding the impact of currency, were even with
the prior year, reflecting heightened competition, a soft market environment in
Spain, and weaker exports worldwide due to the strengthening of the euro.
Aftermarket emission control revenues were up three percent from prior year
excluding the benefits of currency. New customers and market share gains helped
to partially offset significant market declines relating to now standard use of
longer lasting stainless steel by OE manufacturers. South American and Indian
revenues, excluding the benefits of currency appreciation and substrate sales,
were up 21 percent to $190 million compared to last year. Higher OE volumes and
substrate sales as well as improved product mix and pricing drove this increase.
Revenues from our Asia Pacific segment, which includes Australia and Asia,
decreased $3 million to $360 million in 2005, as compared to $363 million in the
prior year. Excluding substrate sales, revenues increased $2 million at our
Asian operations in 2005 compared to last year driven by higher OE volumes. In
Australia, strong OE volumes and strengthening currency increased revenues in
2005 by three percent. Excluding the impact of currency and substrate sales,
Australian revenues decreased two percent.
EBIT
YEARS ENDED
DECEMBER 31,
-------------
2005 2004 CHANGE
----- ----- ------
(MILLIONS)
North America............................................... $145 $133 $12
Europe, South America and India............................. 54 21 33
Asia Pacific................................................ 16 20 (4)
---- ---- ---
$215 $174 $41
==== ==== ===
41
The EBIT results shown in the preceding table include the following items,
discussed below under "Restructuring and Other Charges" and "Liquidity and
Capital Resources -- Capitalization", which have an effect on the comparability
of EBIT results between periods:
YEARS ENDED
DECEMBER 31,
-------------
2005 2004
----- -----
(MILLIONS)
North America
Restructuring and restructuring-related expenses.......... $ 4 $11
New aftermarket customer changeover costs(1).............. 10 8
Consulting fees indexed to stock price.................... -- 2
Europe, South America and India
Restructuring and restructuring-related expenses.......... 8 26
Consulting fees indexed to stock price.................... -- 1
Asia Pacific
Restructuring and restructuring-related expenses.......... -- 3
Consulting fees indexed to stock price.................... -- 1
---------------
(1) Represents costs associated with changing new aftermarket customers from
their prior suppliers to an inventory of our products. Although our
aftermarket business regularly incurs changeover costs, we specifically
identify in the table above those changeover costs that, based on the size
or number of customers involved, we believe are of an unusual nature for
the quarter in which they were incurred.
EBIT for North American operations increased to $145 million from $133
million one year ago. Higher OE volumes increased EBIT by $14 million with
improved OE manufacturing efficiencies and lower selling, general and
administrative costs adding $15 million and $10 million, respectively, to EBIT.
These improvements to EBIT were partially offset by OE price concessions and
steel cost increases, net of other material costs savings and recovery from
customers. North American aftermarket EBIT was negatively impacted by higher
steel costs of $27 million and lower volumes and manufacturing inefficiencies of
$21 million. These decreases were partially offset by lower selling, general,
administrative and engineering costs of $11 million and other material cost
savings and recovery from customers. Included in North America's 2005 EBIT were
$4 million in restructuring and restructuring-related expenses and $10 million
in customer changeover costs. Included in North America's 2004 EBIT were $11
million in restructuring and restructuring-related expenses, $8 million in
customer changeover costs and $2 million in consulting fees indexed to the stock
price.
Our European, South American and Indian segment's EBIT was $54 million for
2005, up $33 million from $21 million in 2004. Higher European OE volumes from
both emission and ride control product lines contributed $21 million to EBIT
during 2005. Increased OE manufacturing efficiencies added $4 million to EBIT.
Steel cost increases of $22 million were offset by other material cost savings
and recovery from customers. OE price concessions and higher selling, general,
administrative and engineering costs negatively impacted EBIT by $17 million.
European aftermarket manufacturing efficiencies and lower selling, general
administrative and engineering costs added $13 million to EBIT. Higher European
aftermarket steel costs of $13 million were offset by other material costs
savings and recovery from customers. South America and India added $8 million to
EBIT as compared to 2004, mostly due to favorable customer pricing actions and
currency appreciation that offset higher steel costs. Included in Europe, South
America and India's 2005 EBIT were $8 million in restructuring and
restructuring-related expenses. Included in 2004 EBIT were $26 million in
restructuring and restructuring-related expenses and $1 million in consulting
fees indexed to the stock price.
EBIT for our Asia Pacific segment, which includes Asia and Australia,
decreased $4 million to $16 million in 2005 compared to $20 million in the prior
year. Manufacturing efficiencies and reduced selling, general, administrative
and engineering costs increased EBIT by $12 million. These increases were
42
more than offset by lower volumes that impacted EBIT by $7 million and increased
steel costs, net of other material cost savings and recovery from customers.
Included in Asia Pacific's 2004 EBIT were $3 million in restructuring and
restructuring-related expenses and $1 million in consulting fees indexed to the
stock price.
You should also read Note 4 to the consolidated financial statements
included in Item 8 for a discussion of the changes in our results due to the
change in our method for valuing inventory.
EBIT AS A PERCENTAGE OF REVENUE
YEARS ENDED
DECEMBER 31,
-------------
2005 2004
----- -----
North America............................................... 7% 7%
Europe, South America and India............................. 3% 1%
Asia Pacific................................................ 4% 6%
Total Tenneco............................................. 5% 4%
In North America, EBIT as a percentage of revenue for 2005 remained at
prior year levels. Higher OE volumes and lower selling, general, administrative
and engineering costs as well as reduced restructuring activities were offset by
higher steel costs and price concessions. Our Europe, South America and India
EBIT margin for 2005 increased two percentage points over the same period last
year. OE volume increases, manufacturing efficiencies and lower restructuring
costs were partially offset by price concessions. EBIT as a percentage of
revenue for our Asia Pacific operations decreased two percentage points in 2005
compared to prior year. Manufacturing efficiencies, lower restructuring costs
and reduced selling, general, administrative and engineering costs were more
than offset by higher steel costs and reduced volumes.
RESTRUCTURING AND OTHER 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
43
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 December 31, 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 $12 million in restructuring and
restructuring-related costs in 2005. Including the costs incurred in 2002
through 2004 of $59 million, we have incurred a total of $71 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 December 31, 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
December 31, 2005, we have excluded $9 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 February 2006, we decided to reduce the work force at certain of our
global locations as part of our ongoing effort to reduce our cost structure. The
plan contemplates a reduction in force of approximately 100 employees during the
first quarter of 2006. We expect to record a pre-tax charge of approximately $4
million to $5 million during the first quarter of 2006 for severance and other
benefits related to these reductions in force, substantially all of which will
be paid in cash. These charges are in addition to other customary quarterly
restructuring charges that we may incur during the quarter.
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.
44
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $130 million in 2005 compared to $179
million in 2004. Interest expense for 2004 includes $42 million related to the
2004 refinancing of our $500 million 11 5/8 percent senior subordinated notes
due 2009. We accomplished this refinancing by issuing new 8 5/8 percent senior
subordinated notes due 2014 in November 2004 and using the net proceeds of that
issuance, together with cash on hand, to redeem our 11 5/8 percent notes. The
11 5/8 percent notes were called for redemption in November 2004 and the
redemption was completed in December 2004. Included in the total is a write-off
of $8 million in debt issuance costs; a premium of $29 million for redeeming the
bonds prior to their maturity date, and $5 million in overlapping interest
expenses during the time between the issuance of the 8 5/8 percent notes and the
final redemption of the 11 5/8 percent notes. 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 2005, and their 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
2005 resulted in lower interest expense of approximately $2 million for the
year. The LIBOR rate as of December 31, 2005 as determined under these
agreements was 3.82 percent. This rate remained in effect until January 15, 2006
when it increased to approximately 4.73 percent. Based on the rate in effect
through January 15, 2006 and using the current LIBOR as determined under these
agreements of approximately 4.73 percent (which remains in effect until July 15,
2006), these swaps are not expected to materially impact our 2006 annual
interest expense. 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 fair value with an
offset to the underlying hedged item, which is long-term debt. As of December
31, 2005, the fair value of the interest rate swaps was a liability of
approximately $5 million. On December 31, 2005, we had $1 billion 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 2007 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. We also have $356 million in
long-term debt obligations that have variable interest rates based on a current
market rate of interest. For further discussion see "Liquidity and Capital
Resources -- Interest Rate Risk" later in this Management's Discussion and
Analysis.
INCOME TAXES
Income taxes were an expense of $25 million in 2005, compared to a benefit
of $24 million in 2004. Included in 2005 were benefits of $4 million, including
settlements of prior year tax issues and resolution of some tax contingencies
with our foreign operations. Including these adjustments the effective tax for
2005 was 30 percent. Excluding these adjustments our effective tax rate was 34
percent. Included in 2004 were benefits of $21 million, including book to return
adjustments, settlements of prior year tax issues and benefits related to
previous tax losses in foreign operations. Due to efforts to improve overseas
operations, we can now recognize the benefits of these previous tax losses in
foreign operations, because it is more likely than not that we will be able to
utilize them to offset future cash tax payments. The effective tax rate for 2004
including the $21 million benefit was 466 percent. Excluding the $21 million
benefit our effective tax rate was 69 percent. You should also read Note 4 to
the consolidated financial statements included in Item 8 for a discussion of the
changes in our results due to the change in our method for valuing inventory.
45
EARNINGS PER SHARE
We reported earnings per diluted common share of $1.29 for 2005, compared
to $0.35 per diluted share for 2004. Included in the results for 2005 are
expenses related to our restructuring activities, customer changeover costs and
favorable tax adjustments. The net impact of these items decreased earnings per
diluted share by $0.23. Included in the results for 2004 are expenses related to
our restructuring activities, the cost related to the refinancing of our senior
subordinated notes, customer changeover costs, consulting fees indexed to the
stock price and favorable tax adjustments. The net impact of these items
decreased earnings per diluted share by $0.87. Please read Note 8 to the
consolidated financial statements included in Item 8 for more detailed
information on earnings per share. You should also read Note 4 to the
consolidated financial statements included in Item 8 for a discussion of the
changes in our results due to the change in our method for valuing inventory.
CRITICAL ACCOUNTING POLICIES
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 when title and risk of loss passes to the customers under the terms of
our arrangements with those customers, which is usually at the time of shipment
from our plants or distribution centers. In connection with the sale of exhaust
systems to certain original equipment manufacturers, we purchase catalytic
converters or components thereof ("substrates") on behalf of our customers which
are used in the assembled system. These substrates are included in our inventory
and "passed through" to the customer at our cost, plus a small margin, since we
take title to the inventory and are responsible for both the delivery and
quality of the finished product. Revenues recognized for substrate sales were
$678 million, $726 million and $653 million in 2005, 2004 and 2003,
respectively. 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 December 31, 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
December 31, 2005, of $566 million, which will expire in varying amounts from
2018 to 2025. The federal tax effect of that NOL
46
is $198 million, and is recorded as a deferred tax asset on our balance sheet at
December 31, 2005. We also have state NOL carryforwards at December 31, 2005 of
$720 million, which will expire in varying amounts from 2006 to 2025. The tax
effect of the state NOL, net of a valuation allowance, is $27 million and is
recorded as a deferred tax asset on our balance sheet at December 31, 2005. We
estimate, based on available evidence both positive and negative, that it is
more likely than not that we will utilize these NOLs within the prescribed
carryforward period. That estimate is based upon our expectations regarding
future taxable income of our U.S. operations and the implementation of available
tax planning strategies that 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 and earnings per share would be lower by less than $2
million or $0.05 per diluted share for each of the years ended December 31, 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 pension and
postretirement health care and life insurance expenses and valuations are
dependent on assumptions used by our actuaries in calculating those 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 2005 we lowered the weighted average discount rate for all of our
pension plans to 5.4 percent, from 6.0 percent. The discount rate for
postretirement benefits was lowered from approximately 6.3 percent for 2004 to
approximately 5.8 percent for 2005.
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
47
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 all of our
pension plans was lowered from 8.4 percent for 2004 to 8.2 percent for 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 December 31, 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.
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 was adopted January 1, 2005, and 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 on or after January 1, 2006, and will be adopted on a
prospective basis. We estimate that the impact on our net income for the full
year 2005 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
48
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), "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) 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 did not 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.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
YEAR ENDED
DECEMBER 31,
---------------
2005 2004 % CHANGE
------ ------ --------
(MILLIONS)
Short term debt and current maturities.................... $ 22 $ 19 16%
Long term debt............................................ 1,356 1,401 (3)
------ ------
Total debt................................................ 1,378 1,420 (3)
------ ------
Total minority interest................................... 24 24 --
Shareholders' equity...................................... 129 159 (19)
------ ------
Total capitalization...................................... $1,531 $1,603 (5)
====== ======
49
General. Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries, as well as any outstanding
borrowings on our revolving credit facilities, increased by approximately $3
million. The current portion of long-term debt decreased by approximately $5
million and was offset by an $8 million increase in foreign subsidiaries'
obligations. Borrowings under our revolving credit facilities were zero as of
December 31, 2005 and December 31, 2004. The overall decrease in long-term debt
resulted from $40 million in voluntary payments made on our outstanding long-
term debt and payments on capital leases in addition to our position on interest
rate swaps entered into during April 2004. See below for further information on
the interest rate swaps.
The year-to-date decrease in shareholders' equity primarily results from
$87 million related to the translation of foreign balances into U.S. dollars and
an adjustment to additional minimum liability of $10 million as a result of an
increase in the accrued benefit obligation related to pensions. This amount was
partially offset by our net income, premium on common stock issued pursuant to
benefit plans and other transactions which contributed $67 million to
shareholders' equity. While our book equity balance was small at December 31,
2005, it had no effect on 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
4 to our consolidated financial statements.
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 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 December 31, 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.
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 issued an additional $125 million of 10 1/4 percent senior secured notes. We
incurred $27 million in fees 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 are being amortized over the term of
the senior secured notes and the amended and restated senior credit facility.
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
2005 resulted in lower interest expense of approximately $2 million for the
year. The LIBOR rate as of December 31, 2005 as determined under these
agreements was 3.82 percent. This rate remained in effect until January 15, 2006
when it increased to approximately 4.73 percent. Based on the rate in effect
through January 15, 2006 and using the current LIBOR as determined under these
agreements of approximately 4.73 percent (which remains in effect until July 15,
2006), these swaps are not expected to materially impact our 2006 annual
interest expense. 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 fair value with an
offset to the underlying hedged item, which is long-term debt. As of December
31, 2005, the
50
fair value of the interest rate swaps was a liability of approximately $5
million. On December 31, 2005, we had $1 billion 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 2007 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. We also have $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 accrued
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. In exchange for the
amendment, 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 are being 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.
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 all remaining cash charges and expenses related to restructuring
initiatives started on or before February 21, 2005, and to exclude up to an
additional $60 million in restructuring-related expenses announced and taken
after February 21, 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 term loan B interest expense in 2005
was approximately $5 million lower than what it would otherwise have been.
During 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 will not be required to reduce the commitments under our tranche B-1
51
letter of credit/revolving loan facility should we obtain additional revolving
credit commitments. 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 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).
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 275 basis points (reduced from 325 basis points in March 2005 and
further reduced from 300 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
37.5 basis points (reduced from 50 basis points to 37.5 basis points in August
2005), plus a margin of 175 basis points (reduced from 225 basis points in March
2005 and further reduced from 200 basis points in August 2005). Letters of
credit issued under the revolving credit facility accrue a letter of credit fee
at a per annum rate of 275 basis points (reduced from 325 basis points in March
2005 and further reduced from 300 basis
52
points in August 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 to 37.5 basis points 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 four 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. ACT.
---- ---- ---- ---- ----- ----- ----- -----
Leverage Ratio (maximum)........................... 4.75 3.52 4.75 3.42 4.50 3.39 4.50 3.31
Interest Coverage Ratio (minimum).................. 2.00 2.83 2.00 3.06 2.00 3.12 2.00 3.40
Fixed Charge Coverage Ratio (minimum).............. 1.10 1.86 1.10 2.02 1.10 2.05 1.10 2.21
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 amended agreement); (iii)
liquidations and dissolutions; (iv) incurring additional indebtedness or
guarantees; (v) capital expenditures; (vi) dividends (limited to no more than
$15 million per year); (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
53
of December 31, 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 December 31, 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 on a nonrecourse basis in North America and Europe.
In North America, we have an 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 $80 million and $68 million at December 31, 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 2006,
this program was renewed for 364 days to January 29, 2007 at a facility size of
$100 million. We also sell some receivables in our European operations to
regional banks in Europe. At December 31, 2005, we sold $49 million of accounts
receivable in Europe down from $56 million at December 31, 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 may 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
54
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.
Contractual Obligations
Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments as of December 31, 2005, are
shown in the following table:
PAYMENTS DUE IN:
--------------------------------------------------
BEYOND
2006 2007 2008 2009 2010 2010 TOTAL
---- ---- ---- ---- ---- ------ ------
(MILLIONS)
Obligations:
Revolver borrowings................................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Senior long-term debt.............................. -- -- -- -- 356 -- 356
Long-term notes.................................... -- 1 2 -- -- 471 474
Capital leases..................................... 3 3 2 2 3 -- 13
Subordinated long-term debt........................ -- -- -- -- -- 500 500
Other subsidiary debt.............................. 1 -- -- -- -- 2 3
Short-term debt.................................... 18 -- -- -- -- -- 18
---- ---- ---- ---- ---- ------ ------
Debt and capital lease obligations............... 22 4 4 2 359 973 1,364
Operating leases................................... 14 12 8 6 4 4 48
Interest payments.................................. 125 125 125 125 123 291 914
Capital commitments................................ 46 -- -- -- -- -- 46
---- ---- ---- ---- ---- ------ ------
Total Payments..................................... $207 $141 $137 $133 $486 $1,268 $2,372
==== ==== ==== ==== ==== ====== ======
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 4.39 percent which was the rate at December 31,
2005. We have assumed that LIBOR will remain unchanged for the outlying years.
See
55
"-- 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 December
31, 2005 to complete the facilities and projects authorized at December 31,
2005, 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.
