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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2006
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 Identification No.)
incorporation or organization)
500 NORTH FIELD DRIVE, LAKE FOREST, 60045
ILLINOIS
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is 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]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, par value $.01 per share: 45,527,276 shares as of October 30,
2006.
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TABLE OF CONTENTS
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).............................. 5
Tenneco Inc. and Consolidated Subsidiaries--
Report of Independent Registered Public Accounting Firm.......... 5
Statements of Income............................................. 6
Balance Sheets................................................... 7
Statements of Cash Flows......................................... 8
Statements of Changes in Shareholders' Equity.................... 9
Statements of Comprehensive Income (Loss)........................ 10
Notes to Consolidated Financial Statements....................... 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 36
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 63
Item 4. Controls and Procedures....................................... 63
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................. *
Item 1A. Risk Factors.............................................. 64
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds... 64
Item 3. Defaults Upon Senior Securities............................... *
Item 4. Submission of Matters to a Vote of Security Holders........... *
Item 5. Other Information............................................. *
Item 6. Exhibits...................................................... 64
--------
* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
concerning, among other things, our prospects and business strategies. These
forward-looking statements are included in various sections of this report,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing in Part I, Item 2. The words "may," "will,"
"believe," "should," "could," "plans," "expect," "anticipated," "estimates,"
and similar expressions (and variations thereof), identify these forward-
looking statements. Although we believe that the expectations reflected in
these forward-looking statements are based on reasonable assumptions, these
expectations may not prove to be correct. Because these forward-looking
statements are also subject to risks and uncertainties, actual results may
differ materially from the expectations expressed in the forward-looking
statements. Important factors that could cause actual results to differ
materially from the expectations reflected in the forward-looking statements
include:
- changes in automotive manufacturers' production rates and their actual
and forecasted requirements for our products, including the overall
highly competitive nature of the automotive parts industry, and our
resultant inability to realize the sales represented by our awarded book
of business (which is based on anticipated pricing for the applicable
program over its life, and is subject to increases or decreases due to
changes in customer requirements, customer and consumer preferences, and
the number of vehicles actually produced by customers);
2
- the loss of any of our large original equipment manufacturer ("OEM")
customers (on whom we depend for a substantial portion of our revenues),
or the loss of market shares by these customers if we are unable to
achieve increased sales to other OEMs;
- increases in the costs of raw materials, including our ability to
successfully reduce the impact of any such cost increases through
materials substitutions, cost reduction initiatives and other methods;
- the cyclical nature of the global vehicular industry, including the
performance of the global aftermarket sector and the longer product lives
of automobile parts;
- changes in consumer demand, prices and our ability to have our products
included on top selling vehicles, such as the recent shift in consumer
preferences from light trucks and SUVs to other vehicles in light of
higher fuel costs (because the percentage of our North American OE
revenues related to light trucks and SUVs is greater than the percentage
of the total North American light vehicle build rate represented by light
trucks and SUVs, our North American OE business is sensitive to this
change in consumer preferences), and other factors impacting the
cyclicality of automotive production and sales of automobiles which
include our products, and the potential negative impact on our revenues
and margins from such products;
- our continued success in cost reduction and cash management programs and
our ability to execute restructuring and other cost reduction plans and
to realize anticipated benefits from these plans;
- general economic, business and market conditions, including without
limitation the financial difficulties facing a number of companies in the
automotive industry and the potential impact thereof on labor unrest,
supply chain disruptions,weakness in demand and the collectibility of any
accounts receivable due us from such companies;
- the impact of consolidation among automotive parts suppliers and
customers on our ability to compete;
- operating hazards associated with our business;
- changes in distribution channels or competitive conditions in the markets
and countries where we operate, including the impact of changes in
distribution channels for aftermarket products on our ability to increase
or maintain aftermarket sales;
- the negative impact of higher fuel prices on discretionary purchases of
aftermarket products by consumers and on purchases of light trucks and
SUVs;
- the cost and outcome of existing and any future legal proceedings;
- labor disruptions at our facilities or any labor or other economic
disruptions at any of our significant customers or suppliers or any of
our customers' other suppliers;
- economic, exchange rate and political conditions in the foreign countries
where we operate or sell our products;
- customer acceptance of new products;
- new technologies that reduce the demand for certain of our products or
otherwise render them obsolete;
- our ability to realize our business strategy of improving operating
performance;
- capital availability or costs, including changes in interest rates,
market perceptions of the industries in which we operate or ratings of
securities;
- our inability to successfully integrate any acquisitions that we
complete;
- changes by the Financial Accounting Standards Board or the Securities and
Exchange Commission of authoritative generally accepted accounting
principles or policies;
- potential legislation, regulatory changes and other governmental actions,
including the ability to receive regulatory approvals and the timing of
such approvals;
3
- the impact of changes in and compliance with laws and regulations,
including environmental laws and regulations, and environmental
liabilities in excess of the amount reserved;
- acts of war and/or terrorism, including, but not limited to, the events
taking place in the Middle East, the current military action in Iraq and
Afghanistan, the current situation in North Korea 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 other transactions,
events and circumstances which may be beyond our control.
The risks included here are not exhaustive. Refer to "Part I, Item 1A--Risk
Factors" in our annual report on Form 10-K for the year ended December 31, 2005,
for further discussion regarding our exposure to risks. Additionally, new risk
factors emerge from time to time and it is not possible for us to predict all
such risk factors, nor to assess the impact such risk factors might have on our
business or the extent to which any factor or combination of factors may cause
actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
4
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TENNECO INC.
We have reviewed the accompanying consolidated balance sheet of Tenneco
Inc. and consolidated subsidiaries as of September 30, 2006, and the related
consolidated statements of income, cash flows, comprehensive income (loss) for
the three-month and nine-month periods ended September 30, 2006 and 2005, and
changes in shareholders' equity for the nine-month periods ended September 30,
2006 and 2005. These interim financial statements are the responsibility of
Tenneco Inc.'s management.
We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated interim financial statements for them to be
in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 2, the Company changed its accounting for stock-based
compensation expense effective January 1, 2006 upon adoption of Statement of
Financial Accounting Standard No. 123(R), "Share-Based Payment."
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Tenneco Inc. and consolidated subsidiaries 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 then ended
(not presented herein); and in our report dated March 14, 2006, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2005 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Chicago, Illinois
November 3, 2006
5
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
REVENUES
Net sales and operating revenues.... $ 1,122 $ 1,096 $ 3,476 $ 3,377
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation and amortization
shown below)..................... 926 889 2,819 2,718
Engineering, research, and
development...................... 24 22 68 64
Selling, general, and
administrative................... 82 96 290 287
Depreciation and amortization of
other intangibles................ 45 44 136 134
----------- ----------- ----------- -----------
1,077 1,051 3,313 3,203
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Loss on sale of receivables......... (2) (1) (4) (2)
Other income........................ 2 6 1 5
----------- ----------- ----------- -----------
-- 5 (3) 3
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME
TAXES, AND MINORITY INTEREST........ 45 50 160 177
Interest expense (net of interest
capitalized)..................... 34 33 101 97
Income tax expense.................. 3 7 18 29
Minority interest................... 2 -- 4 1
----------- ----------- ----------- -----------
NET INCOME............................ $ 6 $ 10 $ 37 $ 50
=========== =========== =========== ===========
EARNINGS PER SHARE
Average shares of common stock
outstanding--
Basic............................... 44,986,076 43,279,086 44,466,543 42,969,663
Diluted............................. 47,207,110 45,583,668 46,790,147 45,215,418
Basic earnings per share of common
stock............................... $ 0.13 $ 0.25 $ 0.84 $ 1.17
Diluted earnings per share of common
stock............................... $ 0.12 $ 0.23 $ 0.79 $ 1.11
The accompanying notes to financial statements are an integral part of these
statements of income.
6
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 116 $ 141
Receivables--
Customer notes and accounts, net..................... 619 515
Other................................................ 22 28
Inventories--
Finished goods....................................... 183 154
Work in process...................................... 88 81
Raw materials........................................ 114 89
Materials and supplies............................... 34 36
Deferred income taxes................................... 46 43
Prepayments and other................................... 139 110
------- -------
1,361 1,197
------- -------
Other assets:
Long-term notes receivable, net......................... 27 23
Goodwill................................................ 201 200
Intangibles, net........................................ 32 30
Deferred income taxes................................... 317 307
Other................................................... 135 140
------- -------
712 700
------- -------
Plant, property, and equipment, at cost................... 2,577 2,428
Less--Reserves for depreciation and amortization........ (1,497) (1,385)
------- -------
1,080 1,043
------- -------
$ 3,153 $ 2,940
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current maturities of long-
term debt)........................................... $ 51 $ 22
Trade payables.......................................... 730 651
Accrued taxes........................................... 52 31
Accrued interest........................................ 34 38
Accrued liabilities..................................... 213 208
Other................................................... 25 29
------- -------
1,105 979
------- -------
Long-term debt............................................ 1,352 1,356
------- -------
Deferred income taxes..................................... 84 86
------- -------
Postretirement benefits................................... 283 285
------- -------
Deferred credits and other liabilities.................... 81 81
------- -------
Commitments and contingencies
Minority interest......................................... 28 24
------- -------
Shareholders' equity:
Common stock............................................ -- --
Premium on common stock and other capital surplus....... 2,785 2,776
Accumulated other comprehensive loss.................... (235) (282)
Retained earnings (accumulated deficit)................. (2,090) (2,125)
------- -------
460 369
Less--Shares held as treasury stock, at cost............ 240 240
------- -------
220 129
------- -------
$ 3,153 $ 2,940
======= =======
The accompanying notes to financial statements are an integral part of these
balance sheets.