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 of approximately $46 million to those plans in 2006. Pension
and postretirement contributions beyond 2006 will be required but those amounts
will vary based upon many factors, including the performance of our pension fund
investments during 2006. In addition, we have not included cash requirements for
environmental remediation. Based upon current estimates we believe we will be
required to spend approximately $8 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 December 31, 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 13 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, and cash management requirements for some
of our subsidiaries totaling $15 million. We have also issued $20 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.
Dividends on Common Stock
On January 10, 2001, we announced that our Board of Directors eliminated
the quarterly dividend on our common stock. The Board took the action in
response to industry conditions, primarily greater than anticipated production
volume reductions by original equipment manufacturers and continued softness in
56
the global light vehicle aftermarket. There are no current plans to reinstate a
dividend on our common stock.
Cash Flows
YEARS ENDED
DECEMBER 31,
-------------
2005 2004
----- -----
(MILLIONS)
Cash provided (used) by:
Operating activities...................................... $ 134 $ 213
Investing activities...................................... (167) (129)
Financing activities...................................... (36) (12)
Operating Activities
For the year ended December 31, 2005, cash flow provided from operating
activities was $134 million as compared to $213 million in the prior year. For
2005 cash used for working capital was $80 million compared to a cash flow
provided of $45 million for 2004. Higher revenues and the discontinuation of the
advance payment programs with three major OE customers in North America were the
primary reasons for higher year over year receivables balances that resulted in
cash outflow of $94 million, a $90 million increase from last year. Inventory
reductions provided cash of $7 million compared to a use of cash of $22 million
in the prior year. Accounts payable provided cash of $1 million versus last
years cash inflow of $53 million. Cash interest payments of $126 million in 2005
were significantly lower than prior year payments of $185 million as a result of
refinancing transactions in 2004. This was partially offset by higher cash tax
payments of $23 million in 2005 compared to $18 million in 2004. Other operating
activity was a use of $24 million in cash for 2005, compared to a cash inflow of
$34 million in the prior year. This change was primarily related to an increase
in pension contributions during 2005.
We had arrangements with three major OE customers in North America under
which, in exchange for a discount, payments for product sales are 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 2005. To mitigate the impact on our liquidity
from the termination of these programs, in 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.
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 in connection with the October 2005 amendment.
One of our European subsidiaries receives payment from one of its OE
customers whereby the 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 which were 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 $34
million at December 31, 2005, compared with $44 million at December 31, 2004.
In certain instances several of our Chinese subsidiaries receive payment
from OE customers and satisfy vendor payments through the receipt and delivery
of negotiable financial instruments. Financial
57
instruments used to satisfy vendor payables and not redeemed totaled $8 million
at December 31, 2005 and were classified as notes payable. Financial instruments
received from OE customers and not redeemed totaled $9 million at December 31,
and were classified as other current assets. One of our Chinese subsidiaries is
required to maintain a cash balance at a financial institution issuing the
financial instruments which are used to satisfy vendor payments. The balance
totaled $3 million at December 31, 2005 and was classified as cash and cash
equivalents.
Investing Activities
Cash used for investing activities was $38 million higher in 2005 compared
to the same period a year ago. In 2005 we used $11 million in cash to acquire
the exhaust operations of Gabilan Manufacturing and $3 million to acquire the
remaining minority interest in India's Hydraulics joint venture operations,
partially offset by net proceeds from the sale of assets of $4 million. In 2004
we received $15 million in cash from the sale of assets, primarily driven by the
sale of our Birmingham, U.K. facility. Expenditures for plant, property and
equipment were $144 in 2005 versus $130 million in 2004. The increase of $14
million in expenditures for plant, property and equipment was primarily due to
the timing of future OE customer platform launches. Expenditures for
software-related intangible assets were $14 million in 2005 compared to $13
million in 2004.
Financing Activities
Cash flow from financing activities was a $36 million outflow in 2005
compared to an outflow of $12 million in the same period of 2004. The primary
reason for the change is attributable to $45 million in cash used to reduce our
long-term debt during 2005.
OUTLOOK
North American OE light vehicle production levels for 2005 were 15.8
million units, even with 2004. Current estimates for 2006 are that North
American OE light vehicle production levels will remain flat with 2005. However,
we remain cautious about the outlook for North American production rates due to
volatile oil prices and the overall financial condition of original equipment
manufacturers, especially Ford and General Motors who have announced job cuts,
plant closings, and other restructuring activities. We are also uncertain about
the willingness of the original equipment manufacturers to continue to support
consumer vehicle sales through incentives. We believe that new product launches,
our position on top-selling platforms, increasing market positions with Toyota,
Honda and Nissan, and a strong new product and technology pipeline will help us
to offset pressures from North American production rates. European light vehicle
production volumes were 20.4 million units during 2005 and 2004. Expectations
for 2006 indicate production increases slightly to 20.6 million units. We saw a
strong increase in heavy-duty truck production rates during 2005. Production
rates for 2006 are expected to remain at the same levels as 2005, primarily due
to the pull forward of production to avoid the introduction of stricter emission
regulations in 2007. In the global aftermarket, issues that have impacted
revenues in the past will likely continue to be a challenge in 2006. Heightened
competition in the European aftermarket and longer product replacement cycles
are expected to continue their impact on volumes. We saw signs of sales
stabilization in the North America aftermarket exhaust business unit during
2005, and we are cautiously optimistic that these conditions will continue in
2006. We also plan to continue our efforts to increase new and existing sales in
the North American aftermarket ride control business unit. In addition, we are
pursuing other aftermarket opportunities with the introduction of filters in
Europe and brakes in both Europe and North America.
Tenneco estimates that its global original equipment revenues will be
approximately $3.5 billion in 2006 and $4.5 billion in 2007. Adjusted for lower
margin substrate sales, the company's global original equipment revenues are
estimated to be approximately $2.7 billion in 2006 and $3.1 billion in 2007.
These revenue estimates are based on original equipment manufacturers' programs
that have been formally awarded to the company; programs where the company is
highly confident that it will be awarded business based on informal customer
indications consistent with past practices, Tenneco's status as supplier for the
existing program and its relationship with the customer; and the actual original
equipment revenues
58
achieved by the company for each of the last several years compared to the
amount of those revenues that the company estimated it would generate at the
beginning of each year. Our revenue estimate is subject to increase or decrease
due to changes in customer requirements, customer and consumer preferences, and
the number of vehicles actually produced by our customers. We do not intend,
however, to update the amounts shown above due to these changes. In addition,
our revenue estimate is based on our anticipated pricing for each applicable
program over its life. However, we are under continuing pricing pressures from
our OE customers. We do not intend to update the amounts shown above for any
price changes. Finally, for our foreign operations, our revenue estimate assumes
a fixed foreign currency value. This value is used to translate foreign business
to the US dollar. Currency in our foreign operations is subject to fluctuation
based on the economic conditions in each of our foreign operations. We do not
intend to update the amounts shown above due to these fluctuations. See
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995" and Item 1A, "Risk Factors."
Raw material prices, and in particular steel prices, continue to be a
concern with continued pressure on prices expected into the foreseeable future.
We worked hard in 2005 and continue to work hard to address this issue by
evaluating alternative materials and processes, reviewing material substitution
opportunities, increasing component and assembly outsourcing to low cost
countries and aggressively pursuing recovery of higher costs from our customers.
In addition to these actions, we continue to pursue productivity initiatives and
review opportunities to reduce costs through Six Sigma, Lean manufacturing and
restructuring activities. We will continue to focus on controlling costs and
leveraging global supply chain spending.
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 December 31, 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 close to zero. 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
$8 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.
59
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. 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 on
the balance sheet. See Note 12 to our consolidated financial statements included
under Item 8 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 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 or file for bankruptcy, 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 75 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 $7 million,
$7 million and $6 million for the years ended December 31, 2005, December 31,
2004 and 2003, respectively. All contributions vest immediately.
60
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Currency Exchange Rate Risk
We use derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
our exposure to changes in foreign currency exchange rates. Our primary exposure
to changes in foreign currency rates results from intercompany loans made
between affiliates to minimize the need for borrowings from third parties.
Additionally, we enter into foreign currency forward purchase and sale contracts
to mitigate our exposure to changes in exchange rates on certain intercompany
and third-party trade receivables and payables. We manage counter-party credit
risk by entering into derivative financial instruments with major financial
institutions that can be expected to fully perform under the terms of such
agreements. We have from time to time also entered into forward contracts to
hedge our net investment in foreign subsidiaries. We do not enter into
derivative financial instruments for speculative purposes.
In managing our foreign currency exposures, we identify and aggregate
existing offsetting positions and then hedge residual exposures through
third-party derivative contracts. The following table summarizes by major
currency the notional amounts, weighted average settlement rates, and fair value
for foreign currency forward purchase and sale contracts as of December 31,
2005. All contracts in the following table mature in 2006.
DECEMBER 31, 2005
-----------------------------------------------------------
NOTIONAL AMOUNT WEIGHTED AVERAGE FAIR VALUE IN
IN FOREIGN CURRENCY SETTLEMENT RATES U.S. DOLLARS
------------------- ---------------- ------------------
(MILLIONS EXCEPT SETTLEMENT RATES)
Australian dollars................ --Purchase 27 .732 $ 20
--Sell (34) .732 (25)
British pounds.................... --Purchase 211 1.720 364
--Sell (185) 1.720 (318)
Canadian dollars.................. --Purchase 54 .861 46
--Sell (38) .862 (32)
Czech Republic koruna............. --Purchase 1611 .041 66
--Sell (1684) .041 (69)
Danish kroner..................... --Purchase 523 .159 83
--Sell (414) .159 (66)
European euro..................... --Purchase 53 1.188 63
--Sell (1) 1.193 (1)
Polish zloty...................... --Purchase 22 .308 7
--Sell (53) .308 (16)
Swedish krona..................... --Purchase 477 .126 60
--Sell (255) .126 (32)
U.S. dollars...................... --Purchase 30 1.000 30
--Sell (184) 1.000 (184)
Other............................. --Purchase 329 .018 6
--Sell (6) .586 (3)
-----
$ (1)
=====
Interest Rate Risk
Our financial instruments that are sensitive to market risk for changes in
interest rates are primarily our debt securities. We primarily use our revolving
credit facilities to finance our short-term capital
61
requirements. We 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
2005 resulted in lower interest expense of approximately $2 million for the
year. The LIBOR rate as of December 31, 2005 as determined under these
agreements was 3.82 percent. This rate remained in effect until January 15, 2006
when it increased to approximately 4.73 percent. Based on the rate in effect
through January 15, 2006 and using the current LIBOR as determined under these
agreements of approximately 4.73 percent (which remains in effect until July 15,
2006), these swaps are not expected to materially impact our 2006 annual
interest expense. 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 fair value with an
offset to the underlying hedged item, which is long-term debt. As of December
31, 2005, the fair value of the interest rate swaps was a liability of
approximately $5 million. On December 31, 2005, we had $1 billion 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 2007 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. We also have $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 December 31, 2005
was about 101 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 $2 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.
62
YEARS 2004 AND 2003
NET SALES AND OPERATING REVENUES
The following tables reflect our revenues for the years of 2004 and 2003.
See "-- Years 2005 and 2004 -- Net Sales and Operating Revenues" for a
description of why we present these reconciliations of revenues.
YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------
SUBSTRATE REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY SUBSTRATE
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control............................ $ 455 $ -- $ 455 $ -- $ 455
Emission Control........................ 1,001 9 992 320 672
------ ---- ------ ---- ------
Total North Original Equipment....... 1,456 9 1,447 320 1,127
North America Aftermarket
Ride Control............................ 342 -- 342 -- 342
Emission Control........................ 161 -- 161 -- 161
------ ---- ------ ---- ------
Total North America Aftermarket...... 503 -- 503 -- 503
Total North America................ 1,959 9 1,950 320 1,630
Europe Original Equipment
Ride Control............................ 356 33 323 -- 323
Emission Control........................ 1,005 76 929 321 608
------ ---- ------ ---- ------
Total Europe Original Equipment...... 1,361 109 1,252 321 931
Europe Aftermarket
Ride Control............................ 169 12 157 -- 157
Emission Control........................ 190 16 174 -- 174
------ ---- ------ ---- ------
Total Europe Aftermarket............. 359 28 331 -- 331
South America & India..................... 171 4 167 15 152
Total Europe, South America &
India........................... 1,891 141 1,750 336 1,414
Asia...................................... 158 1 157 54 103
Australia................................. 205 23 182 16 166
------ ---- ------ ---- ------
Total Asia Pacific................. 363 24 339 70 269
------ ---- ------ ---- ------
Total Tenneco............................. $4,213 $174 $4,039 $726 $3,313
====== ==== ====== ==== ======
63
YEAR ENDED DECEMBER 31, 2003
----------------------------------------------------------
SUBSTRATE REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY SUBSTRATE
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control............................ $ 442 $ -- $ 442 $ -- $ 442
Emission Control........................ 972 -- 972 306 666
------ ----- ------ ---- ------
Total North Original Equipment....... 1,414 -- 1,414 306 1,108
North America Aftermarket
Ride Control............................ 303 -- 303 -- 303
Emission Control........................ 163 -- 163 -- 163
------ ----- ------ ---- ------
Total North America Aftermarket...... 466 -- 466 -- 466
Total North America................ 1,880 -- 1,880 306 1,574
Europe Original Equipment
Ride Control............................ 265 -- 265 -- 265
Emission Control........................ 832 -- 832 263 569
------ ----- ------ ---- ------
Total Europe Original Equipment...... 1,097 -- 1,097 263 834
Europe Aftermarket
Ride Control............................ 170 -- 170 -- 170
Emission Control........................ 176 -- 176 -- 176
------ ----- ------ ---- ------
Total Europe Aftermarket............. 346 -- 346 -- 346
South America & India..................... 135 -- 135 12 123
Total Europe, South America &
India........................... 1,578 -- 1,578 275 1,303
Asia...................................... 145 -- 145 57 88
Australia................................. 163 -- 163 15 148
------ ----- ------ ---- ------
Total Asia Pacific................. 308 -- 308 72 236
------ ----- ------ ---- ------
Total Tenneco............................. $3,766 $ -- $3,766 $653 $3,113
====== ===== ====== ==== ======
Revenues from our North American operations increased $79 million in 2004
compared to the same period in 2003 reflecting higher sales from both OE and
aftermarket businesses. Total North American OE revenues increased three percent
to $1,456 million in 2004. OE emission control revenues were up three percent to
$1,001 million from $972 million in 2003. Substrate sales increased five percent
to $320 million in 2004. Adjusted for substrate sales and currency, OE emission
control sales were up one percent from the prior year. OE ride control revenues
for 2004 increased three percent from 2003 driven primarily by higher sales to
heavy-duty vehicle manufacturers. Total OE revenues, excluding substrate sales
and currency, increased two percent in 2004, while North American light vehicle
production decreased approximately one percent from 2003. We experienced this
improvement despite the build rate decline primarily due to new product launches
and our strong position on top-selling platforms with General Motors, Ford,
DaimlerChrysler, Toyota, Honda and Nissan, as well as the higher heavy-duty
volumes. Aftermarket revenues for North America were $503 million in 2004,
representing an increase of eight percent compared to the same period in 2003.
Aftermarket ride control revenues increased $39 million or 13 percent in 2004,
primarily due to orders from new customers, higher sales of premium priced
products and, to a lesser degree, sales of our DuPont(TM)-branded car care
appearance products launched earlier in 2004. For the last several years,
revenues in the aftermarket emission control business have been declining due to
the OE's use of stainless steel, which reduces aftermarket replacement rates.
64
Aftermarket emission control revenues declined one percent from 2003 to 2004
compared to a nine percent decline from 2002 to 2003, reflecting sales
stabilization in this business.
Our European, South American and Indian segment's revenues increased $311
million or 20 percent in 2004 compared to 2003. Total Europe OE revenues were
$1,361 million, up 24 percent from 2003. OE emission control revenues increased
21 percent to $1,005 million from $832 million in the prior year. Excluding a
$58 million increase in substrate sales and a $76 million increase due to
strengthening currency, OE emission control revenues increased seven percent
over 2003. This increase was greater than the change in European light vehicle
production, estimated to have increased about one percent from prior year
levels. Our increase was greater than the market as a result of strong volumes
on existing platforms as well as the ramp up of new product launches from BMW,
PSA, Porsche and General Motors. OE ride control revenues increased by $91
million in 2004, up 34 percent from $265 million the prior year. Excluding a $33
million benefit from currency appreciation, OE ride control revenues increased
22 percent. We experienced this revenue increase despite the relatively flat
European light vehicle build rate due to stronger sales on new and existing
platforms with Volkswagen, Ford and Renault. European aftermarket sales were
$359 million in 2004 compared to $346 million the prior year. Excluding $28
million attributable to currency appreciation, European aftermarket revenues
declined four percent in 2004 compared to the prior year. Ride control
aftermarket revenues, excluding the impact of currency, were down eight percent
compared to the prior year, reflecting heightened competition, a softer market
environment in Spain, and weaker exports worldwide due to the strengthening of
the euro. Aftermarket emission control revenues were down one percent from prior
year excluding the benefits of currency. New customers and market share gains
helped to partially offset significant market declines relating to now standard
use of longer lasting stainless steel by OE manufacturers. South American and
Indian revenues, excluding the benefits of currency appreciation, were up 24
percent to $167 million compared to 2003. Higher OE volumes and substrate sales
as well as improved product mix and pricing drove this increase.