7
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE
MONTHS
ENDED NINE MONTHS
SEPTEMBER ENDED
30, SEPTEMBER 30,
----------- -------------
2006 2005 2006 2005
---- ---- ----- -----
(MILLIONS)
OPERATING ACTIVITIES
Net income............................................. $ 6 $ 10 $ 37 $ 50
Adjustments to reconcile net income to cash provided
(used) by operating activities--
Depreciation and amortization of other intangibles... 45 44 136 134
Deferred income taxes................................ 1 8 9 3
Stock option expense................................. 1 -- 3 --
Loss on sale of assets, net.......................... -- 1 2 2
Changes in components of working capital (net of
acquisition)--
(Increase) decrease in receivables................ 17 (9) (85) (209)
(Increase) decrease in inventories................ (7) 11 (47) (22)
(Increase) decrease in prepayments and other
current assets.................................. (7) (4) (34) (23)
Increase (decrease) in payables................... (39) (12) 51 52
Increase (decrease) in accrued taxes.............. (8) (8) (8) 11
Increase (decrease) in accrued interest........... (5) (4) (4) (2)
Increase (decrease) in other current liabilities.. 4 15 -- 5
Other.................................................. (5) (14) -- (27)
---- ---- ----- -----
Net cash provided (used) by operating activities....... 3 38 60 (26)
---- ---- ----- -----
INVESTING ACTIVITIES
Net proceeds from the sale of assets................... 4 1 6 4
Expenditures for plant, property, and equipment........ (43) (37) (130) (100)
Expenditures for software related intangible assets.... (3) (5) (9) (12)
Acquisition of businesses (net of cash acquired)....... -- -- -- (11)
Investments and other.................................. (2) (1) (1) 1
---- ---- ----- -----
Net cash used by investing activities.................. (44) (42) (134) (118)
---- ---- ----- -----
FINANCING ACTIVITIES
Issuance of common shares.............................. 3 2 13 6
Issuance of long-term debt............................. -- 1 -- 1
Retirement of long-term debt........................... (1) (1) (3) (43)
Net increase in short-term debt excluding current
maturities of long-term debt......................... 32 22 29 56
Other.................................................. -- 1 2 1
---- ---- ----- -----
Net cash provided by financing activities.............. 34 25 41 21
---- ---- ----- -----
Effect of foreign exchange rate changes on cash and
cash equivalents..................................... -- 2 8 (2)
---- ---- ----- -----
Increase (Decrease) in cash and cash equivalents....... (7) 23 (25) (125)
Cash and cash equivalents, July 1 and January 1,
respectively......................................... 123 66 141 214
---- ---- ----- -----
Cash and cash equivalents, September 30 (Note)......... $116 $ 89 $ 116 $ 89
==== ==== ===== =====
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest............... $ 36 $ 33 $ 103 $ 94
Cash paid during the period for income taxes (net of
refunds)............................................. $ 11 $ 5 $ 18 $ 16
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.
8
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2006 2005
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- -------
(MILLIONS EXCEPT SHARE AMOUNTS)
COMMON STOCK
Balance January 1............................ 45,544,668 $ -- 44,275,594 $ --
Issued (Reacquired) pursuant to benefit
plans................................... (114,546) -- 283,921 --
Stock options exercised.................... 1,389,261 -- 847,798 --
---------- ------- ---------- -------
Balance September 30......................... 46,819,383 -- 45,407,313 --
========== ==========
PREMIUM ON COMMON STOCK AND OTHER CAPITAL
SURPLUS
Balance January 1............................ 2,776 2,764
Premium on common stock issued pursuant to
benefit plans........................... 9 10
------- -------
Balance September 30......................... 2,785 2,774
------- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance January 1............................ (282) (185)
Other comprehensive income (loss).......... 47 (67)
------- -------
Balance September 30......................... (235) (252)
------- -------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1............................ (2,125) (2,180)
Net income................................. 37 50
Other...................................... (2) (2)
------- -------
Balance September 30......................... (2,090) (2,132)
------- -------
LESS--COMMON STOCK HELD AS TREASURY STOCK, AT
COST
Balance January 1 and September 30........... 1,294,692 240 1,294,692 240
========== ------- ========== -------
Total................................. $ 220 $ 150
======= =======
The accompanying notes to financial statements are an integral part
of these statements of changes in shareholders' equity.
9
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2006 2005
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
(LOSS) (LOSS) (LOSS) (LOSS)
------------- ------------- ------------- -------------
(MILLIONS)
NET INCOME.......................... $ 6 $10
--- ---
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) CUMULATIVE
TRANSLATION ADJUSTMENT
Balance July 1...................... $ (98) $(138)
Translation of foreign currency
statements..................... (5) (5) 8 8
----- -----
Balance September 30................ (103) (130)
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance July 1 and September 30..... (132) (122)
----- -----
Balance September 30................ $(235) $(252)
===== --- ===== ---
Other comprehensive income (loss)... (5) 8
--- ---
COMPREHENSIVE INCOME................ $ 1 $18
=== ===
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2006 2005
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
(LOSS) (LOSS) (LOSS) (LOSS)
------------- ------------- ------------- -------------
(MILLIONS)
NET INCOME.......................... $37 $ 50
--- ----
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) CUMULATIVE
TRANSLATION ADJUSTMENT
Balance January 1................... $(150) $ (63)
Translation of foreign currency
statements..................... 47 47 (67) (67)
----- -----
Balance September 30................ (103) (130)
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance January 1 and September 30.. (132) (122)
----- -----
Balance September 30................ $(235) $(252)
===== --- ===== ----
Other comprehensive income (loss)... 47 (67)
--- ----
COMPREHENSIVE INCOME (LOSS)......... $84 $(17)
=== ====
The accompanying notes to financial statements are an integral part
of these statements of comprehensive income (loss).
10
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) As you read the accompanying financial statements and Management's
Discussion and Analysis you should also read our Annual Report on Form 10-K for
the year ended December 31, 2005.
In our opinion, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly Tenneco Inc.'s financial position, results of operations, cash flows,
changes in shareholders' equity, and comprehensive income (loss) for the periods
indicated. We have prepared the unaudited interim consolidated financial
statements pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America ("GAAP") for annual financial statements.
Our consolidated financial statements include all majority-owned
subsidiaries. We carry investments in 20 percent to 50 percent owned companies
at cost plus equity in undistributed earnings and cumulative translation
adjustments from the date of acquisition since we have the ability to exert
significant influence over operating and financial policies.
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) 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 equivalent units, stock
appreciation rights ("SARs"), and stock options to our directors, officers,
employees and consultants. 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, employees and consultants.
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 permitted the granting of a variety of similar awards to
our officers, directors, employees and consultants. Up to 4 million shares of
our common stock were authorized for delivery under the 2002 Long-Term Incentive
Plan. In March 2006, we adopted the 2006 Long-Term Incentive Plan which replaced
the 2002 Long-Term Incentive Plan and permits the granting of a variety of
similar awards to directors, officers, employees and consultants. As of
September 30, 2006, up to 2,569,381 shares of our common stock have been
authorized for delivery under the 2006 Long-Term Incentive Plan. Our
nonqualified stock options have 7 to 20 year terms and vest equally over a three
year service period from the date of the grant.
We have granted restricted common stock to our directors and certain key
employees. These awards generally require, among other things, that the award
holder remains in service to our company during the restriction period. 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 grant's value. In addition, we have
granted SARs to certain key employees in our Asian operations that are payable
in cash after a three year service period. The grant value is indexed to the
stock price.
Accounting Methods--Prior to January 1, 2006, we utilized 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." Therefore, no compensation cost was reflected in net income related
to stock options as all options granted under the plans had an exercise price
equal to the market price of the underlying common stock on the date of the
grant. Compensation cost was previously recognized for restricted stock, stock
equivalent units and SARs under this accounting principle.
11
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), "Share-Based Payment," using the modified
prospective application method. Under this transition method, compensation cost
recognized for the nine months ended September 30, 2006, includes the applicable
amounts of: (1) compensation cost of all unvested stock-based awards granted
prior to January 1, 2006, based upon the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123 and previously presented
in pro forma footnote disclosures, and (2) compensation cost for all stock-based
awards granted on or after January 1, 2006, based upon the grant date fair value
estimated in accordance with the new provisions of SFAS No. 123(R). Results for
prior periods have not been restated.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2005 2005
------------- -------------
(MILLIONS EXCEPT
PER SHARE
AMOUNTS)
Net income............................................... $ 10 $ 50
Add: Stock-based employee compensation expense included
in net income, net of income tax....................... 1 4
Deduct: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of income tax.............................. (2) (6)
----- -----
Adjusted net income...................................... $ 9 $ 48
===== =====
Earnings per share:
Basic--as reported....................................... $0.25 $1.17
Basic--as adjusted for stock-based compensation expense.. $0.23 $1.13
Diluted--as reported..................................... $0.23 $1.11
Diluted--as adjusted for stock-based compensation
expense................................................ $0.22 $1.07
SFAS No. 109, "Accounting for Income Taxes," discusses the deductibility of
transactions. We are allowed a tax deduction for compensation cost which is
calculated as the difference between the value of the stock at the date of grant
and the price upon exercise of a stock option. Prior to adopting SFAS No.
123(R), we presented the cash flow benefit of these deductions as operating cash
flows. Under SFAS No. 123(R), excess tax benefits, which are any excess tax
benefits we may realize upon the exercise of stock options that are greater than
the tax benefit recognized on the compensation cost recorded in our income
statement, are recognized as an addition to paid-in capital. We present cash
retained as a result of excess tax benefits as financing cash flows. Any write-
offs of deferred tax assets related to unrealized tax benefits associated with
the recognized compensation cost would be reported as income tax expense.
Effects of Adopting--Under the previous accounting rules, we recognized
compensation expense for restricted stock, stock equivalent units and SARs in
the income statement and we continue to do so under SFAS No. 123(R).
Compensation expense for these awards, net of tax, was approximately $6 million
for the nine months ended September 30, 2006 compared to approximately $4
million for the nine months ended September 30, 2005, and was recorded in
selling, general, and administrative expense on the statement of income at the
corporate level.
12
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The impact of recognizing compensation expense related to nonqualified
stock options is contained in the table below.
NINE MONTHS ENDED
SEPTEMBER 30, 2006
------------------
(MILLIONS)
Selling, general and administrative............................. $ 3
------
Loss before interest expense, income taxes and minority
interest...................................................... (3)
Income tax benefit.............................................. (1)
------
Net loss........................................................ $ (2)
======
Decrease in basic earnings per share............................ $(0.04)
Decrease in diluted earnings per share.......................... $(0.04)
For the nine months ended September 30, 2006, the impact of adopting SFAS
No. 123(R) on our results of operations including nonqualified stock options and
other stock-based compensation was additional expense of approximately $2
million or $0.04 per diluted share. Adoption of this accounting standard also
increased the calculated number of diluted shares by approximately 0.4 million
primarily due to the elimination of assumed excess tax benefits.
For stock options awarded to retirement eligible employees prior to the
adoption of SFAS No. 123(R) we immediately accelerate the recognition of any
outstanding compensation cost when employees retire before the end of the
explicit vesting period. This methodology has not had a material impact on our
recognized compensation cost.
As of September 30, 2006, there was approximately $4 million, net of tax,
of total unrecognized compensation costs related to these stock-based awards
that we expect to recognize over a weighted average period of 1.2 years.
Cash received from option exercises for the nine months ended September 30,
2006, was approximately $8 million. Stock option exercises during the first nine
months of 2006 generated an excess tax benefit of approximately $9 million.
Pursuant to footnote 82 of SFAS No. 123(R), this benefit was not recorded as we
have federal and state net operating losses which are not currently being
utilized. As a result, the excess tax benefit had no impact on our financial
position or statement of cash flows.
Assumptions--We calculated the fair values of the awards using the Black-
Scholes option pricing model with the weighted average assumptions listed below.