Revenues from our Asia Pacific segment, which includes Australia and Asia,
increased $55 million to $363 million in 2004, as compared to $308 million in
2003. Excluding $1 million from currency appreciation, higher OE volumes drove
increased revenues of $12 million at our Asian operations in 2004 compared to
the prior year. In Australia, strong OE volumes and strengthening currency
increased revenues in 2004 by 26 percent. Excluding the impact of currency and
substrate sales, Australian revenues increased 12 percent.
EBIT
YEARS ENDED
DECEMBER 31,
-------------
2004 2003 CHANGE
----- ----- ------
(MILLIONS)
North America............................................... $133 $129 $ 4
Europe, South America and India............................. 21 22 (1)
Asia Pacific................................................ 20 23 (3)
---- ---- ---
$174 $174 $--
==== ==== ===
65
The EBIT results shown in the preceding table include the following items,
discussed below under "Restructuring and Other Charges" and "Liquidity and
Capital Resources -- Capitalization", which have an effect on the comparability
of EBIT results between periods:
YEARS ENDED
DECEMBER 31,
------------
2004 2003
---- -----
(MILLIONS)
North America
Restructuring and restructuring-related expenses.......... $11 $ 4
Changeover costs for a major new aftermarket
customer(1)............................................ 8 --
Consulting fees indexed to stock price.................... 2 --
Europe, South America and India
Restructuring and restructuring-related expenses.......... 26 4
Consulting fees indexed to stock price.................... 1 --
Asia Pacific................................................ --
Restructuring and restructuring-related expenses.......... 3 --
Consulting fees indexed to stock price.................... 1 --
---------------
(1) Represents costs associated with changing new aftermarket customers from
their prior suppliers to an inventory of our products. Although our
aftermarket business regularly incurs changeover costs, we specifically
identify in the table above those changeover costs that, based on the size
or number of customers involved, we believe are of an unusual nature for
the quarter in which they were incurred.
EBIT for North American operations increased to $133 million in 2004 from
$129 million the prior year. Higher OE ride and emission control volumes
increased EBIT by $11 million and $8 million respectively. These increases were
offset by higher material costs of $16 million, price concessions and higher
manufacturing and selling, general and administrative costs. Higher North
American aftermarket ride control volumes increased EBIT by $23 million with
price and mix improvements adding another $4 million to EBIT. These increases
were partially offset by higher material costs of $4 million and higher selling,
general and administrative costs including changeover, promotion and advertising
expenses. Included in North America's 2004 EBIT were $11 million in
restructuring and restructuring-related expenses, $8 million in changeover costs
and $2 million in consulting fees indexed to the stock price. Included in 2003's
EBIT were $4 million in restructuring and restructuring-related expenses.
Our European, South American and Indian segment's EBIT was $21 million for
2004, down $1 million from $22 million in 2003. Higher European OE volumes from
both product lines contributed $18 million to EBIT during 2004. Increased
manufacturing efficiencies and currency appreciation added $7 million and $5
million, respectively to EBIT. These increases were offset by material cost
increases of $3 million, price concessions, and higher selling, general and
administrative costs. Lower Europe aftermarket volumes reduced EBIT by $9
million, but were partially offset by customer pricing actions. In South America
favorable volume and pricing actions added $8 million to EBIT. These increases
in EBIT were partially offset by higher material costs of $2 million and higher
selling, general and administrative costs. Included in 2004's EBIT were $26
million in restructuring and restructuring-related expenses and $1 million in
consulting fees indexed to the stock price. For the same period last year, EBIT
included $4 million in restructuring-related expenses.
EBIT for our Asia Pacific segment, which includes Asia and Australia,
decreased $3 million to $20 million in 2004 compared to $23 million one year
ago. Higher OE volumes provided $5 million of additional EBIT in 2004 compared
to prior year. Additionally, favorable currency exchange rates in Australia
increased EBIT by $3 million. These increases were more than offset by price
concessions, restructuring and higher selling, general and administrative costs.
Included in Asia Pacific's 2004 EBIT were $3 million in restructuring and
restructuring-related expenses and $1 million in consulting fees indexed to the
stock price.
66
You should also read Note 4 to the consolidated financial statements
included in Item 8 for a discussion of the changes in our results due to the
change in our method for valuing inventory.
EBIT AS A PERCENTAGE OF REVENUE
YEARS ENDED
DECEMBER 31,
-------------
2004 2003
----- -----
North America............................................... 7% 7%
Europe, South America and India............................. 1% 1%
Asia Pacific................................................ 6% 7%
Total Tenneco............................................. 4% 5%
In North America, EBIT as a percentage of revenue for 2004 remained at
prior year levels. Higher OE and aftermarket volumes were offset by higher
material, restructuring and selling, general and administrative costs. In
Europe, South America and India EBIT margins for 2004 were also unchanged from
the same period last year. OE volume increases and manufacturing efficiencies
were offset by higher material, restructuring and selling, general and
administrative costs. EBIT as a percentage of revenue for our Asia Pacific
operations decreased one percentage point from the prior year. Higher OE volumes
and currency appreciation were more than offset by higher price concessions,
restructuring and selling, general and administrative costs.
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $179 million in 2004 compared to $149
million in 2003. Interest expense for 2004 includes $42 million related to the
refinancing of our $500 million 11 5/8 percent senior subordinated notes due
2009. We accomplished this refinancing by issuing new 8 5/8 percent senior
subordinated notes due 2014 in November 2004 and using the net proceeds of that
issuance, together with cash on hand, to redeem our 11 5/8 percent notes. The
11 5/8 percent notes were called for redemption in November and the redemption
was completed in December 2004. Included in the total is a write-off of $8
million in debt issuance costs; a premium of $29 million for redeeming the bonds
prior to their maturity date, and $5 million in overlapping interest expenses
during the time between the issuance of the 8 5/8 percent notes and the final
redemption of the 11 5/8 percent notes. Interest expense for 2003 includes $12
million for the write-off of senior debt issuance costs that were deferred on
the senior debt that we partially paid with the proceeds of our $350 million
bond offering in June of 2003 and fully refinanced in December of 2003. 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,
our issuance of $350 million of 10 1/4 percent senior secured notes due 2013 in
June 2003, our issuance of $125 million of 10 1/4 percent senior secured notes
due 2013 in December 2003 and our refinancing of our senior credit facility in
December 2003 and their impact on our interest expense, in "Liquidity and
Capital Resources -- Capitalization" earlier 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 a per annum rate of
10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus
a 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. The LIBOR rate as of December 31, 2004 as determined under these
agreements is 1.86 percent. This rate remained in effect until January 15, 2005
when it increased to 2.89 percent. These swaps reduced our 2005 annual interest
expense by approximately $2 million. These swaps qualify as fair value hedges in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and as such are recorded on the balance sheet at fair value with an
offset to the underlying hedged item, which is long term debt. As of December
31, 2004, the fair value of the interest rate swaps was a liability of
approximately $1 million, which has been recorded as a decrease to long term
debt and an increase to other long term liabilities.
67
INCOME TAXES
Income taxes were a benefit of $24 million in 2004, compared to a benefit
of $7 million in 2003. Included in 2004 were benefits of $21 million, including
book to return adjustments, settlements of prior year tax issues and benefits
related to previous tax losses in foreign operations. Due to efforts to improve
overseas operations, we can now recognize the benefits of these previous tax
losses in foreign operations, because it is more likely than not that we will be
able to utilize them to offset future cash tax payments. Included in 2003 were
benefits of $17 million, including book to return adjustments, settlements of
prior year tax issues on a more favorable basis than originally anticipated and
a foreign tax adjustment. The effective tax rate for 2004 including the $21
million benefit was 466 percent. Excluding the $21 million benefit our effective
tax rate was 69 percent. The effective tax rate for 2003 including the $17
million benefit was a negative 27 percent. Excluding the $17 million benefit our
effective tax rate was 37 percent. You should also read Note 4 to the
consolidated financial statements included in Item 8 for a discussion of the
changes in our results due to the change in our method for valuing inventory.
EARNINGS PER SHARE
We reported earnings per diluted common share of $0.35 for 2004, compared
to $0.62 per diluted share for 2003. Included in the results for 2004 are
expenses related to our restructuring activities, the cost related to the
refinancing of our senior subordinated notes, customer changeover costs,
consulting fees indexed to the stock price and favorable tax adjustments. The
net impact of these items decreased earnings per diluted share by $0.87.
Included in the results for 2003 are expenses related to our restructuring
activities, the write-off of debt issuance costs relating to issuing senior
secured notes in June and December of 2003, the senior credit facility
refinancing in December of 2003 and tax benefits for the resolution of several
audit issues. The net impact of these items increased earnings per diluted share
by $0.10. Please read Note 8 to the consolidated financial statements included
in Item 8 for more detailed information on earnings per share. You should also
read Note 4 to the consolidated financial statements included in Item 8 for a
discussion of the changes in our results due to the change in our method for
valuing inventory.
CASH FLOWS
YEARS ENDED
DECEMBER 31,
-------------
2004 2003
----- -----
(MILLIONS)
Cash provided (used) by:
Operating activities...................................... $ 213 $ 289
Investing activities...................................... (129) (135)
Financing activities...................................... (12) (49)
Operating Activities
For the year ended December 31, 2004, cash flow provided from operating
activities was $213 million as compared to $289 million in the prior year. For
2004 cash flow provided from working capital was $45 million as compared to $80
million for 2003. Higher sales levels in 2004 are the primary driver for higher
year over year receivables balances. In addition, 2003 benefited from actions to
rationalize our aftermarket product offering, which generated $57 million in
cash flow from reduced inventory levels. Cash interest payments in 2004 were
also significantly higher as a result of the refinancing transactions. This was
partially offset by lower cash tax payments.
In June 2001, we entered into arrangements with two major OE customers in
North America under which, in exchange for a discount, payments for product
sales are made earlier than otherwise required under existing payment terms.
These arrangements reduced accounts receivable by $80 million and
68
$83 million as of December 31, 2004 and 2003, respectively. These arrangements
were discontinued in 2005.
In June 2003, we entered into a similar arrangement with a third major OE
customer in North America. This arrangement reduced accounts receivable by $8
million as of December 31, 2004. These arrangements were discontinued in 2005.
One of our European subsidiaries receives payment from one of its OE
customers whereby the account receivables are satisfied through the delivery of
negotiable financial instruments. These financial instruments are then sold at a
discount to a European bank. The sales of these financial instruments are not
included in the account receivables sold in 2004. Any of these financial
instruments which were not sold as of December 31, 2004 and 2003 are classified
as other current assets and are excluded from our definition of cash
equivalents. We had sold approximately $44 million of these instruments at
December 31, 2004.
INVESTING ACTIVITIES
Cash used for investing activities was $6 million lower in 2004 compared to
2003. In 2004 we received $11 million in cash from the sale of a portion of our
Birmingham, U.K. facility. Expenditures for plant, property and equipment were
$130 million in both 2004 and 2003. Expenditures for software related intangible
assets were $13 million in 2005 and $8 million in 2004.
FINANCING ACTIVITIES
Cash flow from financing activities was a $12 million outflow in 2004
compared to an outflow of $49 million in 2003. The primary reason for the change
is attributable to the $350 million bond offering in June 2003, the $125 million
bond offering in December 2003, the senior debt refinancing in December of 2003
and the subordinated debt refinancing in November of 2004.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The section entitled "Derivative Financial Instruments" in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
69
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES
PAGE
----
Management's Report on Internal Control Over Financial
Reporting................................................. 71
Reports of Independent Registered Public Accounting Firm.... 72
Statements of income for each of the three years in the
period ended December 31, 2005............................ 75
Balance sheets -- December 31, 2005 and 2004................ 76
Statements of cash flows for each of the three years in the
period ended December 31, 2005............................ 77
Statements of changes in shareholders' equity for each of
the three years in the period ended December 31, 2005..... 78
Statements of comprehensive income (loss) for each of the
three years in the period ended December 31, 2005......... 79
Notes to financial statements............................... 80
Schedule II -- Valuation and Qualifying Accounts............ 126
70
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Tenneco Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934). Management's internal
control system is designed to provide reasonable assurance regarding the
preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error or circumvention or
overriding of controls. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation and may not prevent or detect misstatements in
financial reporting. Further, due to changing conditions and adherence to
established policies and controls, internal control effectiveness may vary over
time.
Management assessed the company's effectiveness of internal controls over
financial reporting. In making this assessment, it used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework.
Based on our assessment we believe that the company's internal control over
financial reporting is effective as of December 31, 2005.
Deloitte & Touche LLP, Tenneco Inc.'s independent registered public
accounting firm, has issued an audit report on our assessment of the company's
internal control over financial reporting.
March 14, 2006
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tenneco Inc.
We have audited management's assessment, included in the accompanying
Management Report on Internal Controls Over Financial Reporting, that Tenneco
Inc. and consolidated subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the criteria established in
COSO. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on the criteria established in COSO.
72
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of the Company as of December 31, 2005 and the related consolidated
statements of income, cash flows, changes in shareholders' equity and
comprehensive income (loss) for the year ended December 31, 2005. Our audit also
included the financial statement schedule listed in the index at Item 8. Our
report dated March 14, 2006 expressed an unqualified opinion on those financial
statements and financial statement schedule.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 14, 2006
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tenneco Inc.
We have audited the accompanying consolidated balance sheets of Tenneco
Inc. and consolidated subsidiaries (the "Company") as of December 31, 2005 and
2004, and the related consolidated statements of income, cash flows, changes in
shareholders' equity, and comprehensive income (loss) for each of the three
years in the period ended December 31, 2005. Our audits also included the
financial statement schedule listed in the Index at Item 8. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and 2004, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005,
based on the criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 14, 2006 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 14, 2006
74
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------------
2005 2004 2003
------------- ------------- -------------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
REVENUES
Net sales and operating revenues.................... $ 4,441 $ 4,213 $ 3,766
----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation and
amortization shown below)........................ 3,583 3,368 2,996
Engineering, research, and development.............. 83 76 67
Selling, general, and administrative................ 385 417 364
Depreciation and amortization of other
intangibles...................................... 177 177 163
----------- ----------- -----------
4,228 4,038 3,590
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on sale of assets.............................. -- 1 --
Loss on sale of receivables......................... (3) (1) (2)
Other income (expense).............................. 5 (1) --
----------- ----------- -----------
2 (1) (2)
----------- ----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND
MINORITY INTEREST................................... 215 174 174
Interest expense (net of interest capitalized)...... 130 179 149
Income tax expense (benefit)........................ 25 (24) (7)
Minority interest................................... 2 4 6
----------- ----------- -----------
NET INCOME............................................ $ 58 $ 15 $ 26
=========== =========== ===========
EARNINGS PER SHARE
Average shares of common stock outstanding --
Basic............................................ 43,088,558 41,534,810 40,426,136
Diluted.......................................... 45,321,225 44,180,460 41,767,959
Basic earnings per share of common stock --.......... $ 1.35 $ 0.37 $ 0.64
Diluted earnings per share of common stock --........ $ 1.29 $ 0.35 $ 0.62
The accompanying notes to financial statements are an integral part of these
statements of income.
75
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
DECEMBER 31,
-----------------
2005 2004
------- -------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 141 $ 214
Receivables --
Customer notes and accounts, net....................... 515 458
Other.................................................. 28 30
Inventories............................................... 360 396
Deferred income taxes..................................... 43 70
Prepayments and other..................................... 110 124
------- -------
1,197 1,292
------- -------
Other assets:
Long-term notes receivable, net........................... 23 24
Goodwill.................................................. 200 196
Intangibles, net.......................................... 30 24
Deferred income taxes..................................... 307 304
Other..................................................... 140 145
------- -------
700 693
------- -------
Plant, property, and equipment, at cost..................... 2,428 2,451
Less -- Reserves for depreciation and amortization........ (1,385) 1,317
------- -------
1,043 1,134
------- -------
$ 2,940 $ 3,119
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term
debt).................................................. $ 22 $ 19
Trade payables............................................ 651 696
Accrued taxes............................................. 31 24
Accrued interest.......................................... 38 35
Accrued liabilities....................................... 208 226
Other..................................................... 29 47
------- -------
979 1,047
------- -------
Long-term debt.............................................. 1,356 1,401
------- -------
Deferred income taxes....................................... 86 126
------- -------
Postretirement benefits..................................... 285 276
------- -------
Deferred credits and other liabilities...................... 81 86
------- -------
Commitments and contingencies
Minority interest........................................... 24 24
------- -------
Shareholders' equity:
Common stock.............................................. -- --
Premium on common stock and other capital surplus......... 2,776 2,764
Accumulated other comprehensive loss...................... (282) (185)
Retained earnings (accumulated deficit)................... (2,125) (2,180)
------- -------
369 399
Less -- Shares held as treasury stock, at cost............ 240 240
------- -------
129 159
------- -------
$ 2,940 $ 3,119
======= =======
The accompanying notes to financial statements are an integral part of these
balance sheets.
76
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------
2005 2004 2003
------ ------ ------
(MILLIONS)
OPERATING ACTIVITIES
Net income.................................................. $ 58 $ 15 $ 26
Adjustments to reconcile net income to cash provided by
operating activities --
Depreciation and amortization of other intangibles........ 177 177 163
Deferred income taxes..................................... -- (58) (30)
(Gain) loss on sale of assets, net........................ 3 -- 2
Changes in components of working capital (net of
acquisition)--
(Increase) decrease in receivables..................... (94) (4) 13
(Increase) decrease in inventories..................... 7 (22) 57
(Increase) decrease in prepayments and other current
assets................................................ 5 (4) (1)
Increase (decrease) in payables........................ 1 53 52
Increase (decrease) in accrued taxes................... 13 2 (30)
Increase (decrease) in accrued interest................ 4 (7) 19
Increase (decrease) in other current liabilities....... (16) 27 (30)
Other..................................................... (24) 34 48
----- ----- -----
Net cash provided by operating activities................... 134 213 289
----- ----- -----
INVESTING ACTIVITIES
Net proceeds from sale of assets............................ 4 15 8
Expenditures for plant, property, and equipment............. (144) (130) (130)
Expenditures for software related intangible assets......... (14) (13) (8)
Acquisition of businesses (net of cash acquired)............ (14) -- --
Investments and other....................................... 1 (1) (5)
----- ----- -----
Net cash used by investing activities....................... (167) (129) (135)
----- ----- -----
FINANCING ACTIVITIES
Issuance of common shares................................... 7 10 --
Issuance of long-term debt.................................. 1 500 891
Debt issuance costs on long-term debt....................... -- (13) (27)
Retirement of long-term debt................................ (45) (508) (791)
Net increase (decrease) in short-term debt excluding current
maturities of long-term debt.............................. 1 (1) (121)
Other....................................................... -- -- (1)
----- ----- -----
Net cash used by financing activities....................... (36) (12) (49)
----- ----- -----
Effect of foreign exchange rate changes on cash and cash
equivalents............................................... (4) (3) (14)
----- ----- -----
Increase (decrease) in cash and cash equivalents............ (73) 69 91
Cash and cash equivalents, January 1........................ 214 145 54
----- ----- -----
Cash and cash equivalents, December 31 (Note)............... $ 141 $ 214 $ 145
===== ===== =====
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest...................... $ 126 $ 185 $ 115
Cash paid during the year for income taxes (net of
refunds).................................................. $ 23 $ 18 $ 46
NON-CASH INVESTING AND FINANCING ACTIVITIES
Retirement of obligation and exchange of property........... $ (2) $ -- $ --
------------------
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.
77
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
2005 2004 2003
-------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- ------- ---------- -------
(MILLIONS EXCEPT SHARE AMOUNTS)
COMMON STOCK
Balance January 1................................ 44,275,594 $ -- 42,167,296 $ -- 41,347,340 $ --
Issued pursuant to benefit plans............... 283,797 -- 438,785 -- 534,221 --
Stock options exercised........................ 985,277 -- 1,669,513 -- 285,735 --
---------- ------- ---------- ------- ---------- -------
Balance December 31.............................. 45,544,668 -- 44,275,594 -- 42,167,296 --
========== ======= ========== ======= ========== =======
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance January 1................................ 2,764 2,751 2,749
Premium on common stock issued pursuant to
benefit plans................................ 12 13 2
------- ------- -------
Balance December 31.............................. 2,776 2,764 2,751
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance January 1................................ (185) (241) (357)
Other comprehensive income (loss).............. (97) 56 116
------- ------- -------
Balance December 31.............................. (282) (185) (241)
------- ------- -------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1................................ (2,180) (2,205) (2,238)
Net income..................................... 58 15 26
Other.......................................... (3) 10 7
------- ------- -------
Balance December 31.............................. (2,125) (2,180) (2,205)
------- ------- -------
LESS -- COMMON STOCK HELD AS TREASURY STOCK, AT
COST
Balance January 1 and December 31................ 1,294,692 240 1,294,692 240 1,294,692 240
========== ------- ========== ------- ========== -------
Total.......................................... $ 129 $ 159 $ 65
======= ======= =======
The accompanying notes to financial statements are an integral part of these
statements of changes in shareholders' equity.
78
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
2005 2004
--------------------------------------------- 2003
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED ACCUMULATED
OTHER OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME INCOME INCOME
(LOSS) (LOSS) (LOSS) (LOSS) (LOSS) (LOSS)
------------- ------------- ------------- ------------- ------------- -------------
(MILLIONS)
NET INCOME........................ $ 58 $15 $ 26
---- ---
ACCUMULATED OTHER COMPREHENSIVE
LOSS CUMULATIVE TRANSLATION
ADJUSTMENT
Balance January 1............... $ (63) $(143) $(273)
Translation of foreign
currency statements......... (87) (87) 80 80 130 130
----- ----- -----
Balance December 31............. (150) (63) (143)
----- ----- -----
FAIR VALUE OF INTEREST RATE
SWAPS
Balance January 1............... -- -- (4)
Fair value adjustment......... -- -- -- -- 4 4
----- ----- -----
Balance December 31............. -- -- --
----- ----- -----
ADDITIONAL MINIMUM PENSION
LIABILITY ADJUSTMENT
Balance January 1............... (122) (98) (80)
Additional minimum pension
liability adjustment........ (16) (16) (28) (28) (29) (29)
Income tax benefit............ 6 6 4 4 11 11
----- ----- -----
Balance December 31............. (132) (122) (98)
----- ----- -----
Balance December 31............... $(282) $(185) $(241)
===== ---- ===== =====
Other comprehensive income........ (97) 56 116
---- --- -----
COMPREHENSIVE INCOME (LOSS)....... $(39) $71 $ 142
==== === =====
The accompanying notes to financial statements are an integral part of these
statements of comprehensive income (loss).
79
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Consolidation and Presentation
We recently changed our name from Tenneco Automotive Inc. back 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 and emission control products and systems to automotive original
equipment and aftermarket customers worldwide. Our common stock continues to
trade on the New York Stock Exchange under the symbol "TEN".
Our 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 since the date of acquisition and cumulative translation
adjustments. We have eliminated all significant intercompany transactions.
Sales of Accounts Receivable
We entered into an agreement to sell an interest in some of our U.S. trade
accounts receivable to a third party. Receivables become eligible for the
program on a daily basis, at which time the receivables are sold to the third
party, 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 $129 million, $124 million, and $123 million
at December 31, 2005, 2004, and 2003, respectively. We recognized a loss of
approximately $3 million, $1 million, and $2 million during 2005, 2004, and
2003, respectively, on these sales of trade accounts, representing the discount
from book values at which these receivables were sold to the third party. The
discount rate varies based on funding cost incurred by the third party, and it
averaged five percent during 2005. We retained ownership of the remaining
interest in the pool of receivables not sold to the third party. 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.
Inventories
At December 31, 2005 and 2004, inventory by major classification was as
follows:
2005 2004
---- ----
(MILLIONS)
Finished goods.............................................. $154 $167
Work in process............................................. 81 85
Raw materials............................................... 89 105
Materials and supplies...................................... 36 39
---- ----
$360 $396
==== ====
Our inventories are stated at the lower of cost or market value using the
first-in, first-out ("FIFO") or average cost methods. Prior to the first quarter
of 2005, inventories in the U.S. based operations (17 percent and 19 percent of
our total consolidated inventories at December 31, 2004 and 2003, respectively)
were valued using the last-in, first-out ("LIFO") method. Effective January 1,
2005, we changed our accounting method for valuing inventory for our U.S. based
operations from the LIFO method to the FIFO method. See Note 4 for additional
discussion of this accounting change.
80
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and Intangibles, net
The changes in the carrying amount of goodwill for the twelve months ended
December 31, 2005, are as follows:
EUROPE,
NORTH SOUTH AMERICA ASIA
AMERICA AND INDIA PACIFIC TOTAL
------- ------------- ------- -----
(MILLIONS)
Balance at December 31, 2004.................... $138 $49 $9 $196
Acquisition of minority interest in joint
venture....................................... -- 8 -- 8
Translation adjustments......................... -- (4) -- (4)
---- --- -- ----
Balance at December 31, 2005.................... $138 $53 $9 $200
==== === == ====
We have capitalized certain intangible assets, primarily trademarks and
patents, based on their estimated fair value at the date we acquired them. We
amortize these intangible assets on a straight-line basis over periods ranging
from five to 30 years. Amortization of intangibles amounted to less than $1
million in 2005, 2004, and 2003, and is included in the statements of income
caption "Depreciation and amortization of other intangibles." The carrying
amount and accumulated amortization are as follows:
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
VALUE AMORTIZATION VALUE AMORTIZATION
-------------- ------------ -------------- ------------
(MILLIONS) (MILLIONS)
Amortized Intangible Assets
Customer contract............... $ 6 $-- $ -- $--
Patents......................... 2 (2) 3 (2)
Noncompete covenants............ 2 (1) 2 (1)
Trademarks...................... 1 (1) 2 (2)
Technology rights & capital
subsidies.................... 2 (1) 2 (1)
--- --- ----- ---
Total........................... $13 $(5) $ 9 $(6)
=== === ===== ===
Non-amortized intangible assets include $22 million for the company's
intangible pension assets.
Estimated amortization of intangibles assets over the next five years is
expected to be less than $1 million each year.
Plant, Property, and Equipment, at Cost
At December 31, 2005 and 2004, plant, property, and equipment, at cost, by
major category were as follows:
2005 2004
------ ------
(MILLIONS)
Land, buildings, and improvements........................... $ 400 $ 418
Machinery and equipment..................................... 1,827 1,848
Other, including construction in progress................... 201 185
------ ------
$2,428 $2,451
====== ======
81
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
We depreciate these properties on a straight-line basis over the estimated
useful lives of the assets. Useful lives range from 10 to 50 years for buildings
and improvements and from three to 25 years for machinery and equipment.
Notes Receivable and Allowance for Doubtful Accounts
Short and long-term notes receivable outstanding were $24 million and $34
million at December 31, 2005 and 2004, respectively. The allowance for doubtful
accounts on short- and long-term notes receivable was zero at both December 31,
2005 and 2004, respectively.
At December 31, 2005 and 2004, the allowance for doubtful accounts on
short- and long-term accounts receivable was $19 million and $22 million,
respectively.
Pre-production Design and Development and Tooling Assets
We expense pre-production design and development costs as incurred unless
we have a contractual guarantee for reimbursement from the original equipment
customer. We had long-term receivables of $17 million on the balance sheet at
both December 31, 2005 and 2004, for guaranteed pre-production design and
development reimbursement arrangements with our customers. In addition, plant,
property and equipment includes $59 million and $57 million at December 31, 2005
and 2004, respectively, for original equipment tools and dies that we own, and
prepayments and other includes $32 million and $44 million at December 31, 2005
and 2004, respectively, for in-process tools and dies that we are building for
our original equipment customers.
Internal Use Software Assets
We capitalize certain costs related to the purchase and development of
software that we use in our business operations. We amortize the costs
attributable to these software systems over their estimated useful lives,
ranging from three to 12 years, based on various factors such as the effects of
obsolescence, technology, and other economic factors. Capitalized software
development costs, net of amortization, were $81 million and $90 million at
December 31, 2005 and 2004, respectively, and is recorded in other long-term
assets. Amortization of software development costs was approximately $16 million
for each of the years ended December 31, 2005, 2004, and 2003, respectively, and
is included in the statements of income caption "Depreciation and Amortization
of other intangibles." Additions to capitalized software development costs,
including payroll and payroll-related costs for those employees directly
associated with developing and obtaining the internal use software, are
classified as investing activities in the statements of cash flows.
Income Taxes
We have a U.S. Federal tax net operating loss ("NOL") carryforward at
December 31, 2005, of $566 million, which will expire in varying amounts from
2018 to 2025. The federal tax effect of that NOL is $198 million, and is
recorded as a deferred tax asset on our balance sheet at December 31, 2005. We
also have state NOL carryforwards at December 31, 2005 of $720 million, which
will expire in varying amounts from 2006 to 2025. The tax effect of the state
NOL, net of a valuation allowance, is $27 million and is recorded as a deferred
tax asset on our balance sheet at December 31, 2005. We estimate, based on
available evidence both positive and negative, that it is more likely than not
that we will utilize these NOLs within the prescribed carryforward period. That
estimate is based upon our expectations regarding future taxable income of our
U.S. operations and the implementation of available tax planning strategies that
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
82
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Revenue Recognition
We recognize revenue for sales to our original equipment and aftermarket
customers when title and risk of loss passes to the customers under the terms of
our arrangements with those customers, which is usually at the time of shipment
from our plants or distribution centers. In connection with the sale of exhaust
systems to certain original equipment manufacturers, we purchase catalytic
converters or components thereof ("substrates") on behalf of our customers which
are used in the assembled system. These substrates are included in our inventory
and "passed through" to the customer at our cost, plus a small margin, since we
take title to the inventory and are responsible for both the delivery and
quality of the finished product. Revenues recognized for substrate sales were
$678 million, $726 million and $653 million in 2005, 2004 and 2003,
respectively. 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.
Earnings Per Share
We compute basic earnings per share by dividing income available to common
shareholders by the weighted-average number of common shares outstanding. The
computation of diluted earnings per share is similar to the computation of basic
earnings per share, except that we adjust the weighted-average number of shares
outstanding to include estimates of additional shares that would be issued if
potentially dilutive common shares had been issued. In addition, we adjust
income available to common shareholders to include any changes in income or loss
that would result from the assumed issuance of the dilutive common shares.
Engineering, Research and Development
We expense engineering, research, and development costs as they are
incurred. Engineering, research and development expenses were $83 million for
2005 and $76 million for 2004 and $67 million for 2003, net of reimbursements
from our customers Of these amounts, $11 million in 2005, $12 million in 2004
and $9 million in 2003 relate to research and development, which includes the
search, design, and development of a new unproven product or process.
Additionally, $47 million, $35 million, and $35 million of engineering,
research, and development expense for 2005, 2004, and 2003, respectively,
relates to improvements and enhancements to existing products and processes. The
remainder of the expenses in each year relate to engineering costs we incurred
for application of existing products and processes to vehicle platforms.
Further, our customers reimburse us for engineering, research, and development
costs on some platforms when we prepare prototypes and incur costs before
platform awards. Our engineering research and development expense for 2005,
2004, and 2003 has been reduced by $51 million, $46 million, and $38 million,
respectively, for these reimbursements.
Foreign Currency Translation
We translate the financial statements of foreign subsidiaries into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted-average exchange rate for revenues and expenses in
each period. We record translation adjustments for those subsidiaries whose
local currency is
83
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
their functional currency as a component of accumulated other comprehensive loss
in shareholders' equity. We recognize transaction gains and losses arising from
fluctuations in currency exchange rates on transactions denominated in
currencies other than the functional currency in earnings as incurred, except
for those transactions which hedge purchase commitments and for those
intercompany balances which are designated as long-term investments. Net income
included foreign currency transaction losses of $5 million in 2005, $2 million
in 2004, and $3 million in 2003.
Risk Management Activities
We use derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
our exposure to changes in foreign currency exchange rates, and interest rate
swaps to hedge our exposure to changes in interest rates. Our primary exposure
to changes in foreign currency rates results from intercompany loans made
between affiliates to minimize the need for borrowings from third parties. Net
gains or losses on these foreign currency exchange contracts that are designated
as hedges are recognized in the income statement to offset the foreign currency
gain or loss on the underlying transaction. Additionally, we enter into foreign
currency forward purchase and sale contracts to mitigate our exposure to changes
in exchange rates on some intercompany and third party trade receivables and
payables. Since these anticipated transactions are not firm commitments, we mark
these forward contracts to market each period and record any gain or loss in the
income statement. From time to time we have also entered into forward contracts
to hedge our net investment in foreign subsidiaries. We recognize the after-tax
net gains or losses on these contracts on the accrual basis in the balance sheet
caption "Accumulated other comprehensive loss." In the statement of cash flows,
cash receipts or payments related to these exchange contracts are classified
consistent with the cash flows from the transaction being hedged.
We do not enter into derivative financial instruments for speculative
purposes.
Stock Options
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." Our stock-based employee compensation plans are
described more fully in Note 8. 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
84
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the disclosure requirements only 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:
YEARS ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
(MILLIONS EXCEPT PER SHARE
AMOUNTS)
Net income.................................................. $ 58 $ 15 $ 26
Add: Stock-based employee compensation expense included in
net income, net of income tax............................. 6 14 4
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards, net of
income tax................................................ (8) (16) (6)
----- ----- -----
Pro forma net income........................................ $ 56 $ 13 $ 24
===== ===== =====
Earnings per share:
Basic -- as reported........................................ $1.35 $0.37 $0.64
Basic -- pro forma.......................................... $1.30 $0.32 $0.60
Diluted -- as reported...................................... $1.29 $0.35 $0.62
Diluted -- pro forma........................................ $1.24 $0.30 $0.58
The fair value of each option granted during 2005, 2004, and 2003 is
estimated on the date of grant using the Black-Scholes option pricing model
using the following weighted-average assumptions for grants in 2005, 2004, and
2003, respectively: (i) risk-free interest rates of 3.97 percent, 4.07 percent,
and 4.01 percent; (ii) expected lives of 7.0, 10.0, and 10.0 years; (iii)
expected volatility 42.96 percent, 43.56 percent, and 40.45 percent; and (iv) no
dividend yield.
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 was adopted January 1, 2005, and 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 on or after January 1, 2006, and will be adopted on a
prospective basis. We estimate that the impact on our net income for the full
year 2005 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.
85
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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), "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) did 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 did not 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 did not 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.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. These estimates include allowances for doubtful
receivables, promotional and product returns, pension and post-retirement
benefit plans, income taxes, and contingencies. These items are covered in more
detail in Note 1, Note 7, Note 10, and Note 12. Actual results could differ from
those estimates.
86
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation. Specifically, we have reclassified
expenditures for software-related intangible assets in the statements of cash
flows from operating activities to investing activities as we believe this
presentation is preferable. We do not believe this change in presentation is
material to the financial statements.
2. RESTRUCTURING AND OTHER 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.
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 December 31, 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 $12 million in restructuring and
restructuring-related costs in 2005. Including the costs incurred in 2002
through 2004 of $59 million, we have incurred a total of $71 million for
activities related to our restructuring initiatives.