Determining the fair value of share-based awards requires judgment in estimating
employee and market behavior. If actual results differ significantly from these
estimates, stock-based compensation expense and our results of operations could
be materially impacted.
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
2006 2005
----- -----
Stock Options
Weighted average grant date fair value, per share................ $9.27 $8.14
Weighted average assumptions used:
Expected volatility............................................ 42.6% 43.0%
Expected lives................................................. 5.1 7
Risk-free interest rates....................................... 4.2% 4.0%
Dividend yields................................................ 0.0% 0.0%
13
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Effective January 1, 2006, we changed our method of determining volatility
on all new options granted after that date to implied volatility rather than an
analysis of historical volatility. We believe the market-based measures of
implied volatility are currently the best available indicators of the expected
volatility used in these estimates. The effect of this change did not have a
material impact to our results of operations.
Expected lives of options are based upon the historical and expected time
to post-vesting forfeiture and exercise. We believe this method is the best
estimate of the future exercise patterns currently available.
The risk-free interest rates are based upon the Constant Maturity Rates
provided by the U.S. Treasury. For our valuations, we used the continuous rate
with a term equal to the expected life of the options.
On January 10, 2001, we announced that our Board of Directors eliminated
the quarterly dividend on our common stock. As a result, there is no dividend
yield.
Stock Options--The following table reflects the status and activity for all
options to purchase common stock for the period indicated:
NINE MONTHS ENDED
SEPTEMBER 30, 2006
------------------------------------------------------
WEIGHTED AVG.
SHARES WEIGHTED AVG. REMAINING AGGREGATE
UNDER EXERCISE LIFE IN INTRINSIC
OPTION PRICES YEARS VALUE
--------- ------------- ------------- ----------
(MILLIONS)
Outstanding Stock Options
Outstanding, January 1, 2006.............. 4,922,095 $ 9.08
Granted................................. 451,750 21.21
Canceled................................ (15,738) 20.08
Forfeited............................... (3,061) 7.35
Exercised............................... (803,472) 4.30 $14
---------
Outstanding, March 31, 2006............... 4,551,574 11.08 5.5 49
Granted................................. 1,500 10.75
Canceled................................ (42,050) 5.67
Forfeited............................... (4,231) 12.46
Exercised............................... (164,394) 4.02 3
---------
Outstanding, June 30, 2006................ 4,342,399 11.40 5.3 51
=========
Granted................................. 335 24.15
Canceled................................ -- --
Forfeited............................... (158,010) 17.26
Exercised............................... (421,395) 8.36 6
---------
Outstanding, September 30, 2006........... 3,763,329 11.50 5.0 44
=========
Exercisable, September 30, 2006........... 3,015,554 $10.02 5.0 $40
=========
14
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Restricted Stock--The following table reflects the status for all nonvested
restricted shares for the period indicated:
NINE MONTHS ENDED
SEPTEMBER 30, 2006
------------------------
WEIGHTED AVG.
GRANT DATE
SHARES FAIR VALUE
-------- -------------
Nonvested Restricted Shares
Nonvested balance at January 1, 2006....................... 533,714 $12.67
Granted.................................................. 249,477 21.23
Vested................................................... (222,687) 10.94
Forfeited................................................ -- --
--------
Nonvested balance at March 31, 2006........................ 560,504 $17.17
Granted.................................................. -- --
Vested................................................... (3,749) 12.24
Forfeited................................................ -- --
--------
Nonvested balance at June 30, 2006......................... 556,755 $17.20
Granted.................................................. 335 24.15
Vested................................................... (6,043) 18.87
Forfeited................................................ (136,082) 17.43
========
Nonvested balance at September 30, 2006.................... 414,965 $17.11
========
The fair value of restricted stock grants is equal to the average market
price of our stock at the date of grant. As of September 30, 2006, approximately
$5 million of total unrecognized compensation costs related to compensation for
restricted stock awards is expected to be recognized over a weighted-average
period of approximately 2 years.
Stock Equivalent Units and SAR's--Stock equivalent units and SAR's are paid
in cash and recognized as a liability based upon their fair value. As of
September 30, 2006, approximately $2 million of total unrecognized compensation
costs is expected to be recognized by December 31, 2006.
(3) 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. Based upon the LIBOR rate as determined under
these agreements of 5.61 percent (which is in effect until January 15, 2007) the
inclusion of these swaps in our financial results is expected to add $1 million
to 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 September 30, 2006, the fair value of the interest rate swaps was a liability
of approximately $7 million which has been recorded as a decrease to long-term
debt and an increase to other long-term liabilities.
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.
15
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 24, 2005, and to exclude up to an
additional $60 million in restructuring-related expenses announced and taken
after February 24, 2005, (ii) increase permitted investments to $50 million,
(iii) exclude expenses related to the issuance of stock options from the
definition of consolidated net income, (iv) permit us to redeem up to $125
million of senior secured notes after January 1, 2008 (subject to certain
conditions), (v) increase our ability to add commitments under the revolving
credit facility by $25 million, and (vi) make other minor modifications. We
incurred approximately $1 million in fees and expenses associated with this
amendment, which were capitalized and are being amortized over the remaining
term of the agreement.
Following the February 2005 voluntary prepayment of $40 million, the term
loan B facility is payable as follows: $74 million due March 31, 2010, and $94
million due each of June 30, September 30 and December 12, 2010. The revolving
credit facility requires that if any amounts are drawn, they be repaid by
December 2008. Prior to that date, funds may be borrowed, repaid and reborrowed
under the revolving credit facility without premium or penalty. Letters of
credit may be issued under the revolving credit facility.
The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by December 2010. We can borrow revolving loans from the $155 million
tranche B-1 letter of credit/revolving loan facility and use that facility to
support letters of credit. The tranche B-1 letter of credit/revolving loan
facility lenders have deposited $155 million with the administrative agent, who
has invested that amount in time deposits. We do not have an interest in any of
the funds on deposit. When we draw revolving loans under this facility, the
loans are funded from the $155 million on deposit with the administrative agent.
When we make repayments, the repayments are redeposited with the administrative
agent.
The tranche B-1 letter of credit/revolving loan facility is reflected as
debt on our balance sheet only if we borrow money under this facility or if we
use the facility to make payments for letters of credit. We will not be liable
for any losses to or misappropriation of any (i) return due to the
administrative agent's failure to achieve the return described above or to pay
all or any portion of such return to any lender under such facility or (ii)
funds on deposit in such account by such lender (other than the obligation to
repay funds released from such accounts and provided to us as revolving loans
under such facility).
During 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 are not required to reduce the commitments under our tranche B-1 letter of
credit/revolving loan facility should we obtain additional revolving credit
commitments. In July 2006, we increased the amount of commitments under the
revolving credit portion of the facility from $300 million to $320 million. We
have not yet sought any increased commitments above the $320 million level, but
may do so when, in our judgment, market conditions are favorable.
(4) 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.
16
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. Project Genesis involved closing eight facilities, improving the
process flow and efficiency through value mapping and plant arrangement at 20
facilities, relocating production among facilities, and centralizing some
functional areas. The total of all these restructuring and other costs recorded
in the fourth quarter of 2001 was $32 million before tax, $31 million after tax,
or $0.81 per diluted common share. We eliminated 974 positions in connection
with Project Genesis. Additionally, we executed this plan more efficiently than
originally anticipated and as a result in the fourth quarter of 2002 reduced our
reserves related to this restructuring activity by $6 million, which was
recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2
million of severance reserve to the asset impairment reserve. This
reclassification became necessary, as actual asset impairments along with the
sale of our closed facilities were different than the original estimates. We
completed the remaining restructuring activities under Project Genesis as of the
end of 2004. Since Project Genesis was announced, we have undertaken a number of
related projects designed to restructure our operations, described below.
In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. This charge was primarily recorded in cost
of sales.
In October of 2003, we announced the closing of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees were
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $3 million in costs related to
this action in 2004. This action is in addition to the plant closings announced
in Project Genesis in the fourth quarter of 2001.
In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of layoffs were at middle and senior management levels. As of September 30,
2006, 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.
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. We
recorded a pre-tax charge of $2 million during the third quarter of 2006 and $6
million for the first nine months of 2006 for severance and other benefits
related to these reductions in force, substantially all of which have been paid
in cash.
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. We expect to
continue to undertake additional restructuring actions as deemed necessary,
however, there can be no assurances we will undertake such 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.
We incurred $7 million in restructuring and restructuring-related costs
during the third quarter of 2006, of which $6 million was recorded in cost of
sales and $1 million in selling, general and administrative expense. Including
the costs incurred in 2002 through 2005 of $71 million, we have incurred a total
of $92 million for activities related to our restructuring initiatives as of
September 30, 2006.
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 2005, our senior credit facility was amended to exclude
all remaining cash charges and expenses related to restructuring initiatives
started on or before February 24, 2005. As
17
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
of September 30, 2006, we have excluded $63 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 24, 2005 from the calculation of the
financial covenant ratios required under our senior credit facility. As of
September 30, 2006, we have excluded $27 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.
(5) 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 costs
related to an existing condition caused by past operations and that do not
contribute to current or future revenue generation. We record liabilities when
environmental assessments indicate that remedial efforts are probable and the
costs can be reasonably estimated. Estimates of the liability are based upon
currently available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and other
societal and economic factors. We consider all available evidence including
prior experience in remediation of contaminated sites, other companies' cleanup
experiences and data released by the United States Environmental Protection
Agency or other organizations. These estimated liabilities are subject to
revision in future periods based on actual costs or new information. Where
future cash flows are fixed or reliably determinable, we have discounted the
liabilities. All other environmental liabilities are recorded at their
undiscounted amounts. We evaluate recoveries separately from the liability and,
when they are assured, recoveries are recorded and reported separately from the
associated liability in our financial statements.
As of September 30, 2006, we are designated as a potentially responsible
party in one Superfund site. Including the Superfund site, we may have the
obligation to remediate current or former facilities, and we estimate our share
of environmental remediation costs 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.
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 defending a legal proceeding by Chinese government 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
18
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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. A small percentage
of the claims have been asserted by railroad workers alleging exposure to
asbestos products in railroad cars manufactured by The Pullman Company, one of
our subsidiaries. Nearly all of the claims are related to alleged exposure to
asbestos in our automotive emission control products. Only a small percentage of
these claimants allege that they were automobile mechanics 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. 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.
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
current liabilities on the balance sheet.
Below is a table that shows the activity in the warranty accrual accounts:
NINE MONTHS
ENDED
SEPTEMBER
30,
-----------
2006 2005
---- ----
(MILLIONS)
Beginning Balance January 1,....................................... $ 22 $19
Accruals related to product warranties............................. 16 10
Reductions for payments made....................................... (12) (9)
---- ---
Ending Balance September 30,....................................... $ 26 $20
==== ===
The current year increase in the warranty accrual is primarily driven by
higher unit pricing in the North American aftermarket and miscellaneous warranty
issues in Australia and China
(6) In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. 46" (revised December
2003). The statement addresses whether a reporting enterprise should consider
whether it holds an implicit variable interest in a variable interest entity
("VIE") or potential VIE when specific conditions exist. The guidance was
applied in the first reporting period beginning after March 3, 2005. The
adoption of FSP No. FIN 46(R)-5 did not have an impact on our consolidated
financial statements.
19
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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
Conditional Asset Retirement Obligations," 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 was 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 was effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 did not have a material impact on our financial
position or results of operation.
In June 2005, the FASB issued Staff Position ("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 operation.
In November 2005, the FASB issued FSP FAS 123(R)-3, "Transition Election to
Accounting for the Tax Effects of Share-Based Payment Awards." This FSP requires
an entity to follow either the transition guidance for the additional paid-in-
capital pool as prescribed in SFAS No. 123(R), Share-Based Payment, or the
alternative transition method as described in the FSP. An entity that adopts
SFAS No. 123(R) using the modified prospective application may make a one-time
election to adopt the transition method described in this FSP. An entity may
take up to one year from the later of its initial adoption of SFAS No. 123(R) or
the effective date of this FSP to evaluate its available transition alternatives
and make its one-time election. This FSP became effective in November 2005. We
continue to evaluate the impact that the adoption of this FSP could have on our
financial statements.
In June 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in
Income Taxes--an interpretation of FASB Statement No. 109." This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements and prescribes a threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This interpretation is
effective for fiscal years ending after December 15, 2006. We continue to
evaluate the impact that adoption of this interpretation could have on our
financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement."
This statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. The statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We do not
expect the adoption of this statement to have a material impact to our financial
statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)." Part of this Statement will be
effective as of December 31, 2006, and requires companies that have defined
benefit pension plans and other postretirement benefit plans to recognize the
funded status of those plans on the balance sheet on a prospective basis from
the effective date. The funded status of these plans is determined as of the
plans' measurement dates and represents the difference between the amount of the
obligations owed to participants under each plan (including the
20
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
effects of future salary increases for defined benefit plans) and the fair value
of each plan's assets dedicated to paying those obligations. To record the
funded status of those plans, unrecognized prior service costs and net actuarial
losses experienced by the plans will be recorded in the Other Comprehensive
Income (OCI) section of shareholders' equity on the balance sheet. We are
currently evaluating the potential impact this standard may have on our
financial position and results of operations, but because we had previously
recorded only a portion of the excess of obligations over plan assets in our
defined benefit plans and retiree health care plans, we expect this will result
in a reduction of OCI in shareholders' equity.
In addition, SFAS No. 158 requires that companies using a measurement date
for their defined benefit pension plans and other postretirement benefit plans
other than their fiscal year end, change the measurement date effective for
fiscal years ending after December 15, 2008. We currently use a September 30
measurement date for substantially all of our defined benefit plans and are
planning to adopt this statement's measurement date change effective for
calendar year 2007. We do not believe the impact of the application of this part
of the statement will be material to our financial position and results of
operations.
(7) We have 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 $144 million and $146 million at September
30, 2006 and 2005, respectively. We recognized a loss of approximately $4
million for the nine months ended September 30, 2006, and approximately $2
million for the nine months ended September 30, 2005, 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, which has averaged approximately 6 percent during
2006. We retain 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.
21
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(8) Earnings per share of common stock outstanding were computed as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
Basic earnings per share--
Income.............................. $ 6 $ 10 $ 37 $ 50
=========== =========== =========== ===========
Average shares of common stock
outstanding...................... 44,986,076 43,279,086 44,466,543 42,969,663
=========== =========== =========== ===========
Earnings per average share of common
stock............................ $ 0.13 $ 0.25 $ 0.84 $ 1.17
=========== =========== =========== ===========
Diluted earnings per share--
Income.............................. $ 6 $ 10 $ 37 $ 50
=========== =========== =========== ===========
Average shares of common stock
outstanding...................... 44,986,076 43,279,086 44,466,543 42,969,663
Effect of dilutive securities:
Restricted stock................. 335,432 425,395 409,223 356,337
Stock options.................... 1,885,602 1,879,187 1,914,381 1,889,418
----------- ----------- ----------- -----------
Average shares of common stock
outstanding including dilutive
securities....................... 47,207,110 45,583,668 46,790,147 45,215,418
=========== =========== =========== ===========
Earnings per average share of common
stock............................ $ 0.12 $ 0.23 $ 0.79 $ 1.11
=========== =========== =========== ===========
Options to purchase 1,020,145 and 1,239,391 shares of common stock were
outstanding at September 30, 2006 and 2005, respectively, but were not included
in the computation of diluted EPS because the options were anti-dilutive for the
quarters ended September 30, 2006 and 2005, respectively.
(9) Net periodic pension costs (income) and postretirement benefit costs
(income) consist of the following components:
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
POSTRETIREME-
PENSION NT
--------------------------------- -------------
2006 2005 2006 2005
--------------- --------------- ---- ----
US FOREIGN US FOREIGN US US
--- ------- --- ------- ---- ----
(MILLIONS)
Service cost--benefits earned during the
year...................................... $ 4 $ 2 $ 3 $ 1 $-- $ 1
Interest cost............................... 5 3 5 3 2 2
Expected return on plan assets.............. (4) (4) (4) (4) -- --
Net amortization:
Actuarial loss............................ 2 1 1 1 2 2
Prior service cost........................ -- 1 1 1 (1) (2)
--- --- --- --- --- ---
Net pension and postretirement costs........ $ 7 $ 3 $ 6 $ 2 $ 3 $ 3
=== === === === === ===
22
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
POSTRETIREME-
PENSION NT
----------------------------------- -------------
2006 2005 2006 2005
---------------- ---------------- ---- ----
US FOREIGN US FOREIGN US US
---- ------- ---- ------- ---- ----
(MILLIONS)
Service cost--benefits earned during the
year..................................... $ 12 $ 6 $ 11 $ 5 $ 2 $ 2
Interest cost.............................. 14 11 14 10 6 6
Expected return on plan assets............. (14) (12) (12) (11) -- --
Net amortization:
Actuarial loss........................... 4 4 3 2 5 5
Prior service cost....................... 2 1 2 1 (4) (5)
---- ---- ---- ---- --- ---
Net pension and postretirement costs....... $ 18 $ 10 $ 18 $ 7 $ 9 $ 8
==== ==== ==== ==== === ===
For the nine months ended September 30, 2006, we made pension contributions
of approximately $26 million for our domestic pension plans and $10 million for
our foreign pension plans. Based on current actuarial estimates, we believe we
will be required to make approximately $7 million in contributions for the
remainder of 2006.
We made postretirement contributions of approximately $6 million during the
first nine months of 2006. Based on current actuarial estimates, we believe we
will be required to make approximately $3 million in contributions for the
remainder of 2006.
In August 2006, we announced that we are freezing our current defined
benefit plans as of December 31, 2006 and replacing them with additional
contributions under defined contribution plans for nearly all U.S.-based
salaried and non-union hourly employees effective January 1, 2007.
(10) 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 less than $1 million at both September 30, 2006 and 2005. 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 12 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
23
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 highly 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 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. 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 $20 million at September
30, 2006, compared with $26 million at September 30, 2005.
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 approximately $9 million at September
30, 2006 and are classified as notes payable. Financial instruments received
from OE customers and not redeemed totaled approximately $7 million at September
30, 2006 and are 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 was not material at September 30, 2006 and is classified as cash and
cash equivalents.
(11) In 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 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
the 2006 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. Products are transferred between segments and
geographic areas on a basis intended to reflect as nearly as possible the
"market value" of the products.
24
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The following table summarizes certain Tenneco segment information:
SEGMENT
-----------------------------------------------------
NORTH ASIA RECLASS &
AMERICA EUROPE PACIFIC ELIMS CONSOLIDATED
------- ------ ------- --------- ------------
(MILLIONS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2006
Revenues from external customers.......... $ 442 $ 569 $111 $ -- $1,122
Intersegment revenues..................... 2 15 4 (21) --
Income before interest expense, income
taxes, and minority interest............ 16 24 5 -- 45
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2005
Revenues from external customers.......... $ 502 $ 500 $ 94 $ -- $1,096
Intersegment revenues..................... 1 12 3 (16) --
Income before interest expense, income
taxes, and minority interest............ 37 9 4 -- 50
AT SEPTEMBER 30, 2006, AND FOR THE NINE
MONTHS THEN ENDED
Revenues from external customers.......... $1,481 $1,692 $303 $ -- $3,476
Intersegment revenues..................... 5 47 11 (63) --
Income before interest expense, income
taxes, and minority interest............ 87 66 7 -- 160
Total assets.............................. 1,394 1,412 290 57 3,153
AT SEPTEMBER 30, 2005, AND FOR THE NINE
MONTHS THEN ENDED
Revenues from external customers.......... $1,543 $1,564 $270 $ -- $3,377
Intersegment revenues..................... 4 42 9 (55) --
Income before interest expense, income
taxes, and minority interest............ 126 41 10 -- 177
Total assets.............................. 1,361 1,387 259 43 3,050
(12) Supplemental guarantor condensed financial statements are presented
below:
Basis of Presentation
Subject to limited exceptions, all of our existing and future material
domestic wholly owned subsidiaries (which are referred to as the Guarantor
Subsidiaries) fully and unconditionally guarantee our senior subordinated notes
due 2014 and our senior secured notes due 2013 on a joint and several basis. We
have not presented separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries because management has determined
that such information is not material to the holders of the notes. Therefore,
the Guarantor Subsidiaries are combined in the presentation below.
These condensed consolidating financial statements are presented on the
equity method. Under this method, our investments are recorded at cost and
adjusted for our ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
You should read the condensed consolidating financial statements of the
Guarantor Subsidiaries in connection with our consolidated financial statements
and related notes of which this note is an integral part.
Distributions
There are no significant restrictions on the ability of the Guarantor
Subsidiaries to make distributions to us.