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 December 31, 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
December 31, 2005, we have excluded $9 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 February 2006, we decided to reduce the work force at certain of our
global locations as part of our ongoing effort to reduce our cost structure. The
plan contemplates a reduction in force of approximately 100 employees during the
first quarter of 2006. We expect to record a pre-tax charge of approximately $4
million to $5 million during the first quarter of 2006 for severance and other
benefits related to these reductions in force, substantially all of which will
be paid in cash. These charges are in addition to other customary quarterly
restructuring charges that we may incur during the quarter.
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.
3. ACQUISITIONS
In February 2005, we acquired substantially all the exhaust assets, and
assumed certain related liabilities 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. Gabilan generated
approximately $37 million in revenue for the eleven month period ended December
31, 2005.
In December 2005, we completed the acquisition of the minority interest of
the joint venture partner for our Indian ride control operations. We purchased
the minority owned interest for approximately $5 million in cash and property.
4. CHANGE IN ACCOUNTING PRINCIPLE
Inventory Valuation
Prior to the first quarter of 2005, inventories in the U.S. based
operations (17 percent and 19 percent of our total consolidated inventories at
December 31, 2004 and 2003, respectively) were valued using the LIFO method and
all other inventories were valued using the FIFO or average cost methods at the
lower of cost or market value. Effective January 1, 2005, we changed our
accounting method for valuing inventory for our U.S. based operations from the
LIFO method to the 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
88
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 restating prior year's financial statements which have been
previously filed under an amended 10 K/A for the year ended December 31, 2004.
The effect of the change in accounting principle on our financial position is
presented below.
AS OF
DECEMBER 31,
-------------
2004 2003
----- -----
(MILLIONS)
INCREASE
(DECREASE)
Inventories................................................. $14 $11
Deferred income tax assets (noncurrent)..................... $(5) $(4)
Shareholders' equity........................................ $ 9 $ 7
The effect of the change in accounting principle on the results of
operations is presented below.
YEARS ENDED
DECEMBER 31,
--------------------
2004 2003
------- --------
(MILLIONS EXCEPT PER
SHARE AMOUNTS)
INCREASE (DECREASE)
Income (loss) before interest expense, income taxes and
minority interest......................................... $ 3 $ (2)
Income tax expense (benefit)................................ 1 (1)
----- ------
Net Income (loss)........................................... $ 2 $ (1)
===== ======
Basic earnings (loss) per share of common stock............. $0.04 $(0.03)
===== ======
Diluted earnings (loss) per share of common stock........... $0.04 $(0.03)
===== ======
89
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS
Long-Term Debt
A summary of our long-term debt obligations at December 31, 2005 and 2004,
is set forth in the following table:
2005 2004
------ ------
(MILLIONS)
Tenneco Inc. --
Senior Term Loans due 2010, average effective interest rate
5.7% in 2005 and 4.5% in 2004............................. $ 356 $ 396
10 1/4% Senior Secured Notes due 2013, including
unamortized premium.................................... 483 489
8 5/8% Senior Subordinated Notes due 2014................. 500 500
Debentures due 2008 through 2025, average effective
interest rate 9.3% in both 2005 and 2004............... 3 3
Notes due 2005 through 2007, average effective interest
rate 7.2% in both 2005 and 2004........................ 2 2
Other subsidiaries -- Notes due 2006 through 2013, average
effective interest rate 3% in 2005 and 4.6% in 2004....... 16 20
------ ------
1,360 1,410
Less -- current maturities.................................. 4 9
------ ------
Total long-term debt........................................ $1,356 $1,401
====== ======
The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 2005, are $4 million, $4 million, $4 million,
$2 million, and $359 million for 2006, 2007, 2008, 2009, and 2010, respectively.
Short-Term Debt
We principally use revolving credit facilities to finance our short-term
capital requirements. As a result, we classify the outstanding balance of
borrowings under the revolving credit facilities within our short-term debt. The
revolving credit facility balance included in short-term debt was zero at both
December 31, 2005 and 2004. Information regarding our short-term debt as of and
for the years ended December 31, 2005 and 2004 is as follows:
2005 2004
---- ----
(MILLIONS)
Current maturities on long-term debt........................ $ 4 $ 9
Notes payable............................................... 18 10
--- ---
Total short-term debt....................................... $22 $19
=== ===
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2005 2004
---------------- ----------------
NOTES PAYABLE(A) NOTES PAYABLE(A)
---------------- ----------------
(DOLLARS IN MILLIONS)
Outstanding borrowings at end of year................. $ 18 $ 10
Weighted average interest rate on outstanding
borrowings at end of year(b)........................ 4.09% 6.09%
Approximate maximum month-end outstanding borrowings
during year......................................... $ 204 $ 67
Approximate average month-end outstanding borrowings
during year......................................... $ 115 $ 32
Weighted average interest rate on approximate average
month-end outstanding borrowings during year(b)..... 5.5% 4.8%
-------------------------
(a) Includes borrowings under both committed credit facilities and uncommitted
lines of credit and similar arrangements.
(b) This calculation does not include the commitment fees to be paid on the
unused revolving credit facilities balances which are recorded as interest
expense for accounting purposes.
Financing Arrangements
COMMITTED CREDIT FACILITIES(A)
-------------------------------------------------
DECEMBER 31, 2005
-----------------------
LETTERS OF
TERM COMMITMENTS BORROWINGS CREDIT(B) AVAILABLE
------- ----------- ---------- ---------- ---------
(MILLIONS)
Tenneco Inc. revolving credit
agreement...................... 2008 $300 $ -- $ -- $300
Tenneco Inc. Tranche B letter of
credit/revolving loan
agreement...................... 2010 155 -- 38 117
Subsidiaries' credit
agreements..................... Various 18 18 -- --
---- ----- ----- ----
$473 $ 18 $ 38 $417
==== ===== ===== ====
-------------------------
(a) We generally are required to pay commitment fees on the unused portion of
the total commitment.
(b) Letters of credit reduce the available borrowings under the revolving
credit agreement.
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 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 December 31, 2005, the senior
credit facility consisted of a seven-year,
91
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$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.
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 issued an additional $125 million of 10 1/4 percent senior secured notes. We
incurred $27 million in fees 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 are being amortized over the term of
the senior secured notes and the amended and restated senior credit facility.
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
2005 resulted in lower interest expense of approximately $2 million for the
year. The LIBOR rate as of December 31, 2005 as determined under these
agreements was 3.82 percent. This rate remained in effect until January 15, 2006
when it increased to approximately 4.73 percent. Based on the rate in effect
through January 15, 2006 and using the current LIBOR as determined under these
agreements of approximately 4.73 percent (which remains in effect until July 15,
2006), these swaps are not expected to materially impact our 2006 annual
interest expense. 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 fair value with an
offset to the underlying hedged item, which is long-term debt. As of December
31, 2005, the fair value of the interest rate swaps was a liability of
approximately $5 million. On December 31, 2005, we had $1 billion 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 2007 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. We also have $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 accrued
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. In exchange for the
amendment, 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 are being 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.
92
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 all remaining cash charges and expenses related to restructuring
initiatives started on or before February 21, 2005, and to exclude up to an
additional $60 million in restructuring-related expenses announced and taken
after February 21, 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 term loan B interest expense in 2005
was approximately $5 million lower than what it would otherwise have been.
During 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 will not be required to reduce the commitments under our tranche B-1 letter
of credit/revolving loan facility should we obtain additional revolving credit
commitments. 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
93
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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).
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 275 basis points (reduced from 325 basis points in March 2005 and
further reduced from 300 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
37.5 basis points (reduced from 50 basis points basis points to 37.5 basis
points in August 2005), plus a margin of 175 basis points (reduced from 225
basis points in March 2005 and further reduced from 200 basis points in August
2005). Letters of credit issued under the revolving credit facility accrue a
letter of credit fee at a per annum rate of 275 basis points (reduced from 325
basis points in March 2005 and further reduced from 300 basis points in August
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 to 37.5 basis points as our consolidated leverage ratio
was less than 3.5.
94
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 four 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. ACT.
---- ---- ---- ---- ----- ----- ----- -----
Leverage Ratio (maximum)................. 4.75 3.52 4.75 3.42 4.50 3.39 4.50 3.31
Interest Coverage Ratio (minimum)........ 2.00 2.83 2.00 3.06 2.00 3.12 2.00 3.40
Fixed Charge Coverage Ratio (minimum).... 1.10 1.86 1.10 2.02 1.10 2.05 1.10 2.21
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 amended agreement); (iii)
liquidations and dissolutions; (iv) incurring additional indebtedness or
guarantees; (v) capital expenditures; (vi) dividends (limited to no more than
$15 million per year); (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 December 31, 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
95
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 December 31, 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 on a nonrecourse basis in North America and Europe.
In North America, we have an 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 $80 million and $68 million at December 31, 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 2006,
this program was renewed for 364 days to January 29, 2007 at a facility size of
$100 million. We also sell some receivables in our European operations to
regional banks in Europe. At December 31, 2005, we sold $49 million of accounts
receivable in Europe down from $56 million at December 31, 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 may 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.
96
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. FINANCIAL INSTRUMENTS
The carrying and estimated fair values of our financial instruments by
class at December 31, 2005 and 2004 were as follows:
2005 2004
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(MILLIONS)
ASSETS (LIABILITIES)
Long-term debt (including current maturities)..... $1,360 $1,373 $1,410 $1,522
Instruments with off-balance-sheet risk:
Foreign currency contracts...................... -- (1) -- (5)
Financial guarantees............................ -- -- -- --
Interest rate swaps............................. -- (5) -- (1)
Asset and Liability Instruments -- The fair value of cash and cash
equivalents, short and long-term receivables, accounts payable, and short-term
debt was considered to be the same as or was not determined to be materially
different from the carrying amount.
Long-term Debt -- The fair value of fixed rate long-term debt was based on
the market value of debt with similar maturities and interest rates.
Instruments With Off-Balance-Sheet Risk
Foreign Currency Contracts -- Note 1, "Summary of Accounting
Policies -- Risk Management Activities" describes our use of and accounting for
foreign currency exchange contracts. The following table summarizes by major
currency the contractual amounts of foreign currency contracts we utilize:
NOTIONAL AMOUNT
-------------------------------------
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
PURCHASE SELL PURCHASE SELL
--------- ----- --------- -----
(MILLIONS)
Foreign currency contracts (in U.S.$):
Australian dollars................................ $ 20 $ 25 $ 18 $ 34
British pounds.................................... 364 318 284 223
Canadian dollars.................................. 46 32 35 22
Czech Republic koruna............................. 66 69 25 42
Danish kroner..................................... 83 66 85 69
European euro..................................... 63 1 132 94
Polish zloty...................................... 7 16 1 21
Swedish krona..................................... 60 32 59 30
U.S. dollars...................................... 30 184 98 208
Other............................................. 6 3 3 2
---- ---- ---- ----
$745 $746 $740 $745
==== ==== ==== ====
We manage our foreign currency risk by entering into derivative financial
instruments with major financial institutions that can be expected to fully
perform under the terms of such agreements. Based on exchange rates at December
31, 2005 and 2004, the cost of replacing these contracts in the event of non-
performance by the counterparties would not have been material. The face value
of these instruments is recorded in other current liabilities.
97
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Financial Guarantees -- 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 December 31, 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 13 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, and cash management requirements for some
of our subsidiaries totaling $15 million. We have also issued $20 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.
Interest Rate Swaps -- In April 2004, we hedged our exposure to fixed
interest rates by entering into fixed-to-floating interest rate swaps covering
$150 million of our fixed interest rate debt. 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 fair value as a long-term asset or liability with an offset to the
underlying hedged item, which is long-term debt. The cost of replacing these
contracts in the event of non-performance by the counterparties was not
material. These hedges are effective, so we have not recognized in earnings any
amounts related to the ineffectiveness of the interest rate swaps. No amounts
were excluded from the assessment of hedge effectiveness.
Negotiable Financial Instruments -- One of our European subsidiaries
receives payment from one of its OE customers whereby the account receivables
are satisfied through the delivery of negotiable financial instruments. These
financial instruments are then sold at a discount to a European bank. The sales
of these financial instruments are not included in the account receivables sold
in 2005. Any of these financial instruments which were not sold as of December
31, 2005 and 2004 are classified as other current assets and are excluded from
our definition of cash equivalents. We had sold approximately $34 million of
these instruments at December 31, 2005 and $44 million at December 31, 2004.
In certain instances several of our Chinese subsidiaries receive payment
from OE customers and satisfy vendor payments through the receipt and delivery
of negotiable financial instruments. Financial instruments used to satisfy
vendor payables and not redeemed totaled $8 million at December 31, 2005 and
were classified as notes payable. Financial instruments received from OE
customers and not redeemed totaled $9 million at December 31, and were
classified as other current assets. One of our Chinese subsidiaries is required
to maintain a cash balance at a financial institution issuing the financial
instruments which are used to satisfy vendor payments. The balance totaled $3
million at December 31, 2005 and was classified as cash and cash equivalents.
98
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The domestic and foreign components of our income before income taxes and
minority interest are as follows:
YEARS ENDED
DECEMBER 31,
-------------------
2005 2004 2003
---- ----- ----
(MILLIONS)
U.S. loss before income taxes............................... $(4) $(106) $(42)
Foreign income before income taxes.......................... 89 101 67
--- ----- ----
Income (loss) before income taxes and minority interest..... $85 $ (5) $ 25
=== ===== ====
Following is a comparative analysis of the components of income tax expense
(benefit):
YEARS ENDED DECEMBER 31,
--------------------------
2005 2004 2003
------ ------ ------
(MILLIONS)
Current --
U.S. ..................................................... $ -- $ -- $ --
State and local........................................... 2 1 2
Foreign................................................... 23 33 21
---- ---- ----
25 34 23
---- ---- ----
Deferred --
U.S. ..................................................... (16) (30) (23)
State and local........................................... 4 (3) (2)
Foreign................................................... 12 (25) (5)
---- ---- ----
-- (58) (30)
---- ---- ----
Income tax expense (benefit)................................ $ 25 $(24) $ (7)
==== ==== ====
99
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following is a reconciliation of income taxes computed at the statutory
U.S. federal income tax rate (35 percent for all years presented) to the income
tax benefit reflected in the statements of income:
YEARS ENDED DECEMBER 31,
-------------------------
2005 2004 2003
----- ----- -----
(MILLIONS)
Tax expense (benefit) computed at the statutory U.S. federal
income tax rate........................................... $29 $ (3) $ 10
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates and foreign losses
with no tax benefit.................................... 1 7 14
Taxes on repatriation of dividends........................ 1 4 --
State and local taxes on income, net of U.S. federal
income tax benefit..................................... 1 -- 1
Changes in valuation allowance for tax loss carryforwards
and credits............................................ 2 (19) (1)
Amortization of tax goodwill.............................. (2) (2) (2)
Income exempt from tax due to tax holidays................ (2) (3) (8)
Nondeductible restructuring expenses...................... -- -- (5)
Foreign earnings subject to U.S. federal income tax....... 1 -- 5
Adjustment of prior years taxes........................... 1 (1) (13)
Impact of Belgium rate reduction.......................... (1) (1) --
Tax contingencies......................................... (9) -- (11)
Other..................................................... 3 (6) 3
--- ---- ----
Income tax expense (benefit)................................ $25 $(24) $ (7)
=== ==== ====
100
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The components of our net deferred tax asset were as follows:
DECEMBER 31,
-------------
2005 2004
----- -----
(MILLIONS)
Deferred tax assets --
Tax loss carryforwards:
U.S. .................................................. $198 $194
State.................................................. 44 37
Foreign................................................ 75 75
Investment tax credit benefits............................ 40 35
Postretirement benefits other than pensions............... 33 37
Pensions.................................................. 50 72
Bad debts................................................. 3 2
Sales allowances.......................................... 6 6
Other..................................................... 103 76
Valuation allowance....................................... (75) (68)
---- ----
Net deferred tax asset............................ 477 466
---- ----
Deferred tax liabilities --
Tax over book depreciation................................ 130 158
Other..................................................... 92 76
---- ----
Total deferred tax liability......................... 222 234
---- ----
Net deferred tax asset...................................... $255 $232
==== ====
Following is a reconciliation of deferred taxes to the deferred taxes shown
in the balance sheet:
DECEMBER 31,
------------
2005 2004
---- -----
(MILLIONS)
Balance Sheet:
Current portion -- deferred tax asset..................... $ 43 $ 70
Non-current portion -- deferred tax asset................. 307 304
Current portion -- deferred tax liability shown in other
current liabilities.................................... (9) (16)
Non-current portion -- deferred tax liability............. (86) (126)
---- -----
Net Deferred Tax Assets..................................... $255 $ 232
==== =====
As shown by the valuation allowance in the table above, we had potential
tax benefits of $75 million and $68 million at December 31, 2005 and 2004,
respectively, that we did not recognize in the statements of income when they
were generated. These unrecognized tax benefits resulted primarily from foreign
tax loss carryforwards, foreign investment tax credits and U.S. state net
operating losses that are available to reduce future foreign tax liabilities.
We have a U.S. Federal tax net operating loss carryforward ("NOL") at
December 31, 2005, of $566 million, which will expire in varying amounts from
2018 to 2025. The federal tax effect of that NOL is $198 million, and is
recorded as a deferred tax asset on our balance sheet at December 31, 2005. We
also have state NOL carryforwards at December 31, 2005 of $720 million, which
will expire in varying amounts from 2006 to 2025. The tax effect of the state
NOL, net of a valuation allowance, is $27 million
101
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
and is recorded as a deferred tax asset on our balance sheet at December 31,
2005. We estimate, based on available evidence both positive and negative, that
it is more likely than not that we will utilize these NOLs within the prescribed
carryforward period. That estimate is based upon our expectations regarding
future taxable income of our U.S. operations and the implementation of available
tax planning strategies that 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.