25
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
---------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External..................... $430 $692 $ -- $ -- $1,122
Affiliated companies......... 22 112 -- (134) --
---- ---- ---- ----- ------
452 804 -- (134) 1,122
---- ---- ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below).... 374 685 -- (133) 926
Engineering, research, and
development.................. 8 16 -- -- 24
Selling, general, and
administrative............... 34 47 1 -- 82
Depreciation and amortization of
other intangibles............ 17 28 -- -- 45
---- ---- ---- ----- ------
433 776 1 (133) 1,077
---- ---- ---- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables..... -- (2) -- -- (2)
Other income (loss)............. 1 -- -- 1 2
---- ---- ---- ----- ------
1 (2) -- 1 --
---- ---- ---- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES....................... 20 26 (1) -- 45
Interest expense--
External (net of interest
capitalized)............... (2) 1 35 -- 34
Affiliated companies (net of
interest income)........... 43 (3) (40) -- --
Income tax expense (benefit).... (6) 8 13 (12) 3
Minority interest............... -- 2 -- -- 2
---- ---- ---- ----- ------
(15) 18 (9) 12 6
Equity in net income (loss) from
affiliated companies......... 12 1 15 (28) --
---- ---- ---- ----- ------
NET INCOME (LOSS)................. $ (3) $ 19 $ 6 $ (16) $ 6
==== ==== ==== ===== ======
26
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
---------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External..................... $497 $599 $ -- $ -- $1,096
Affiliated companies......... 19 121 -- (140) --
---- ---- ---- ----- ------
516 720 -- (140) 1,096
---- ---- ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below).... 419 610 -- (140) 889
Engineering, research, and
development.................. 8 14 -- -- 22
Selling, general, and
administrative............... 47 49 -- -- 96
Depreciation and amortization of
other intangibles............ 17 27 -- -- 44
---- ---- ---- ----- ------
491 700 -- (140) 1,051
---- ---- ---- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables..... -- (1) -- -- (1)
Other income (loss)............. 12 (7) -- 1 6
---- ---- ---- ----- ------
12 (8) -- 1 5
---- ---- ---- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES....................... 37 12 -- 1 50
Interest expense--
External (net of interest
capitalized)............... (1) 1 33 -- 33
Affiliated companies (net of
interest income)........... 31 (2) (29) -- --
Income tax expense (benefit).... 14 (10) (2) 5 7
Minority interest............... -- -- -- -- --
---- ---- ---- ----- ------
(7) 23 (2) (4) 10
Equity in net income (loss) from
affiliated companies......... 28 -- 12 (40) --
---- ---- ---- ----- ------
NET INCOME (LOSS)................. $ 21 $ 23 $ 10 $ (44) $ 10
==== ==== ==== ===== ======
27
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
---------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External..................... $1,438 $2,038 $ -- $ -- $3,476
Affiliated companies......... 66 360 -- (426) --
------ ------ ----- ----- ------
1,504 2,398 -- (426) 3,476
------ ------ ----- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below).... 1,212 2,032 -- (425) 2,819
Engineering, research, and
development.................. 25 43 -- -- 68
Selling, general, and
administrative............... 125 162 3 -- 290
Depreciation and amortization of
other intangibles............ 52 84 -- -- 136
------ ------ ----- ----- ------
1,414 2,321 3 (425) 3,313
------ ------ ----- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables..... -- (4) -- -- (4)
Other income (loss)............. 6 (5) -- -- 1
------ ------ ----- ----- ------
6 (9) -- -- (3)
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES....................... 96 68 (3) (1) 160
Interest expense--
External (net of interest
capitalized)............... (4) 3 102 -- 101
Affiliated companies (net of
interest income)........... 121 (9) (112) -- --
Income tax expense (benefit).... -- 19 39 (40) 18
Minority interest............... -- 4 -- -- 4
------ ------ ----- ----- ------
(21) 51 (32) 39 37
Equity in net income (loss) from
affiliated companies......... 38 1 69 (108) --
------ ------ ----- ----- ------
NET INCOME (LOSS)................. $ 17 $ 52 $ 37 $ (69) $ 37
====== ====== ===== ===== ======
28
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External...................... $1,552 $1,825 $ -- $ -- $3,377
Affiliated companies.......... 54 379 -- (433) --
------ ------ ---- ----- ------
1,606 2,204 -- (433) 3,377
------ ------ ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)..... 1,291 1,860 -- (433) 2,718
Engineering, research, and
development................... 32 32 -- -- 64
Selling, general, and
administrative................ 122 165 -- -- 287
Depreciation and amortization of
other intangibles............. 52 82 -- -- 134
------ ------ ---- ----- ------
1,497 2,139 -- (433) 3,203
------ ------ ---- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables...... -- (2) -- -- (2)
Other income (loss).............. 20 (12) -- (3) 5
------ ------ ---- ----- ------
20 (14) -- (3) 3
------ ------ ---- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES........................ 129 51 -- (3) 177
Interest expense--
External (net of interest
capitalized)................ (1) 3 95 -- 97
Affiliated companies (net of
interest income)............ 101 (20) (81) -- --
Income tax expense (benefit)..... 51 5 (7) (20) 29
Minority interest................ -- 1 -- -- 1
------ ------ ---- ----- ------
(22) 62 (7) 17 50
Equity in net income (loss) from
affiliated companies.......... 74 -- 57 (131) --
------ ------ ---- ----- ------
NET INCOME (LOSS).................. $ 52 $ 62 $ 50 $(114) $ 50
====== ====== ==== ===== ======
29
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
BALANCE SHEET
SEPTEMBER 30, 2006
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents........ $ 1 $ 115 $ -- $ -- $ 116
Receivables, net................. 320 789 25 (493) 641
Inventories...................... 128 291 -- -- 419
Deferred income taxes............ 33 12 3 (2) 46
Prepayments and other............ 25 114 -- -- 139
------ ------ ------ -------- ------
507 1,321 28 (495) 1,361
------ ------ ------ -------- ------
Other assets:
Investment in affiliated
companies..................... 467 -- 1,104 (1,571) --
Notes and advances receivable
from affiliates............... 3,375 206 4,962 (8,543) --
Long-term notes receivable, net.. 2 25 -- -- 27
Goodwill......................... 136 65 -- -- 201
Intangibles, net................. 12 20 -- -- 32
Deferred income taxes............ 264 53 197 (197) 317
Other............................ 37 69 29 -- 135
------ ------ ------ -------- ------
4,293 438 6,292 (10,311) 712
------ ------ ------ -------- ------
Plant, property, and equipment, at
cost............................. 950 1,627 -- -- 2,577
Less--Reserves for depreciation
and amortization.............. 608 889 -- -- 1,497
------ ------ ------ -------- ------
342 738 -- -- 1,080
------ ------ ------ -------- ------
$5,142 $2,497 $6,320 $(10,806) $3,153
====== ====== ====== ======== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including
current maturities of long-
term debt)
Short-term debt--non-
affiliated.................. $ -- $ 22 $ 29 $ -- $ 51
Short-term debt--affiliated... 133 268 10 (411) --
Trade payables................... 221 588 -- (79) 730
Accrued taxes.................... 161 24 -- (133) 52
Other............................ 126 115 34 (3) 272
------ ------ ------ -------- ------
641 1,017 73 (626) 1,105
Long-term debt--non-affiliated..... -- 11 1,341 -- 1,352
Long-term debt--affiliated......... 3,806 56 4,681 (8,543) --
Deferred income taxes.............. 104 76 -- (96) 84
Postretirement benefits and other
liabilities...................... 261 90 6 7 364
Commitments and contingencies
Minority interest.................. -- 28 -- -- 28
Shareholder's equity............... 330 1,219 219 (1,548) 220
------ ------ ------ -------- ------
$5,142 $2,497 $6,320 $(10,806) $3,153
====== ====== ====== ======== ======
30
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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
====== ====== ====== ======== ======
31
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2006
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $(106) $ 184 $(75) $-- $ 3
----- ----- ---- --- ----
INVESTING ACTIVITIES
Net proceeds from the sale of
assets............................ -- 4 -- -- 4
Expenditures for plant, property,
and equipment..................... (15) (28) -- -- (43)
Expenditures for software related
intangible assets................. (2) (1) -- -- (3)
Acquisition of businesses........... -- -- -- -- --
Investments and other............... 1 (3) -- -- (2)
----- ----- ---- --- ----
Net cash used by investing
activities........................ (16) (28) -- -- (44)
----- ----- ---- --- ----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- 3 -- 3
Issuance of long-term debt.......... -- -- -- -- --
Retirement of long-term debt........ -- (1) -- -- (1)
Net increase (decrease) in short-
term debt excluding current
maturities of long-term debt...... -- 3 29 -- 32
Intercompany dividends and net
increase (decrease) in
intercompany obligations.......... 111 (154) 43 -- --
Other............................... -- -- -- -- --
----- ----- ---- --- ----
Net cash provided (used) by
financing activities.............. 111 (152) 75 -- 34
----- ----- ---- --- ----
Effect of foreign exchange rate
changes on cash and cash
equivalents....................... -- -- -- -- --
----- ----- ---- --- ----
Increase (decrease) in cash and cash
equivalents....................... (11) 4 -- -- (7)
Cash and cash equivalents, July 1... 12 111 -- -- 123
----- ----- ---- --- ----
Cash and cash equivalents, September
30 (Note)......................... $ 1 $ 115 $ -- $-- $116
===== ===== ==== === ====
NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
32
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2005
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $ 46 $ 52 $(60) $-- $ 38
----- ----- ---- --- ----
INVESTING ACTIVITIES
Net proceeds from the sale of
assets............................ 1 -- -- -- 1
Expenditures for plant, property,
and equipment..................... (14) (23) -- -- (37)
Expenditures for software related
intangible assets................. (3) (2) -- -- (5)
Acquisition of business............. -- -- -- -- --
Investments and other............... -- (1) -- -- (1)
----- ----- ---- --- ----
Net cash used by investing
activities........................ (16) (26) -- -- (42)
----- ----- ---- --- ----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- 2 -- 2
Issuance of long-term debt.......... -- 1 -- -- 1
Retirement of long-term debt........ -- -- (1) -- (1)
Net increase (decrease) in short-
term debt excluding current
maturities of long-term debt...... 169 (169) 22 -- 22
Intercompany dividends and net
increase (decrease) in
intercompany obligations.......... (199) 162 37 -- --
Other............................... -- 1 -- -- 1
----- ----- ---- --- ----
Net cash provided (used) by
financing activities.............. (30) (5) 60 -- 25
----- ----- ---- --- ----
Effect of foreign exchange rate
changes on cash and cash
equivalents....................... -- 2 -- -- 2
----- ----- ---- --- ----
Increase (decrease) in cash and cash
equivalents....................... -- 23 -- -- 23
Cash and cash equivalents, July 1... -- 66 -- -- 66
----- ----- ---- --- ----
Cash and cash equivalents, September
30 (Note)......................... $ -- $ 89 $ -- $-- $ 89
===== ===== ==== === ====
NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
33
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2006
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $ 82 $ 191 $(213) $-- $ 60
---- ----- ----- --- -----
INVESTING ACTIVITIES
Net proceeds from the sale of
assets............................ -- 6 -- -- 6
Expenditures for plant, property,
and equipment..................... (60) (70) -- -- (130)
Expenditures for software related
intangible assets................. (6) (3) -- -- (9)
Acquisition of businesses........... -- -- -- -- --
Investments and other............... 1 (2) -- -- (1)
---- ----- ----- --- -----
Net cash used by investing
activities........................ (65) (69) -- -- (134)
---- ----- ----- --- -----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- 13 -- 13
Issuance of long-term debt.......... -- -- -- -- --
Retirement of long-term debt........ -- (2) (1) -- (3)
Net increase (decrease) in short-
term debt excluding current
maturities of long-term debt...... -- -- 29 -- 29
Intercompany dividends and net
increase (decrease) in
intercompany obligations.......... (47) (125) 172 -- --
Other............................... -- 2 -- -- 2
---- ----- ----- --- -----
Net cash provided (used) by
financing activities.............. (47) (125) 213 -- 41
---- ----- ----- --- -----
Effect of foreign exchange rate
changes on cash and cash
equivalents....................... -- 8 -- -- 8
---- ----- ----- --- -----
Increase (decrease) in cash and cash
equivalents....................... (30) 5 -- -- (25)
Cash and cash equivalents, January
1................................. 31 110 -- -- 141
---- ----- ----- --- -----
Cash and cash equivalents, September
30 (Note)......................... $ 1 $ 115 $ -- $-- $ 116
==== ===== ===== === =====
NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
34
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $ 55 $ 92 $(173) $-- $ (26)
----- ---- ----- --- -----
INVESTING ACTIVITIES
Net proceeds from the sale of
assets............................ 3 1 -- -- 4
Expenditures for plant, property,
and equipment..................... (37) (63) -- -- (100)
Expenditures for software related
intangible assets................. (5) (7) -- -- (12)
Acquisition of business............. -- (11) -- -- (11)
Investments and other............... 3 (2) -- -- 1
----- ---- ----- --- -----
Net cash used by investing
activities........................ (36) (82) -- -- (118)
----- ---- ----- --- -----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- 6 -- 6
Issuance of long-term debt.......... -- 1 -- -- 1
Retirement of long-term debt........ -- (2) (41) -- (43)
Net increase (decrease) in short-
term debt excluding current
maturities of long-term debt...... -- 1 55 -- 56
Intercompany dividends and net
increase (decrease) in
intercompany obligations.......... (159) 6 153 -- --
Other............................... -- 1 -- -- 1
----- ---- ----- --- -----
Net cash provided (used) by
financing activities.............. (159) 7 173 -- 21
----- ---- ----- --- -----
Effect of foreign exchange rate
changes on cash and cash
equivalents....................... -- (2) -- -- (2)
----- ---- ----- --- -----
Increase (decrease) in cash and cash
equivalents....................... (140) 15 -- -- (125)
Cash and cash equivalents, January
1................................. 140 74 -- -- 214
----- ---- ----- --- -----
Cash and cash equivalents, September
30 (Note)......................... $ -- $ 89 $ -- $-- $ 89
===== ==== ===== === =====
NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
(The preceding notes are an integral part of the foregoing financial
statements.)