As of December 31, 2005, for foreign income tax purposes, we have $75
million of foreign tax NOLs. Of the $75 million of foreign tax NOLs, $62 million
does not expire and the remainder will expire in varying amounts from 2006 to
2020.
We do not provide for U.S. income taxes on unremitted earnings of foreign
subsidiaries, except for the earnings of certain of our China operations, as our
present intention is to reinvest the unremitted earnings in our foreign
operations. Unremitted earnings of foreign subsidiaries are approximately $475
million at December 31, 2005. We estimated that the amount of U.S. income taxes
that would be accrued upon remittance of the assets that represent those
unremitted earnings is $166 million.
We have tax sharing agreements with our former affiliates that allocate tax
liabilities for prior periods and establish indemnity rights on certain tax
issues.
8. COMMON STOCK
We have authorized 135 million shares ($0.01 par value) of common stock, of
which 45,544,668 shares and 44,275,594 shares were issued at December 31, 2005
and 2004, respectively. We held 1,294,692 shares of treasury stock at both
December 31, 2005 and 2004.
Stock Plans
The total number of shares of our common stock outstanding and available at
December 31, 2005 and 2004, were as follows:
DECEMBER 31,
---------------------
2005 2004
--------- ---------
Number of shares covering stock option awards............... 4,922,095 5,512,513
Number of shares available for future issuance.............. 816,694 1,582,417
2002 Long-Term Incentive Plan and Other Equity Plans -- In December 1996,
we adopted the 1996 Stock Ownership Plan, which permitted the granting of a
variety of awards, including common stock, restricted stock, performance units,
stock appreciation rights ("SARs"), and stock options to our directors,
102
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
officers, and employees. The plan, which terminated as to new awards on December
31, 2001, was renamed the "Stock Ownership Plan." In December 1999, we adopted
the Supplemental Stock Ownership Plan, which permitted the granting of a variety
of similar awards to our directors, officers and employees. We were authorized
to deliver up to about 1.1 million treasury shares of common stock under the
Supplemental Stock Ownership Plan, which also terminated as to new awards on
December 31, 2001. In March 2002, we adopted the 2002 Long-Term Incentive Plan
which permits the granting of a variety of similar awards to our officers,
directors and employees. Up to 4 million shares of our common stock have been
authorized for delivery under the 2002 Long-Term Incentive Plan, of which
507,251 had been issued as of December 31, 2005.
Restricted Stocks and Stock Equivalent Units -- We have granted restricted
stock to certain key employees. These awards generally require, among other
things, that the employee remains our employee during the restriction period.
During 2005, 2004, and 2003, we granted 285,500, 305,083, and 150,250 shares,
respectively, with a weighted average fair value based on the price of our
common stock on the grant date of $16.00, $8.80, and $3.75 per share,
respectively. At December 31, 2005, 667,958 restricted shares at an average
price of $10.93 per share were outstanding.
We have also granted stock equivalent units to certain key employees that
are payable in cash annually based on the attainment of specified performance
goals. The grant value is indexed to the stock price. Each employee granted
stock equivalent units receives a percentage of the total grants value. There
were 968,000, 956,125 and 961,293 stock equivalent units in 2005, 2004 and 2003,
respectively, that were settled in cash. At December 31, 2005, 869,500 stock
equivalent units at an average price of $7.68 per unit were outstanding.
In December 2005, we granted a total of 28,000 shares of restricted stock
to our outside directors with a fair value based on the price of our common
stock on the grant date of $17.43. We also granted restricted stock to a certain
director in satisfaction of residual obligations under the discontinued
retirement plan. During 2005, 2004, and 2003, we granted 963, 1,774, and 4,164
shares, respectively, with a weighted average fair value based on the price of
our common stock on the grant date of $16.00, $8.68, and $3.77 per share,
respectively. In addition, we have granted 2,500 restricted shares to the
corporate secretary with a weighted average fair value based on the price of our
common stock on the date of grant of $13.28. At December 31, 2005, a total of
47,899 restricted shares at an average price of $12.81 per unit were outstanding
in connection with these grants.
We recognized after-tax stock based compensation expense in 2005 of $6
million, 2004 of $14 million, and in 2003 of $4 million.
103
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options -- The following table reflects the status and activity for
all options to purchase common stock we have issued for the periods indicated:
2005 2004 2003
--------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVG. SHARES AVG. SHARES AVG.
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
STOCK OPTIONS OPTION PRICES OPTION PRICES OPTION PRICES
------------- --------- -------- ---------- -------- --------- --------
Outstanding, beginning of year... 5,512,513 $7.43 6,706,258 $6.33 5,991,048 $6.66
Granted........................ 539,370 15.98 561,902 8.80 1,489,521 3.76
Cancelled...................... (144,511) 6.68 (86,134) 6.43 (488,576) 5.00
Exercised...................... (985,277) 3.96 (1,669,513) 3.54 (285,735) 2.10
--------- ---------- ---------
Outstanding, end of year......... 4,922,095 9.08 5,512,513 7.43 6,706,258 6.33
========= ========== =========
Options exercisable at end of
year........................... 3,659,892 $8.84 4,232,466 $7.92 4,391,900 $8.01
Weighted average fair value of
options granted during the
year........................... $8.14 $5.34 $2.19
The following table reflects summarized information about stock options
outstanding at December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
NUMBER REMAINING AVG. NUMBER AVG.
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICE AT 12/31/05 LIFE PRICE AT 12/31/05 PRICE
----------------------- ----------- ------------- -------- ----------- --------
$ 1.57 -- $ 8.00....................... 2,181,927 6.3 years $2.96 1,735,607 $2.75
$ 8.01 -- $14.00....................... 1,494,557 5.2 years 8.68 1,160,112 8.65
$14.01 -- $21.00....................... 618,381 7.0 years 16.49 136,943 18.23
$21.01 -- $27.00....................... 627,230 1.4 years 24.02 627,230 24.02
--------- ---------
4,922,095 3,659,892
========= =========
Rights Plan
On September 9, 1998, we adopted a Rights Plan and established an
independent Board committee to review it every three years. The Rights Plan was
adopted to deter coercive takeover tactics and to prevent a potential acquirer
from gaining control of us in a transaction that is not in the best interests of
our shareholders. Generally, under the Rights Plan, as it has been amended to
date, if a person becomes the beneficial owner of 15 percent or more of our
outstanding common stock, each right will entitle its holder to purchase, at the
right's exercise price, a number of shares of our common stock or, under certain
circumstances, of the acquiring person's common stock, having a market value of
twice the right's exercise price. Rights held by the 15 percent or more holders
will become void and will not be exercisable.
In March 2000, we amended the Rights Plan to (i) reduce from 20 percent to
15 percent the level of beneficial ownership at which the rights became
exercisable, as described above, and (ii) eliminate the "qualified offer" terms
of the plan. These terms provided that the rights would not become exercisable
in connection with a "qualified offer," which was defined as an all-cash tender
offer for all outstanding common stock that was fully financed, remained open
for a period of at least 60 business days, resulted in the offeror owning at
least 85 percent of our common stock after consummation of the offer, assured a
prompt second-step acquisition of shares not purchased in the initial offer, at
the same price as the initial offer, and met certain other requirements.
104
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the adoption of the Rights Plan, our Board of Directors
also adopted a three-year independent director evaluation ("TIDE") mechanism.
Under the TIDE mechanism, an independent Board committee (the "Tide Committee")
will review, on an ongoing basis, the Rights Plan and developments in rights
plans generally, and, if it deems appropriate, recommend modification or
termination of the Rights Plan. The independent committee will report to our
Board at least every three years as to whether the Rights Plan continues to be
in the best interests of our shareholders.
In 2005, the Tide Committee met and reviewed, among other things,
developments in rights plans and academic studies of rights plans and contests
for corporate control since the last meeting of the Tide Committee. Based upon
this review, the Tide Committee determined that the Rights Agreement continues
to be in our best interests and the best interests of our shareholders. The Tide
Committee recommended to our Board of Directors that the Board should not take
any action with respect to the Rights Plan.
Earnings Per Share
Earnings per share of common stock outstanding were computed as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------
2005 2004 2003
------------- ------------- -------------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
Basic earnings per share --
Net Income.......................................... $ 58 $ 15 $ 26
=========== =========== ===========
Average shares of common stock outstanding.......... 43,088,588 41,534,810 40,426,136
=========== =========== ===========
Earnings per average share of common stock.......... $ 1.35 $ 0.37 $ 0.64
=========== =========== ===========
Diluted earnings per share --
Net Income.......................................... $ 58 $ 15 $ 26
=========== =========== ===========
Average shares of common stock outstanding.......... 43,088,588 41,534,810 40,426,136
Effect of dilutive securities:
Restricted stock................................. 380,656 272,561 67,462
Stock options.................................... 1,852,011 2,373,089 1,274,361
----------- ----------- -----------
Average shares of common stock outstanding including
dilutive securities.............................. 45,321,225 44,180,460 41,767,959
=========== =========== ===========
Earnings per average share of common stock.......... $ 1.29 $ 0.35 $ 0.62
=========== =========== ===========
Options to purchase 716,441, 741,921, and 2,367,094 shares of common stock
were outstanding at December 31, 2005, 2004, and 2003, 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.
9. PREFERRED STOCK
We had 50 million shares of preferred stock ($.01 par value) authorized at
December 31, 2005 and 2004. No shares of preferred stock were outstanding at
those dates. We have designated and reserved 2 million shares of the preferred
stock as junior preferred stock for the Rights Plan.
105
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
10. PENSION PLANS, POSTRETIREMENT AND OTHER EMPLOYEE BENEFITS
We have various defined benefit pension plans that cover substantially all
of our employees. The measurement date used to determine measurement of the
majority of our pension plan assets and benefit obligations is September 30th,
for both our domestic and foreign plans. Benefits are based on years of service
and, for most salaried employees, on final average compensation. Our funding
policy is to contribute to the plans amounts necessary to satisfy the funding
requirement of applicable federal or foreign laws and regulations. Of our $634
million benefit obligation at December 31, 2005, approximately $571 million
required funding under applicable federal and foreign laws. At December 31,
2005, we had approximately $390 million in assets to fund that obligation. The
balance of our benefit obligation, $63 million, did not require funding under
applicable federal or foreign laws and regulations. Pension plan assets were
invested in the following classes of securities:
PERCENTAGE OF FAIR MARKET VALUE
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- ---------------
US FOREIGN US FOREIGN
---- -------- ---- --------
Equity Securities......................................... 71% 69% 69% 64%
Debt Securities........................................... 28% 22% 29% 27%
Real Estate............................................... -- -- -- --
Other..................................................... 1% 9% 2% 9%
Our investment policy for both our domestic and foreign plans is to invest
more heavily in equity securities rather than debt securities. Targeted pension
plan allocations are 70 percent in equity securities and 30 percent in debt
securities, with acceptable tolerance levels of plus or minus five percent
within each category for our domestic plans. Our foreign plans are individually
managed to different target levels depending on the investing environment in
each country.
Our approach to determining expected return on plan asset assumptions
evaluates both historical returns as well as estimates of future returns, and
adjusts for any expected changes in the long term outlook for the equity and
fixed income markets for both our domestic and foreign plans.
106
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the change in benefit obligation, the change in plan assets,
the development of net amount recognized, and the amounts recognized in the
balance sheets for the pension plans and postretirement benefit plans follows:
PENSION POSTRETIREMENT
-------------------------------- ---------------
2005 2004 2005 2005
-------------- --------------- ------ ------
US FOREIGN US FOREIGN US US
---- ------- ----- ------- ------ ------
(MILLIONS)
Change in benefit obligation:
Benefit obligation at September 30 of the previous
year.............................................. $301 $270 $ 269 $230 $ 133 $ 119
Currency rate conversion............................ -- (21) -- 17 -- --
Settlement.......................................... -- (1) -- -- -- --
Service cost........................................ 15 6 14 5 3 3
Interest cost....................................... 18 14 17 14 8 8
Plan amendments..................................... 2 2 -- 1 -- 11
Actuarial loss...................................... 10 39 12 12 14 2
Benefits paid....................................... (14) (9) (11) (10) (12) (11)
Participants' contributions......................... -- 2 -- -- -- --
Other............................................... -- -- -- 1 -- 1
---- ---- ----- ---- ----- -----
Benefit obligation at September 30.................. $332 $302 $ 301 $270 $ 146 $ 133
==== ==== ===== ==== ===== =====
Change in plan assets:
Fair value at September 30 of the previous year..... 154 172 $ 136 $143 $ -- $ --
Currency rate conversion............................ -- (12) -- 11 -- --
Settlement.......................................... -- (1) -- -- -- --
Actual return on plan assets........................ 16 32 18 15 -- --
Employer contributions.............................. 40 10 12 11 11 11
Participants' contributions......................... -- 2 -- 1 -- --
Benefits paid....................................... (14) (9) (12) (9) (11) (11)
---- ---- ----- ---- ----- -----
Fair value at September 30.......................... $196 $194 $ 154 $172 $ -- $ --
==== ==== ===== ==== ===== =====
Development of net amount recognized:
Funded status at September 30....................... (136) (108) $(148) $(97) $(146) $(132)
Contributions during the fourth quarter............. -- 3 3 3 3 3
Unrecognized cost:
Actuarial loss.................................... 110 122 104 109 98 90
Prior service cost................................ 24 10 26 9 (54) (60)
Transition asset.................................. -- (1) -- (1) -- --
---- ---- ----- ---- ----- -----
Net amount recognized at December 31................ $ (2) $ 26 $ (15) $ 23 $ (99) $ (99)
==== ==== ===== ==== ===== =====
Amounts recognized in the balance sheets:
Prepaid benefit cost................................ $ -- $ 5 $ -- $ -- $ -- $ --
Accrued benefit cost................................ (113) (90) (115) (83) (99) (99)
Intangible asset.................................... 12 10 11 10 -- --
Accumulated other comprehensive loss................ 99 101 89 96 -- --
---- ---- ----- ---- ----- -----
Net amount recognized............................... $ (2) $ 26 $ (15) $ 23 $ (99) $ (99)
==== ==== ===== ==== ===== =====
---------------
Notes: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid (accrued) pension cost has been recorded based
upon certain actuarial estimates as described below. Those estimates are
subject to revision in future periods given new facts or circumstances.
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension costs (income) for the years 2005, 2004, and 2003,
consist of the following components:
2005 2004 2003
------------- ------------- -------------
US FOREIGN US FOREIGN US FOREIGN
--- ------- --- ------- --- -------
(MILLIONS)
Service cost -- benefits earned during the
year.................................... $15 $ 6 $14 $ 5 $11 $ 5
Interest on prior year's projected benefit
obligation.............................. 19 14 17 14 16 12
Expected return on plan assets............ (16) (15) (15) (15) (15) (13)
Net amortization:
Actuarial loss.......................... 4 4 3 3 1 1
Prior service cost...................... 3 1 3 1 3 1
--- ---- --- ---- --- ----
Net pension costs......................... $24 $ 10 $22 $ 8 $16 $ 6
=== ==== === ==== === ====
Other comprehensive loss.................. $10 $ 5 $ 7 $ 21 $18 $ 11
=== ==== === ==== === ====
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for all pension plans with accumulated benefit obligations
in excess of plan assets at September 30, 2005 and 2004 were as follows:
SEPTEMBER 30,
-------------------------------
2005 2004
-------------- --------------
US FOREIGN US FOREIGN
---- ------- ---- -------
(MILLIONS)
Projected Benefit Obligation.......................... $332 $284 $301 $260
Accumulated Benefit Obligation........................ 300 268 266 247
Fair Value of Plan Assets............................. 196 175 154 163
The following estimated benefit payments are payable from the pension plans
to participants:
PENSION
YEAR BENEFITS
---- ----------
(MILLIONS)
2006........................................................ $22
2007........................................................ 23
2008........................................................ 24
2009........................................................ 26
2010........................................................ 28
2011-2015................................................... 188
108
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following assumptions were used in the accounting for the pension plans
for the years of 2005, 2004, and 2003:
2005 2004
------------- -------------
US FOREIGN US FOREIGN
--- ------- --- -------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT
OBLIGATIONS
Discount rate............................................ 5.8% 5.0% 6.3% 5.7%
Rate of compensation increase............................ 3.2% 4.3% 4.5% 4.4%
2005 2004 2003
------------- ------------- -------------
US FOREIGN US FOREIGN US FOREIGN
--- ------- --- ------- --- -------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO
DETERMINE NET PERIODIC BENEFIT COST
Discount rate............................... 6.3% 5.7% 6.5% 5.7% 7.0% 5.5%
Expected long-term return on plan assets.... 8.8% 7.7% 8.9% 8.0% 8.9% 8.0%
Rate of compensation increase............... 4.5% 4.4% 4.5% 4.1% 4.5% 4.0%
We made contributions of $50 million to these pension plans during 2005.
Based on current actuarial estimates, we believe we will be required to make
contributions of $37 million to those plans during 2006. Pension contributions
beyond 2006 will be required, but those amounts will vary based upon many
factors, including the performance of our pension fund investments during 2006.
We have life insurance plans which cover a majority of our domestic
employees. We also have postretirement plans for our domestic employees hired
before January 1, 2001. The plans cover salaried employees retiring on or after
attaining age 55 who have at least 10 years of service with us after attaining
age 45. For hourly employees, the postretirement benefit plans generally cover
employees who retire according to one of our hourly employee retirement plans.
All of these benefits may be subject to deductibles, copayment provisions and
other limitations, and we have reserved the right to change these benefits. For
those employees hired after January 1, 2001, we do not provide any
postretirement benefits. Our postretirement healthcare and life insurance plans
are not funded. The measurement date used to determine postretirement benefit
obligations is September 30th.
On September 1, 2003, we changed our retiree medical benefits program to
provide participating retirees with continued access to group health coverage
while reducing our subsidization of the program. This negative plan amendment is
being amortized over the average remaining service life to retirement
eligibility of active plan participants as a reduction of service cost beginning
September 1, 2003.
In July 2004, we entered into a settlement with a group of the retirees
which were a part of the September 2003 change mentioned above. This settlement
provided the group with increased coverage, and as a result, a portion of the
negative plan amendment was reversed and a positive plan amendment put in place.
The effect of the settlement increased our 2004 postretirement benefit expense
by approximately $1 million and increased our accumulated postretirement benefit
obligation by approximately $13 million.
109
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic postretirement benefit cost for the years 2005, 2004, and
2003, consists of the following components:
2005 2004 2003
---- ---- ----
(MILLIONS)
Service cost -- benefits earned during the year............. $ 3 $ 3 $ 4
Interest on accumulated postretirement benefit obligation... 8 8 9
Net amortization:
Actuarial loss............................................ 6 5 5
Prior service cost........................................ (6) (6) (4)
--- --- ---
Net periodic postretirement benefit cost.................... $11 $10 $14
=== === ===
The following estimated postretirement benefit payments are payable from
the plans to participants:
POSTRETIREMENT
YEAR BENEFITS
---- --------------
(MILLIONS)
2006........................................................ $9
2007........................................................ 9
2008........................................................ 10
2009........................................................ 10
2010........................................................ 11
2011-2015................................................... 56
The weighted average assumed health care cost trend rate used in
determining the 2005 accumulated postretirement benefit obligation was 9
percent, declining to 5 percent by 2010. In 2004 and 2003 the health care cost
trend rate was 9 percent.
The following assumptions were used in the accounting for postretirement
cost for the years of 2005, 2004 and 2003:
2005 2004
---- ----
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT
OBLIGATIONS
Discount rate............................................... 5.8% 6.3%
Rate of compensation increase............................... 4.9% 4.5%
2005 2004 2003
---- ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC
BENEFIT COST
Discount rate............................................... 6.3% 6.5% 7.0%
Rate of compensation increase............................... 4.5% 4.5% 4.5%
The effect of a one-percentage-point increase or decrease in the assumed
health care cost trend rates on total service cost and interest and the
postretirement benefit obligation are as follows:
ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(MILLIONS)
Effect on total of service cost and interest cost........ $1 $ 1
Effect on postretirement benefit obligation.............. 12 (10)
Based on current actuarial estimates, we believe we will be required to
make postretirement contributions of approximately $9 million during 2006.
110
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. The Act introduces
a voluntary prescription drug benefit under Medicare as well as a federal
subsidy to sponsors of retiree healthcare plans that provide prescription drug
benefits that are at least actuarially equivalent to Medicare Part D. This
subsidy covers a defined portion of an individual beneficiary's annual covered
prescription drug costs, and is exempt from federal taxation.
In May 2004, the FASB issued FSP 106-2 which provides guidance on the
accounting for the effects of the Act. We adopted the provisions of FSP 106-2 in
the third quarter of 2004 which lowered our 2004 postretirement benefit expense
by less than $1 million. The application of the Medicare subsidy reduced our
2004 accumulated postretirement benefit obligation by $10 million, all of which
was related to benefits attributed to past service and was accounted for as an
actuarial gain as required by the FSP.
Employee Stock Ownership Plans (401(k) Plans) -- We have established
Employee Stock Ownership Plans for the benefit of our employees. Under the
plans, participants may elect to defer up to 75 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 $7 million,
$7 million and $6 million for the years ended December 31, 2005, December 31,
2004 and 2003, respectively. All contributions vest immediately.
11. SEGMENT AND GEOGRAPHIC AREA INFORMATION
In October 2004 and July 2005, we announced changes in the structure of our
organization which changed the components of 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
had no impact on our consolidated results, it changed 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 ("Europe"), 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.
111
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Products are transferred between segments and geographic areas on a basis
intended to reflect as nearly as possible the "market value" of the products.
Segment results for 2005, 2004, and 2003 are as follows:
SEGMENT
--------------------------------------------------------
NORTH ASIA RECLASS &
AMERICA EUROPE PACIFIC ELIMS CONSOLIDATED
------- ------ ------- ------------ ------------
(MILLIONS)
AT DECEMBER 31, 2005, AND FOR THE YEAR THEN
ENDED
Revenues from external customers.............. $2,028 $2,053 $360 $ -- $4,441
Intersegment revenues......................... 6 57 11 (74) --
Interest income............................... 1 3 -- -- 4
Depreciation and amortization of other
intangibles................................. 90 76 11 -- 177
Income before interest expense, income taxes,
and minority interest....................... 145 54 16 -- 215
Total assets.................................. 1,340 1,295 251 54 2,940
Investment in affiliated companies............ -- 6 -- -- 6
Expenditures for plant, property and
equipment................................... 74 54 16 -- 144
Noncash items other than depreciation and
amortization................................ (8) 8 -- -- --
AT DECEMBER 31, 2004, AND FOR THE YEAR THEN
ENDED
Revenues from external customers.............. $1,959 $1,891 $363 $ -- $4,213
Intersegment revenues......................... 7 49 17 (73) --
Interest income............................... 1 3 -- -- 4
Depreciation and amortization of other
intangibles................................. 93 73 11 -- 177
Income before interest expense, income taxes,
and minority interest....................... 133 21 20 -- 174
Total assets.................................. 1,344 1,410 242 123 3,119
Investment in affiliated companies............ -- 5 -- -- 5
Expenditures for plant, property and
equipment................................... 55 59 16 -- 130
Noncash items other than depreciation and
amortization................................ 4 1 -- -- 5
AT DECEMBER 31, 2003, AND FOR THE YEAR THEN
ENDED
Revenues from external customers.............. $1,880 $1,578 $308 $ -- $3,766
Intersegment revenues......................... 7 33 14 (54) --
Interest income............................... 1 3 -- -- 4
Depreciation and amortization of other
intangibles................................. 90 64 9 -- 163
Income before interest expense, income taxes,
and minority interest....................... 129 22 23 -- 174
Total assets.................................. 1,212 1,248 227 165 2,852
Investment in affiliated companies............ -- 1 5 -- 6
Expenditures for plant, property and
equipment................................... 54 61 15 -- 130
Noncash items other than depreciation and
amortization................................ 12 (1) 1 -- 12
112
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows information relating to our external customer
revenues for each product or each group of similar products:
NET SALES AND OPERATING
--------------------------
REVENUES
YEAR ENDED DECEMBER 31,
--------------------------
2005 2004 2003
------ -------- ------
(MILLIONS)
EMISSION CONTROL SYSTEMS & PRODUCTS
Aftermarket............................................. $ 368 $ 365 $ 350
Original equipment market............................... 2,390 2,287 2,037
------ ------ ------
2,758 2,652 2,387
------ ------ ------
RIDE CONTROL SYSTEMS & PRODUCTS
Aftermarket............................................. 653 630 579
Original equipment market............................... 1,030 931 800
------ ------ ------
1,683 1,561 1,379
------ ------ ------
Total................................................ $4,441 $4,213 $3,766
====== ====== ======
During 2005, sales to four major customers comprised approximately 17
percent, 12 percent, 9 percent and 9 percent of consolidated net sales and
operating revenues. During 2004, sales to the same four major customers
comprised approximately 18 percent, 12 percent, 11 percent and 8 percent of
consolidated net sales and operating revenues. During 2003, sales to the same
four major customers comprised approximately 19 percent, 14 percent, 11 percent
and 9 percent of consolidated net sales and operating revenues.
GEOGRAPHIC AREA
-----------------------------------------------------------
UNITED OTHER RECLASS &
STATES GERMANY FOREIGN(A) ELIMS CONSOLIDATED
------ ------- ---------- ------------ ------------
(MILLIONS)
AT DECEMBER 31, 2005, AND FOR THE YEAR THEN
ENDED
Revenues from external customers(b)........ $2,071 $633 $1,737 $ -- $4,441
Long-lived assets(c)....................... 407 136 668 -- 1,211
Total assets............................... 1,253 305 1,471 (89) 2,940
AT DECEMBER 31, 2004, AND FOR THE YEAR THEN
ENDED
Revenues from external customers(b)........ $1,840 $515 $1,858 $ -- $4,213
Long-lived assets(c)....................... 409 157 731 -- 1,297
Total assets............................... 1,336 358 1,502 (77) 3,119
AT DECEMBER 31, 2003, AND FOR THE YEAR THEN
ENDED
Revenues from external customers(b)........ $1,818 $467 $1,481 $ -- $3,766
Long-lived assets(c)....................... 472 142 710 -- 1,324
Total assets............................... 1,220 291 1,401 (60) 2,852
---------------
Notes: (a) Revenues from external customers and long-lived assets for individual
foreign countries other than Germany are not material.
113
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(b) Revenues are attributed to countries based on location of the seller.
(c) Long-lived assets include all long-term assets except goodwill,
intangibles, and deferred tax assets.
12. COMMITMENTS AND CONTINGENCIES
Capital Commitments
We estimate that expenditures aggregating approximately $46 million will be
required after December 31, 2005 to complete facilities and projects authorized
at such date, and we have made substantial commitments in connection with these
facilities and projects.
Lease Commitments
We have long-term leases for certain facilities, equipment, and other
assets. The minimum lease payments under non-cancelable leases with lease terms
in excess of one year are:
SUBSEQUENT
2006 2007 2008 2009 2010 YEARS
---- ---- ---- ---- ---- ----------
(MILLIONS)
Operating Leases........................... $14 $12 $8 $6 $4 $ 4
Capital Leases............................. $ 3 $ 3 $2 $2 $3 $ --
Total rental expense for the year 2005, 2004, and 2003 was $35 million, $32
million, and $33 million respectively.
Litigation
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
114
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for damages. As major asbestos manufacturers continue to go out of business or
file for bankruptcy, 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.
Product Warranties
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.
Below is a table that shows the activity in the warranty accrual accounts:
YEARS ENDED
DECEMBER 31,
------------------
2005 2004 2003
---- ---- ----
(MILLIONS)
Beginning Balance........................................... $ 19 $ 18 $ 21
Accruals related to product warranties...................... 16 14 19
Reductions for payments made................................ (13) (13) (22)
---- ---- ----
Ending Balance.............................................. $ 22 $ 19 $ 18
==== ==== ====
Environmental 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 December 31, 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 close to zero. In addition to the
115
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $8 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. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
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 in 2014 and our senior secured notes due 2013 on a joint and several basis.
You should also read Note 6, "Financial Instruments" for further discussion of
the notes and related guarantee. 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.
116
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2005
----------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ---------- ------------
(MILLIONS)
REVENUES
Net sales and operating revenues --
External........................ $2,027 $2,414 $ -- $ -- $4,441
Affiliated companies............ 73 508 -- (581) --
------ ------ ----- ----- ------
2,100 2,922 -- (581) 4,441
------ ------ ----- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)....... 1,702 2,462 -- (581) 3,583
Engineering, research, and
development..................... 41 42 -- -- 83
Selling, general, and
administrative.................. 164 221 -- -- 385
Depreciation and amortization of
other intangibles............... 71 106 -- -- 177
------ ------ ----- ----- ------
1,978 2,831 -- (581) 4,228
------ ------ ----- ----- ------
OTHER INCOME (EXPENSE)
Gain (loss) on sale of assets...... -- -- -- -- --
Loss on sale of receivables........ -- (3) -- -- (3)
Other income (expense)............. 43 (30) -- (8) 5
------ ------ ----- ----- ------
43 (33) -- (8) 2
------ ------ ----- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET INCOME
FROM AFFILIATED COMPANIES.......... 165 58 -- (8) 215
Interest expense --
External (net of interest
capitalized)............... (2) 4 128 -- 130
Affiliated companies (net of
interest income)........... 122 (8) (114) -- --
Income tax expense (benefit).... (77) 26 69 7 25
Minority interest............... -- 2 -- -- 2
------ ------ ----- ----- ------
122 34 (83) (15) 58
Equity in net income (loss) from
affiliated companies.......... 57 -- 141 (198) --
------ ------ ----- ----- ------
NET INCOME (LOSS).................... $ 179 $ 34 $ 58 $(213) $ 58
====== ====== ===== ===== ======
117
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- ------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues -- External........... $1,832 $2,381 $ -- $ -- $4,213
Affiliated companies........... 54 331 -- (385) --
------ ------ ---- ----- ------
1,886 2,712 -- (385) 4,213
------ ------ ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)...... 1,463 2,290 -- (385) 3,368
Engineering, research, and
development.................... 36 40 -- -- 76
Selling, general, and
administrative................. 203 214 -- -- 417
Depreciation and amortization of
other intangibles.............. 74 103 -- -- 177
------ ------ ---- ----- ------
1,776 2,647 -- (385) 4,038
------ ------ ---- ----- ------
OTHER INCOME (EXPENSE)
Gain (loss) on sale of assets..... -- 1 -- -- 1
Loss on sale of receivables....... -- (1) -- -- (1)
Other income (expense)............ 23 (15) -- (9) (1)
------ ------ ---- ----- ------
23 (15) -- (9) (1)
------ ------ ---- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET INCOME
FROM AFFILIATED COMPANIES......... 133 50 -- (9) 174
Interest expense --
External (net of interest
capitalized).............. -- 7 172 -- 179
Affiliated companies (net of
interest income).......... 90 (10) (80) -- --
Income tax expense (benefit)... -- 10 (34) -- (24)
Minority interest.............. -- 4 -- -- 4
------ ------ ---- ----- ------
43 39 (58) (9) 15
Equity in net income (loss)
from affiliated companies.... 48 -- 73 (121) --
------ ------ ---- ----- ------
NET INCOME (LOSS)................... $ 91 $ 39 $ 15 $(130) $ 15
====== ====== ==== ===== ======
118
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2003
----------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- ------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues -- External........... $1,810 $1,956 $ -- $ -- $3,766
Affiliated companies........... 53 328 -- (381) --
------ ------ ---- ----- ------
1,863 2,284 -- (381) 3,766
------ ------ ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)...... 1,444 1,933 -- (381) 2,996
Engineering, research, and
development.................... 27 40 -- -- 67
Selling, general, and
administrative................. 178 186 -- -- 364
Depreciation and amortization of
other intangibles.............. 72 91 -- -- 163
------ ------ ---- ----- ------
1,721 2,250 -- (381) 3,590
------ ------ ---- ----- ------
OTHER INCOME (EXPENSE)
Gain (loss) on sale of assets..... -- -- -- -- --
Loss on sale of receivables....... -- (2) -- -- (2)
Other income (expense)............ (10) 12 37 (39) --
------ ------ ---- ----- ------
(10) 10 37 (39) (2)
------ ------ ---- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET INCOME
FROM AFFILIATED COMPANIES......... 132 44 37 (39) 174
Interest expense --
External (net of interest
capitalized).............. (1) 6 144 -- 149
Affiliated companies (net of
interest income).......... 83 (3) (80) -- --
Income tax expense (benefit)... (144) 24 60 53 (7)
Minority interest.............. -- 6 -- -- 6
------ ------ ---- ----- ------
194 11 (87) (92) 26
Equity in net income (loss)
from affiliated companies.... 26 (2) 113 (137) --
------ ------ ---- ----- ------
NET INCOME (LOSS)................... $ 220 $ 9 $ 26 $(229) $ 26
====== ====== ==== ===== ======
119
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
DECEMBER 31, 2005
----------------------------------------------------------------
TENNECO
INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ -------- -------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents....................... $ 31 $ 110 $ -- $ -- $ 141
Receivables, net................................ 203 675 30 (365) 543
Inventories..................................... 109 251 -- -- 360
Deferred income taxes........................... 35 7 1 -- 43
Prepayments and other........................... 14 96 -- -- 110
------ ------ ------ -------- ------
392 1,139 31 (365) 1,197
------ ------ ------ -------- ------
Other assets:
Investment in affiliated companies.............. 436 -- 1,032 (1,468) --
Notes and advances receivable from affiliates... 3,235 139 4,785 (8,159) --
Long-term notes receivable, net................. 2 21 -- -- 23
Goodwill........................................ 135 65 -- -- 200
Intangibles, net................................ 14 16 -- -- 30
Deferred income taxes........................... 247 60 176 (176) 307
Other........................................... 37 71 32 -- 140
------ ------ ------ -------- ------
4,106 372 6,025 (9,803) 700
------ ------ ------ -------- ------
Plant, property, and equipment, at cost........... 921 1,507 -- -- 2,428
Less -- Reserves for depreciation and
amortization.................................. 593 792 -- -- 1,385
------ ------ ------ -------- ------
328 715 -- -- 1,043
------ ------ ------ -------- ------
$4,826 $2,226 $6,056 $(10,168) $2,940
====== ====== ====== ======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current maturities of
long-term debt)
Short-term debt -- non-affiliated............. $ -- $ 22 $ -- $ -- $ 22
Short-term debt -- affiliated................. 128 124 10 (262) --
Trade payables.................................. 219 526 -- (94) 651
Accrued taxes................................... (29) 22 38 -- 31
Other........................................... 132 113 38 (8) 275
------ ------ ------ -------- ------
450 807 86 (364) 979
Long-term debt-non-affiliated..................... -- 12 1,344 -- 1,356
Long-term debt-affiliated......................... 3,541 126 4,492 (8,159) --
Deferred income taxes............................. 182 80 -- (176) 86
Postretirement benefits and other liabilities..... 265 90 5 6 366
Commitments and contingencies
Minority interest................................. -- 24 -- -- 24
Shareholders' equity.............................. 388 1,087 129 (1,475) 129
------ ------ ------ -------- ------
$4,826 $2,226 $6,056 $(10,168) $2,940
====== ====== ====== ======== ======
120
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
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
====== ====== ====== ======= ======
121
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005
----------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- ------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $ 208 $ 164 $(238) $ -- $ 134
INVESTING ACTIVITIES
Net proceeds from the sale of
assets............................ 3 1 -- -- 4
Expenditures for plant, property,
and equipment..................... (53) (91) -- -- (144)
Expenditures for software related
intangible assets................. (6) (8) -- -- (14)
Acquisition of businesses........... -- (14) -- -- (14)
Investments and other............... 3 (2) -- -- 1
----- ----- ----- ----- -----
Net cash used by investing
activities........................ (53) (114) -- -- (167)