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
We are one of the world's leading manufacturers of automotive emission
control and ride control products and systems. We serve both original equipment
(OE) vehicle manufacturers and the repair and replacement markets, or
aftermarket, globally through leading brands, including Monroe(R), Rancho(R),
Clevite(R) Elastomers and Fric Rot(TM) ride control products and Walker(R),
Fonos(TM), and Gillet(TM) emission control products. Worldwide we serve more
than 30 different original equipment manufacturers, and our products or systems
are included on 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. Our aftermarket customers are 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, a shift in consumer preferences to other vehicles
in response to higher fuel costs and other economic and social factors,
increasing technologically sophisticated content, changing aftermarket
distribution channels, increasing environmental standards and extended product
life of automotive parts, also play 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. As such, our ability to
generate cash--both to fund operations and service our debt--is also a
significant area of focus for our company. See "Liquidity and Capital Resources"
below for further discussion of cash flows.
Total revenues for the third quarter of 2006 were $1,122 million, a two
percent increase over 2005. Excluding the impact of currency and substrate
sales, which typically carry lower margins, revenue was $886 million versus $930
million a year ago. The decrease was primarily the result of OE production
volume declines of light trucks and SUVs in North America. Gross margin for the
third quarter of 2006 was 17.5 percent, down from 18.9 percent in 2005. The
growth in substrate sales in Europe, driven by more diesel aftertreatment and
hot-end exhaust business, diluted gross margin. In addition, European
manufacturing productivity improvements and global cost reduction efforts were
more than offset by significant OE volume declines in North America, higher
steel costs, and higher restructuring costs. Selling, general, administrative
and engineering expenses for the third quarter of 2006 were 9.4 percent of
revenues, as compared to 10.8 percent of revenues for the same period last year.
Aggressive efforts to reduce costs globally, including tight discretionary
spending controls, drove the improvement.
Earnings before interest, taxes and minority interest ("EBIT") was $45
million for the third quarter of 2006, down from $50 million a year ago.
Restructuring and restructuring-related expenses in the third quarter of 2006,
before taxes, were $7 million compared to $2 million in the same period last
year.
Total revenues for the first nine months of 2006 were $3,476 million, a
three percent increase over the $3,377 million reported for the same period last
year. Excluding the impact of currency and substrate sales, revenue was down $39
million, or one percent, driven by declines in North American OE production of
light trucks and SUVs. Gross margin for the first nine months of 2006 was 18.9
percent compared to 19.5 percent in the same 2005 period. The change is
primarily attributable to significant OE volume declines in North America,
higher restructuring and material costs and a shift in the mix of our OE
emission control business in Europe toward more hot-end exhaust and diesel
aftertreatment business, which contains more substrate content that carries
lower margins. This was partially offset by improved manufacturing efficiencies,
particularly in our European OE businesses. Selling, general, administrative and
engineering expense was 10.3 percent of revenues for the first nine months of
2006 compared to 10.4 percent in 2005. EBIT for the first nine months of 2006
was $160 million, compared to
36
$177 million in the 2005 period. The change was primarily due to higher
restructuring and restructuring-related expenses and aftermarket customer
changeover costs.
In 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 Indian (as well as South American) 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 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.
37
RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
NET SALES AND OPERATING REVENUES
The following tables reflect our revenues for the third quarter of 2006 and
2005. 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" catalytic converter and diesel particulate filter
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 and diesel particulate filter components from suppliers, use them in
our manufacturing process, and sell them as part of the completed system. While,
generally, our original equipment customers assume the risk of this volatility,
it impacts our reported revenues. Excluding "substrate" catalytic converter and
diesel particulate filters sales removes this impact. We have not reflected any
currency impact in the 2005 table since this is the base period for measuring
the effects of currency during 2006 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.
THREE MONTHS ENDED SEPTEMBER 30, 2006
----------------------------------------------------------
SUBSTRATE REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY SUBSTRATE
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control........................ $ 109 $-- $ 109 $ -- $109
Emission Control.................... 198 1 197 54 143
------ --- ------ ---- ----
Total North America Original
Equipment...................... 307 1 306 54 252
North America Aftermarket
Ride Control........................ 91 -- 91 -- 91
Emission Control.................... 44 44 44
------ --- ------ ---- ----
Total North America Aftermarket.. 135 135 135
Total North America............ 442 1 441 54 387
Europe Original Equipment
Ride Control........................ 87 2 85 -- 85
Emission Control.................... 306 12 294 124 170
------ --- ------ ---- ----
Total Europe Original Equipment.. 393 14 379 124 255
Europe Aftermarket
Ride Control........................ 48 1 47 -- 47
Emission Control.................... 58 3 55 55
------ --- ------ ---- ----
Total Europe Aftermarket......... 106 4 102 102
South America & India................. 70 3 67 9 58
Total Europe, South America &
India.......................... 569 21 548 133 415
Asia.................................. 66 -- 66 23 43
Australia............................. 45 (1) 46 5 41
------ --- ------ ---- ----
Total Asia Pacific............... 111 (1) 112 28 84
------ --- ------ ---- ----
Total Tenneco......................... $1,122 $21 $1,101 $215 $886
====== === ====== ==== ====
38
THREE MONTHS ENDED SEPTEMBER 30, 2005
----------------------------------------------------------
REVENUES
EXCLUDING
REVENUES CURRENCY AND
CURRENCY EXCLUDING SUBSTRATE SUBSTRATE
REVENUES IMPACT CURRENCY SALES SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control......................... $ 120 $-- $ 120 $ -- $120
Emission Control..................... 249 -- 249 69 180
------ --- ------ ---- ----
Total North America Original
Equipment....................... 369 -- 369 69 300
North America Aftermarket
Ride Control......................... 90 -- 90 -- 90
Emission Control..................... 43 -- 43 -- 43
------ --- ------ ---- ----
Total North America Aftermarket... 133 133 -- 133
Total North America............. 502 502 69 433
Europe Original Equipment
Ride Control......................... 84 -- 84 -- 84
Emission Control..................... 257 -- 257 77 180
------ --- ------ ---- ----
Total Europe Original Equipment... 341 341 77 264
Europe Aftermarket
Ride Control......................... 46 -- 46 -- 46
Emission Control..................... 51 -- 51 -- 51
------ --- ------ ---- ----
Total Europe Aftermarket.......... 97 -- 97 -- 97
South America & India.................. 62 -- 62 5 57
Total Europe, South America &
India........................ 500 -- 500 82 418
Asia................................... 38 -- 38 10 28
Australia.............................. 56 -- 56 5 51
------ --- ------ ---- ----
Total Asia Pacific.............. 94 94 15 79
------ --- ------ ---- ----
Total Tenneco.......................... $1,096 $-- $1,096 $166 $930
====== === ====== ==== ====
Revenues from our North American operations decreased $60 million in the
third quarter of 2006 compared to the same period last year. Higher sales from
the aftermarket business were more than offset by lower total North American OE
revenues. North American OE emission control revenues were down $51 million in
the third quarter of 2006. This decline was primarily due to the impact from
lower OE production of light trucks and SUVs, on key platforms like the Dodge
Ram and Ford F-150 pick-up trucks and GM's Trailblazer/Envoy vehicles, three of
Tenneco's top ten largest OE platforms. The timing on the transition of
Tenneco's emission control business on one of GM's largest light truck platforms
also negatively impacted revenue. North American OE ride control revenues for
the third quarter of 2006 were down $11 million from the prior year. Increased
heavy duty and commercial volumes partially offset reduced light vehicle sales.
Our total North American OE revenues, excluding substrate sales and currency,
decreased 16 percent in the third quarter of 2006 compared to third quarter of
2005. North American light vehicle production decreased eight percent with a 16
percent decline in light truck and SUV production being partially offset by a 3%
production increase in passenger cars. Aftermarket revenues for North America
were $135 million in the third quarter of 2006, an increase of $2 million
compared to the prior year, driven by sales to new customers and price increases
in both product lines which more than offset lower unit volumes. Aftermarket
ride control revenues grew to $91 million in the third quarter of 2006, up one
percent from the same
39
period last year. Aftermarket emission control revenues increased four percent
in the third quarter of 2006 to $44 million, as compared to $43 million in 2005.
Our European, South American and Indian segment's revenues increased $69
million, or 14 percent, in the third quarter of 2006 compared to last year.
Total European light vehicle production was flat for the third quarter of 2006
compared to the third quarter of 2005. Europe OE emission control revenues of
$306 million in the third quarter of 2006 were up 19 percent as compared to the
third quarter of 2005. Excluding a $47 million increase in substrate sales and
$12 million due to the impact of currency, Europe OE emission control revenues
decreased six percent over 2005, due to lower volumes on older models like the
VW Sharan, Peugeot 307, Citroen C5 and VW LT2. In addition, BMW Mini volumes
were down due to a delay in the model's launch and production volumes were cut
on certain other models. Helping to offset some of the overall volume decline
was the BMW 3 Series as it reached its full production run rate, the launch of a
new Ford platform that includes the Volvo S80 and S-MAX models, as well as
strong demand from the Nissan Pathfinder, the Mercedes E-Class, VW's T5 van and
the Ford Focus. Europe OE ride control revenues of $87 million in the third
quarter of 2006 were up four percent year-over-year. Excluding currency,
revenues increased by one percent in the 2006 third quarter due to higher
revenues on models like the Ford Fiesta, Audi A6 with our electronic shock
technology, the Mazda 5 and the new DaimlerChrysler Sprinter. European
aftermarket revenues increased $9 million in the third quarter of 2006 compared
to last year. When adjusted for currency, aftermarket revenues were up $5
million or five percent. Excluding the $4 million impact of currency, ride
control aftermarket revenues were up one percent and emission control
aftermarket revenues were up eight percent on improved pricing, exhaust market
share gains and the introduction of new diesel particulate filter business.
South American and Indian revenues were $70 million during the third quarter of
2006, compared with $62 million in the prior year. Stronger OE and aftermarket
sales and currency appreciation drove this increase in South America.
Revenues from our Asia Pacific segment, which includes Australia and Asia,
increased $17 million to $111 million in the third quarter of 2006 compared to
the same period last year. Excluding the impact of substrate sales and currency,
revenues increased to $84 million from $79 million in the prior year. Asian
revenues for the third quarter of 2006 were $66 million, up 76 percent from last
year. This increase was primarily due to higher OE sales in China driven by new
launches and higher emission control volumes on key General Motors and VW
platforms. Third quarter revenues for Australia fell 20 percent to $45 million.
Currency had an unfavorable impact of $1 million on Australian revenue, but the
industry wide OE production decline of 18 percent had the most significant
impact on Australia's revenue decline.
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST ("EBIT")
THREE
MONTHS
ENDED
SEPTEMBER
30,
-----------
2006 2005 CHANGE
---- ---- ------
(MILLIONS)
North America................................................ $16 $37 $(21)
Europe, South America & India................................ 24 9 15
Asia Pacific................................................. 5 4 1
--- --- ----
$45 $50 $ (5)
=== === ====
40
The EBIT results shown in the preceding table include the following items,
discussed below under "Restructuring and Other Charges" which have an effect on
the comparability of EBIT results between periods:
THREE MONTHS
ENDED
SEPTEMBER 30,
-------------
2006 2005
---- ----
(MILLIONS)
North America
Restructuring and restructuring-related expenses................ $3 $--
Europe, South America & India
Restructuring and restructuring-related expenses................ 2 2
Asia Pacific
Restructuring and restructuring-related expenses................ 2 --
EBIT for North American operations decreased to $16 million in the third
quarter of 2006, from $37 million one year ago. Lower volumes on key OE exhaust
platforms negatively impacted operations by $15 million. Higher OE price
concessions and increased material and warranty costs also negatively impacted
EBIT. These decreases were partially offset by lower selling, general,
administrative and engineering expenses and efforts to adjust operations to
match the lower customer demand. Included in North America's third quarter 2006
EBIT was $3 million in restructuring and restructuring-related expenses.
Our European, South American and Indian segment's EBIT was $24 million for
the third quarter of 2006 compared to $9 million during the same period last
year. Stronger aftermarket sales, improved European OE manufacturing
efficiencies, particularly in our exhaust operations, and reduced selling,
general, and administrative and engineering expense drove the improvement. These
increases were partially offset by price concessions and higher material costs.
South America and India benefited from higher revenue. Restructuring and
restructuring-related expenses of $2 million were included in third quarter EBIT
for both periods.
EBIT for our Asia Pacific segment in the third quarter of 2006 was $5
million compared to $4 million in the third quarter of 2005. Stronger OE
production and new platform launches in China were partially offset by higher
warranty costs and lower sales in Australia. Included in the third quarter of
2006's EBIT was $2 million in restructuring and restructuring-related expenses.
Currency had a $3 million favorable impact on overall company EBIT for the
three months ended September 30, 2006, as compared to the prior year.
EBIT AS A PERCENTAGE OF REVENUE
THREE MONTHS
ENDED
SEPTEMBER 30,
-------------
2006 2005
---- ----
North America..................................................... 4% 7%
Europe, South America & India..................................... 4% 2%
Asia Pacific...................................................... 5% 4%
Total Tenneco................................................... 4% 5%
In North America, EBIT as a percentage of revenue for the third quarter of
2006 was three percentage points less than last year. OE volume declines and
higher material costs, as well as an increase in warranty costs in the quarter
more than offset selling, general, administrative and engineering expense
reductions, manufacturing efficiency improvements and the company's efforts to
adjust operations to match lower customer demand. In addition, during the third
quarter of 2006, North American results included higher restructuring and
restructuring related charges. In Europe, South America and India, EBIT margin
for the third quarter of 2006 was two percentage points higher compared to the
prior year. Improved European OE manufacturing efficiencies, primarily related
to our exhaust operations, and reduced selling, administrative, and engineering
costs drove the improvement. EBIT as a percentage of revenue for our Asia
Pacific segment increased one percentage point in the third quarter of 2006
41
versus the prior year. In Asia, stronger OE production and new platform launches
offset lower Australia volumes and higher restructuring and warranty costs.
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $34 million in the third quarter of 2006
compared to $33 million in the prior year. This increase is primarily due to the
impact of higher LIBOR rates on the variable interest rate portion of our debt.
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. Based upon the LIBOR rate as determined under these agreements of 5.61
percent (which is in effect until January 15, 2007) the inclusion of these swaps
in our financial results is expected to add $1 million to 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 September
30, 2006, the fair value of the interest rate swaps was a liability of
approximately $7 million which has been recorded as a decrease to long-term debt
and an increase to other long-term liabilities.
INCOME TAXES
We had income tax expense of $3 million in the third quarter of 2006. The
effective tax rate for the third quarter of 2006 was 33 percent. Income tax
expense was $7 million in the third quarter of 2005. The effective tax rate for
the third quarter of 2005 was 40 percent.
EARNINGS PER SHARE
We reported net income of $6 million or $0.12 per diluted common share for
the third quarter of 2006, as compared to net income of $10 million or $0.23 per
diluted common share for the third quarter of 2005. Included in the results for
the third quarter of 2006 were negative impacts from expenses related to our
restructuring activities. The net impact of these items decreased earnings per
diluted share by $0.10. Included in the results for the third quarter of 2005
were negative impacts from expenses related to our restructuring activities. The
net impact of these items decreased earnings per diluted share by $0.04. Please
read the Notes to the consolidated financial statements for more detailed
information on earnings per share.
42
RESULTS FROM OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
NET SALES AND OPERATING REVENUES
The following tables reflect our revenues for the first nine months of 2006
and 2005, including the same reconciliations as are presented above for the
third quarter of 2006 and 2005. See "Results from Operations for the Three
Months Ended September 30, 2006 and 2005" for a description of why we present,
and how we use, these reconciliations.
NINE MONTHS ENDED SEPTEMBER 30, 2006
----------------------------------------------------------
SUBSTRATE REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY SUBSTRATE
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control........................ $ 371 $-- $ 371 $ -- $ 371
Emission Control.................... 677 6 671 181 490
------ --- ------ ---- ------
Total North America Original
Equipment...................... 1,048 6 1,042 181 861
North America Aftermarket
Ride Control........................ 304 -- 304 -- 304
Emission Control.................... 129 -- 129 -- 129
------ --- ------ ---- ------
Total North America Aftermarket.. 433 -- 433 -- 433
Total North America............ 1,481 6 1,475 181 1,294
Europe Original Equipment
Ride Control........................ 280 1 279 -- 279
Emission Control.................... 912 912 352 560
------ --- ------ ---- ------
Total Europe Original Equipment.. 1,192 1 1,191 352 839
Europe Aftermarket
Ride Control........................ 138 138 -- 138
Emission Control.................... 161 161 -- 161
------ --- ------ ---- ------
Total Europe Aftermarket....... 299 299 -- 299
South America & India................. 201 13 188 24 164
Total Europe, South America &
India....................... 1,692 14 1,678 376 1,302
Asia.................................. 174 -- 174 59 115
Australia............................. 129 (4) 133 14 119
------ --- ------ ---- ------
Total Asia Pacific............. 303 (4) 307 73 234
------ --- ------ ---- ------
Total Tenneco......................... $3,476 $16 $3,460 $630 $2,830
====== === ====== ==== ======
43
NINE MONTHS ENDED SEPTEMBER 30, 2005
----------------------------------------------------------
REVENUES
EXCLUDING
REVENUES CURRENCY AND
CURRENCY EXCLUDING SUBSTRATE SUBSTRATE
REVENUES IMPACT CURRENCY SALES SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control......................... $ 378 $-- $ 378 $ -- $ 378
Emissions Control.................... 756 -- 756 204 552
------ --- ------ ---- ------
Total North America Original
Equipment....................... 1,134 -- 1,134 204 930
North America Aftermarket
Ride Control......................... 284 -- 284 -- 284
Emissions Control.................... 125 -- 125 -- 125
------ --- ------ ---- ------
Total North America Aftermarket... 409 -- 409 -- 409
Total North America............. 1,543 -- 1,543 204 1,339
Europe Original Equipment
Ride Control......................... 291 -- 291 -- 291
Emissions Control.................... 813 -- 813 243 570
------ --- ------ ---- ------
Total Europe Original Equipment... 1,104 -- 1,104 243 861
Europe Aftermarket
Ride Control......................... 134 -- 134 -- 134
Emissions Control.................... 154 -- 154 -- 154
------ --- ------ ---- ------
Total Europe Aftermarket.......... 288 -- 288 -- 288
South America & India.................. 172 -- 172 14 158
Total Europe, South America &
India........................ 1,564 -- 1,564 257 1,307
Asia................................... 108 -- 108 33 75
Australia.............................. 162 -- 162 14 148
------ --- ------ ---- ------
Total Asia Pacific.............. 270 -- 270 47 223
------ --- ------ ---- ------
Total Tenneco.......................... $3,377 $-- $3,377 $508 $2,869
====== === ====== ==== ======
Revenues from our North American operations decreased $62 million in the
first nine months of 2006 compared to last year, reflecting OE production cuts
and the timing of the GMT800/900 platform transition. Total North American OE
revenues decreased eight percent to $1,048 million in the first nine months of
this year. OE emission control revenues were down 10 percent in the first nine
months of 2006 as compared to the prior year. Adjusted for substrate sales and
currency, OE emission control sales were down 11 percent compared to the prior
year. OE ride control revenues decreased two percent from the prior year. Total
OE revenues, excluding substrate sales and currency, decreased eight percent in
the first nine months of 2006. North American light vehicle production was down
two percent compared to the first nine months a year ago with an eight percent
decline in light truck and SUV production being partially offset by a seven
percent production increase in passenger cars. Our revenue decline was primarily
due to lower OE production of light trucks and SUVs, partially offset by higher
heavy duty volumes. Aftermarket revenues for North America were $433 million in
the first nine months of 2006, representing an increase of six percent compared
to the same period in the prior year. Aftermarket ride control revenues
increased $20 million or 7 percent in the first nine months of 2006, due to
price increases and new customers. Aftermarket emission control revenues
increased three percent in the first nine months of 2006 compared to 2005,
mostly due to price increases.