----- ----- ----- ----- -----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- 7 -- 7
Issuance of long-term debt.......... -- 1 -- -- 1
Retirement of long-term debt........ -- (3) (42) -- (45)
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.......... (264) (9) 273 -- 0
----- ----- ----- ----- -----
Net cash provided (used) by
financing activities.............. (264) (10) 238 -- (36)
----- ----- ----- ----- -----
Effect of foreign exchange rate
changes on cash and cash
equivalents....................... -- (4) -- -- (4)
----- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents....................... (109) 36 -- -- (73)
Cash and cash equivalents, January
1................................. 140 74 -- -- 214
----- ----- ----- ----- -----
Cash and cash equivalents, December
31 (Note)......................... $ 31 $ 110 $ -- $ -- $ 141
===== ===== ===== ===== =====
---------------
Note: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
122
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004
------------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- --------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities............. $ 311 $ 164 $(262) $ -- $ 213
----- ----- ----- ----- -----
INVESTING ACTIVITIES
Net proceeds from the sale of
assets........................... -- 15 -- -- 15
Expenditures for plant, property,
and equipment.................... (40) (90) -- -- (130)
Expenditures for software related
intangible assets................ (5) (8) -- -- (13)
Investments and other.............. -- (1) -- -- (1)
----- ----- ----- ----- -----
Net cash used by investing
activities....................... (45) (84) -- -- (129)
----- ----- ----- ----- -----
FINANCING ACTIVITIES
Issuance of common shares.......... -- -- 10 -- 10
Issuance of long-term debt......... -- -- 500 -- 500
Debt issuance cost on long-term
debt............................. -- -- (13) -- (13)
Retirement of long-term debt....... -- (3) (505) -- (508)
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......... (196) (74) 270 -- --
Other.............................. -- -- -- -- --
----- ----- ----- ----- -----
Net cash provided (used) by
financing activities............. (196) (78) 262 -- (12)
----- ----- ----- ----- -----
Effect of foreign exchange rate
changes on cash and cash
equivalents...................... -- (3) -- -- (3)
----- ----- ----- ----- -----
Increase (decrease) in cash and
cash equivalents................. 70 (1) -- -- 69
Cash and cash equivalents, January
1................................ 70 75 -- -- 145
----- ----- ----- ----- -----
Cash and cash equivalents, December
31 (Note)........................ $ 140 $ 74 $ -- $ -- $ 214
===== ===== ===== ===== =====
---------------
Note: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
123
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
-------------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- ---------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $ 261 $ 210 $(182) $ -- $ 289
----- ----- ----- ----- -----
INVESTING ACTIVITIES
Net proceeds from the sale of
assets............................ 1 7 -- -- 8
Expenditures for plant, property,
and equipment..................... (44) (86) -- -- (130)
Expenditures for software related
intangible assets................. (2) (6) -- -- (8)
Investments and other............... -- (5) -- -- (5)
----- ----- ----- ----- -----
Net cash used by investing
activities........................ (45) (90) -- -- (135)
----- ----- ----- ----- -----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- -- -- --
Issuance of long-term debt.......... -- -- 891 -- 891
Debt issuance cost on long-term
debt.............................. -- -- (27) -- (27)
Retirement of long-term debt........ -- (3) (788) -- (791)
Net increase (decrease) in
short-term debt excluding current
maturities of long-term debt...... -- (1) (120) -- (121)
Intercompany dividends and net
increase (decrease) in
intercompany obligations.......... (148) (77) 225 -- --
Other............................... -- (2) 1 -- (1)
----- ----- ----- ----- -----
Net cash provided (used) by
financing activities.............. (148) (83) 182 -- (49)
----- ----- ----- ----- -----
Effect of foreign exchange rate
changes on cash and cash
equivalents....................... -- (14) -- -- (14)
----- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents....................... 68 23 -- -- 91
Cash and cash equivalents, January
1................................. 2 52 -- -- 54
----- ----- ----- ----- -----
Cash and cash equivalents, December
31 (Note)......................... $ 70 $ 75 $ -- $ -- $ 145
===== ===== ===== ===== =====
---------------
Note: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
124
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
INCOME BEFORE
NET SALES INTEREST EXPENSE,
AND INCOME TAXES
OPERATING AND MINORITY NET INCOME
QUARTER REVENUES INTEREST (LOSS)
------- --------- ----------------- ----------
(MILLIONS)
2005
1st.................................................... $1,101 $ 44 $ 7
2nd.................................................... 1,180 83 33
3rd.................................................... 1,096 50 10
4th.................................................... 1,064 38 8
------ ---- ----
$4,441 $215 $ 58
====== ==== ====
2004
1st.................................................... $1,033 $ 33 $ (2)
2nd.................................................... 1,113 76 30
3rd.................................................... 996 44 6
4th.................................................... 1,071 21 (19)
------ ---- ----
$4,213 $174 $ 15
====== ==== ====
BASIC DILUTED
EARNINGS (LOSS) EARNINGS (LOSS)
PER SHARE OF PER SHARE OF
QUARTER COMMON STOCK COMMON STOCK
------- --------------- ---------------
2005
1st....................................................... $ 0.17 $ 0.16
2nd....................................................... 0.75 0.71
3rd....................................................... 0.25 0.23
4th....................................................... 0.19 0.18
Full Year................................................. 1.35 1.29
2004
1st....................................................... $(0.05) $(0.05)
2nd....................................................... 0.73 0.69
3rd....................................................... 0.15 0.14
4th....................................................... (0.45) (0.45)
Full Year................................................. 0.37 0.35
------------------
Note: The sum of the quarters may not equal the total of the respective year's
earnings per share on either a basic or diluted basis due to changes in
the weighted average shares outstanding throughout the year.
(The preceding notes are an integral part of the foregoing financial
statements.)
125
SCHEDULE II
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- --------- -------------------- ---------- --------
ADDITIONS
--------------------
BALANCE CHARGED CHARGED
AT TO TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- --------- --------- -------- ---------- --------
(MILLIONS)
Allowance for Doubtful Accounts and Notes
Deducted from Assets to Which it Applies:
Year Ended December 31, 2005............. $22 $2 $ 1 $6 $19
=== == ===== == ===
Year Ended December 31, 2004............. $23 $6 $ -- $7 $22
=== == ===== == ===
Year Ended December 31, 2003............. $22 $6 $ -- $5 $23
=== == ===== == ===
126
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 year 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 and such information is accumulated and communicated
to management as appropriate to allow timely decisions regarding required
disclosures.
See Item 8, "Financial Statements and Supplementary Data" for management's
report on internal control over financial reporting and the report of our
independent registered public accounting firm thereon.
ITEM 9B. OTHER INFORMATION.
None.
127
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The sections entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 9, 2006 is incorporated herein by
reference. In addition, Item 4.1 of this Annual Report on Form 10-K, which
appears at the end of Part I, is incorporated herein by reference.
A copy of our Code of Ethical Conduct for Financial Managers, which applies
to our Chief Executive Officer, Chief Financial Officer, Controller and other
key financial managers, is filed as Exhibit 14 to this Form 10-K. We have posted
a copy of the Code of Ethical Conduct for Financial Managers on our Internet
website at www.tenneco.com. We will make a copy of this code available to any
person, without charge, upon written request to Tenneco Inc., 500 North Field
Drive, Lake Forest, Illinois 60045, Attn: General Counsel. We intend to satisfy
the disclosure requirement under Item 5.05 of Form 8-K and applicable NYSE rules
regarding amendments to or waivers of our Code of Ethical Conduct by posting
this information on our Internet website at www.tenneco.com.
ITEM 11. EXECUTIVE COMPENSATION.
The sections entitled "Executive Compensation" and "Election of
Directors -- Compensation of Directors" in our definitive Proxy Statement for
the Annual Meeting of Stockholders to be held May 9, 2006 are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The section entitled "Ownership of Common Stock" in our definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 9, 2006 is
incorporated herein by reference.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table shows, as of December 31, 2005, information regarding
outstanding awards available under our compensation plans (including individual
compensation arrangements) under which our equity securities may be delivered:
NUMBER OF
SECURITIES TO BE WEIGHTED-
ISSUED UPON AVERAGE EXERCISE
EXERCISE OF PRICE OF NUMBER OF
OUTSTANDING OUTSTANDING SECURITIES
OPTIONS, OPTIONS, AVAILABLE FOR
WARRANTS AND WARRANTS AND FUTURE
PLAN CATEGORY RIGHTS(1) RIGHTS ISSUANCE(1)
-------------------------------------------------- ---------------- ---------------- -------------
EQUITY COMPENSATION PLANS APPROVED BY SECURITY
HOLDERS:
Stock Ownership Plan(2)......................... 2,631,838(3) $9.68 --
2002 Long-Term Incentive Plan (as amended)...... 1,987,957(4)(5) $8.35(4) 816,694(5)
EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY
HOLDERS:
Supplemental Stock Ownership Plan(6)............ 302,300(7) $8.56 --
---------------
(1) Reflects the number of shares of the Company's common stock. Does not
include 247,196 shares that may be issued in settlement of common stock
equivalent units that were credited to outside directors as payment for
their retainer fee. In general, these units are settled in cash. At the
option of the Company, however, the units may be settled in shares of the
Company's common stock.
128
(2) This plan terminated as to new awards on December 31, 2001 (except awards
pursuant to commitments outstanding at that date). Does not include 6,628
shares subject to outstanding restricted stock (vest over time) as of
December 31, 2005 that were issued at a weighted-average issue price of
$4.65 per share.
(3) At February 28, 2006, due to option exercises since the end of 2005,
outstanding awards of options, warrants, and rights granted under this plan
covered the delivery of up to 2,191,692 shares of common stock. There were
6,628 shares of restricted stock outstanding under this plan at February 28,
2006.
(4) Does not include 709,229 shares subject to outstanding restricted stock
(vest over time) as of December 31, 2005 that were issued at a
weighted-average issue price of $11.11 per share. Under this plan, as of
December 31, 2005, a maximum of 269,771 shares remained available for
delivery under full value awards (i.e., bonus stock, stock equivalent units,
performance units, restricted stock and restricted stock units).
(5) At February 28, 2006, due to plan activity since the end of 2005, (i)
outstanding awards of options, warrants, and rights granted under this plan
covered the delivery of up to 2,123,290 shares of common stock, (ii) 231,534
shares remained available under the plan, of which 115,861 shares could be
delivered as full value awards and (iii) 730,847 shares of restricted stock
were outstanding under this plan.
(6) The plan described in the table above as not having been approved by
security holders is the Tenneco Inc. Supplemental Stock Ownership Plan. This
plan, which terminated on December 31, 2001 as to new awards (except awards
pursuant to commitments outstanding at that date), originally covered the
delivery of up to 1.5 million shares of common stock held in the Company's
treasury. This plan was and continues to be administered by the
Compensation/Nominating/Governance Committee. The Company's directors,
officers and other employees were eligible to receive awards under this
plan, although awards under the plan were limited to the Company's
non-executive employees. Awards under the plan could take the form of
non-statutory stock options, stock appreciation rights, restricted stock,
stock equivalent units or performance units. All awards made under this plan
were discretionary. The committee determined which eligible persons received
awards and determined all terms and conditions (including form, amount and
timing) of each award.
(7) At February 28, 2006, due to option exercises since the end of 2005,
outstanding awards of options, warrants, and rights granted under this plan
covered the delivery of up to 279,300 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The sections entitled "Ratify Appointment of Independent Public
Accountants -- Audit, Audit-Related, Tax and Other Fees" and "Ratify Appointment
of Independent Public Accountants -- Pre-Approval Policy" in our definitive
Proxy Statement for the Annual Meeting of Stockholders to be held May 9, 2006
are incorporated herein by reference.
129
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
FINANCIAL STATEMENTS INCLUDED IN ITEM 8
See "Index to Financial Statements of Tenneco Inc. and Consolidated
Subsidiaries" set forth in Item 8, "Financial Statements and Supplementary Data"
for a list of financial statements filed as part of this Report.
INDEX TO SCHEDULE INCLUDED IN ITEM 8
PAGE
----
Schedule of Tenneco Inc. and Consolidated
Subsidiaries -- Schedule II -- Valuation and qualifying
accounts -- three years ended December 31, 2005........... 126
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE
Schedule I -- Condensed financial information of registrant
Schedule III -- Real estate and accumulated depreciation
Schedule IV -- Mortgage loans on real estate
Schedule V -- Supplemental information concerning property -- casualty insurance
operations
130
EXHIBITS
The following exhibits are filed with this Annual Report on Form 10-K for
the fiscal year ended December 31, 2005, or incorporated herein by reference
(exhibits designated by an asterisk are filed with the report; all other
exhibits are incorporated by reference):
INDEX TO EXHIBITS
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, dated October 27, 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 27, 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).
131
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
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).
132
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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) -- 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(d) -- 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).
4.2(e) -- 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
(incorporated herein by reference from Exhibit 4.3 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005, File No. 1-12387).
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 Tenneco Inc. 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).
133
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
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, the registrant 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 (incorporated
herein by reference from Exhibit 4.5(h) to the registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005, File No. 1-12387).
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 (incorporated herein by reference
from Exhibit 4.5(i) to the registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005, File No.
1-12387).
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).
134
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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
(incorporated herein by reference from Exhibit 4.6(f) to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005, File No. 1-12387).
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).
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 27, 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 4.8(d) to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005, File No. 1-12387).
9 -- None
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).
135
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.3 -- Debt and Cash Allocation Agreement, dated December 11, 1996,
by and among El Paso Tennessee Pipeline Co. , the
registrant, and Newport News Ship- building 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., the
registrant, El Paso Natural Gas Company and Newport News
Shipbuilding Inc. (incorporated herein by reference from
Exhibit 10.7 of the registrant'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, as in effect
for periods through December 31, 2005 (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).
+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).
136
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 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 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).
+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).
137
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+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 10.37
to the registrant's Annual Report on Form 10-K for the year
ended December 31, 2004, file No. 1-12387).
*+10.37 -- Summary of 2006 Outside Directors' Compensation.
*+10.38 -- Summary of 2006 Named Executive Officer Compensation.
+10.39 Amendment No. 1 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 to
the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005, File No. 1-12387).
+10.41 Second Amendment to the Key Executive Pension Plan
(incorporated herein by reference from Exhibit 10.41 to 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 to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005, File No. 1-12387).
138
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+10.43 Supplemental Retirement Plan (incorporated herein by
reference from Exhibit 10.43 to 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 Supplemental
Retirement Plan (incorporated herein by reference from
Exhibit 10.44 to 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 to 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 to the registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005, File No. 1-
12387).
*+10.47 Amended and Restated Value Added ("TAVA") Incentive
Compensation Plan, effective January 1, 2006.
*+10.48 Form of Restricted Stock Award Agreement for non-employee
directors under the 2002 Long-Term Incentive Plan, as
amended (providing for one year cliff vesting).
11 -- None.
*12 -- Computation of Ratio of Earnings to Fixed Charges.
13 -- None.
14 -- Tenneco Inc. Code of Ethical Conduct for Financial Managers
(incorporated herein by reference from Exhibit 99.3 to the
registrant's Annual Report on Form 10-K for the year ended
December 31, 2002, File No. 1-12387).
16 -- None.
18 -- None.
*21 -- List of Subsidiaries of Tenneco Inc.
22 -- None.
*23 -- Consent of Independent Registered Public Accounting firm.
*24 -- Powers of Attorney.
*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.
33 -- None.
34 -- None.
35 -- None.
99 -- None.
100 -- None.
---------------
* Filed herewith.
+ Indicates a management contract or compensatory plan or arrangement.
139
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TENNECO INC.
By *
------------------------------------
Mark P. Frissora
Chairman and Chief Executive Officer
Date: March 15, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons in the capacities indicated on
March 15, 2006.
SIGNATURE TITLE
--------- -----
* Chairman, President and Chief Executive
-------------------------------------------------------- Officer and Director (principal executive
Mark P. Frissora officer)
/s/ TIMOTHY R. DONOVAN Executive Vice President, Strategy and
-------------------------------------------------------- Business Development, General Counsel and
Timothy R. Donovan Director
* Executive Vice President and Chief
-------------------------------------------------------- Financial Officer (principal financial
Kenneth R. Trammell officer)
* Vice President and Controller (principal
-------------------------------------------------------- accounting officer)
James A. Perkins, Jr.
* Director
--------------------------------------------------------
Charles W. Cramb
* Director
--------------------------------------------------------
M. Kathryn Eickhoff
* Director
--------------------------------------------------------
Frank E. Macher
* Director
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Roger B. Porter
* Director
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David B. Price, Jr.
* Director
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Dennis G. Severance
* Director
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Paul T. Stecko
* Director
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Mitsunobi Takeuchi
* Director
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Jane L. Warner
*By: /s/ TIMOTHY R. DONOVAN
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Timothy R. Donovan
Attorney in fact
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