Our European, South American and Indian segment's revenues increased $128
million or eight percent in the first nine months of 2006 compared to last
year's first nine months. Total Europe OE revenues were $1,192 million, up eight
percent compared to the first nine months of last year. Total European light
vehicle production increased
44
about two percent for the first nine months of 2006 compared to the first nine
months of 2005. OE emission control revenues in the first nine months increased
12 percent to $912 million from $813 million in the prior year. Excluding a $109
million increase in substrate sales, OE emissions control revenues were 10
million lower than the first nine months of 2005. OE ride control revenues in
the first nine months decreased to $280 million, down four percent from $291
million a year ago. Excluding a $1 million favorable impact from currency, OE
ride control revenues decreased four percent. 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 net of the related cost
of sales. If we had reported our first quarter 2005 revenues in the same manner,
they would have been lower by $15 million. European aftermarket sales were $299
million in the first nine months of this year up 4 percent compared to $288
million in last year's first nine months. In the aftermarket, ride control and
emissions control revenues were up three percent and five percent, respectively,
from the prior year, reflecting improved pricing, market share gains, and new
diesel particulate business. Stronger volumes, pricing and currency appreciation
increased South American revenues, by $25 million or 17 percent over the same
period last year.
Revenues from our Asia Pacific operations, which include Australia and
Asia, increased $33 million to $303 million in the first nine months of 2006 as
compared to $270 million in the first nine months of the prior year. OE volumes
and substrate sales drove increased revenues of $66 million at our Asian
operations. In Australia, lower OE volumes and weakening currency decreased
revenues by 20 percent to $129 million.
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
2005
2006 (MILLIONS) CHANGE
---- ---------- ------
North America............................................. $ 87 $126 $(39)
Europe, South America & India............................. 66 41 25
Asia Pacific.............................................. 7 10 (3)
---- ---- ----
$160 $177 $(17)
==== ==== ====
The EBIT results shown in the preceding table include the following items,
discussed above under "Restructuring and Other Nonrecurring Charges", which have
an effect on the comparability of EBIT results between periods:
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
2006 2005
---- ----
(MILLIONS)
North America
Restructuring and restructuring-related expenses................ $10 $ 2
Changeover costs for a major new aftermarket customer(1)........ 6 --
Stock based compensation accounting change...................... 1 --
Europe, South America & India
Restructuring and restructuring-related expenses................ 6 5
Asia Pacific
Restructuring and restructuring-related expenses................ 5 --
--------
(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.
45
EBIT for North American operations decreased to $87 million in the first
nine months of 2006, from $126 million one year ago. Lower OE exhaust volumes on
key light truck and SUV platforms, unfavorable OE pricing and higher material
and selling, general, administrative and engineering costs were partially offset
by the impact on EBIT of higher North American aftermarket revenues. Included in
North America's EBIT for the first nine months of 2006 was $10 million in
restructuring and restructuring-related charges, $6 million in customer
changeover costs, and $1 million in stock-based compensation expense associated
with the adoption of a new accounting standard. Included in North America's EBIT
for the first nine months of 2005 was $2 million in restructuring and
restructuring-related costs.
Our European, South American and Indian segment's EBIT was $66 million for
the first nine months of 2006 compared to $41 million during the same period
last year. Improved European OE manufacturing efficiencies, primarily related to
our exhaust operations, and higher aftermarket revenues drove the increase.
These increases to European EBIT were partially offset by price concessions. In
addition, higher material and selling, general, administrative, and engineering
costs reduced EBIT. South American pricing and volume, and favorable currency
was partially offset by higher steel and other material costs. Included in
Europe, South America and India's EBIT for the first nine months of 2006 was $6
million in restructuring and restructuring-related expenses. Included in Europe,
South America, and India's EBIT for the first nine months of 2005 was $5 million
in restructuring and restructuring-related expenses.
EBIT for our Asia Pacific segment was $7 million in the first nine months
of 2006 compared to $10 million in the first nine months of 2005. Reduced
volumes, higher warranty and workers compensation costs in Australia were
partially offset by improved volumes and lower selling, general, administrative
and engineering expenses in Asia. Asia Pacific's EBIT for the first nine months
of 2006 included $5 million in restructuring and restructuring-related expenses.
EBIT AS A PERCENTAGE OF REVENUE
NINE MONTHS
ENDED
SEPTEMBER
30,
-----------
2006 2005
---- ----
North America...................................................... 6% 8%
Europe, South America & India...................................... 4% 3%
Asia Pacific....................................................... 2% 4%
Total Tenneco...................................................... 5% 5%
In North America, EBIT as a percentage of revenue for the first nine months
of 2006 was down two percentage points compared to the prior year. Lower volumes
in OE exhaust on key light truck and SUV platforms, unfavorable OE customer
pricing, and higher material and selling, general, administrative and
engineering costs, were partially offset by the impact on EBIT of higher
aftermarket revenues. In Europe, South America and India, EBIT margins for the
first nine months of 2006 were up one percentage point compared with the same
period last year. Improved European OE manufacturing efficiencies, primarily
related to our exhaust operations, and higher aftermarket revenues were
partially offset by customer price concessions and higher selling, general,
administrative, and engineering costs. EBIT as a percentage of revenue for our
Asia Pacific operations decreased to two percent in the first nine months of
2006 compared to four percent in the prior year. Lower volumes and higher
material costs in Australia were partially offset by improved volumes in Asia.
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $101 million for the first nine months of
2006 compared to $97 million in the prior year. This increase is primarily due
to the impact of higher LIBOR rates on the variable portion of our debt. The
increase was partially offset by a 25 basis point reduction in April 2006 in the
interest rates on the term loan B facility and the tranche B-1 letter of
credit/revolving loan facility. See more detailed explanations of our debt
structure, including the prepayments and amendments to our senior credit
facility in 2005, in "Liquidity and Capital Resources--Capitalization" later in
this Management Discussion and Analysis.
46
INCOME TAXES
Income tax expense was $18 million for the first nine months of 2006,
compared to $29 million for the first nine months of 2005. The first nine months
of 2006 included $3 million tax benefit primarily related to the resolution of
certain tax issues with former affiliates. Including this benefit the effective
tax rate for the first nine months of 2006 was 31 percent. Excluding this
benefit our effective tax rate was 35 percent. The first nine months of 2005
included $1 million of tax expense, primarily related to adjusting state tax net
operating loss carryforwards, partially offset by the settlement of prior year
tax issues on a more favorable basis than originally anticipated. Including
these adjustments the effective tax rate for the first nine months of 2005 was
36 percent. Excluding these adjustments our effective tax rate was 35 percent.
EARNINGS PER SHARE
We reported earnings per diluted common share of $0.79 for the first nine
months of 2006, compared to $1.11 per diluted share for the first nine months of
2005. Included in the results for the first nine months of 2006 were the
negative impacts from expenses related to our restructuring activities, customer
changeover costs and the accounting change for stock based compensation. In
total, these items decreased earnings per diluted common share by $0.36.
Included in the results for the first nine months of 2005 were the negative
impacts from expenses related to our restructuring activities and tax expense
related to the adjustment of state net operating loss carryforwards. In total,
these items decreased earnings per diluted common share by $0.13. You should
also read the Notes to the financial statements for more detailed information on
earnings per share.
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.
47
In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of layoffs were at middle and senior management levels. As of September 30,
2006, 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.
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. We
recorded a pre-tax charge of $2 million during the third quarter of 2006 and $6
million for the first nine months of 2006 for severance and other benefits
related to these reductions in force, substantially all of which have been paid
in cash.
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. We expect to
continue to undertake additional restructuring actions as deemed necessary,
however, there can be no assurances we will undertake such 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.
We incurred $7 million in restructuring and restructuring-related costs
during the third quarter of 2006, of which $6 million was recorded in cost of
sales and $1 million in selling, general and administrative expense. Including
the costs incurred in 2002 through 2005 of $71 million, as of September 30, 2006
we have incurred a total of $92 million for activities related to our
restructuring initiatives.
Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we were allowed to exclude up to $60 million
of cash charges and expenses, before taxes, related to cost reduction
initiatives over the 2002 to 2006 time period from the calculation of the
financial covenant ratios we are required to maintain under our senior credit
agreement. In February 2005, our senior credit facility was amended to exclude
all remaining cash charges and expenses related to restructuring initiatives
started on or before February 24, 2005. As of September 30, 2006, we have
excluded $63 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 24, 2005 from the calculation of the
financial covenant ratios required under our senior credit facility. As of
September 30, 2006, we have excluded $27 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.
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
48
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 and diesel particulate filters
including precious metals ("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 $630 million
and $508 million for the first nine months of 2006 and 2005, 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.
Warranty Reserves
Where we have offered product warranty, we also provide for warranty costs.
Those estimates are based upon historical experience and upon specific warranty
issues as they arise. While we have not experienced any material differences
between these estimates and our actual costs, it is reasonably possible that
future warranty issues could arise that could have a significant impact on our
financial statements.
Long-Term Receivables
We expense pre-production design and development costs incurred for our
original equipment customers unless we have a contractual guarantee for
reimbursement of those costs from the customer. At September 30, 2006, we had
approximately $20 million recorded as a long-term receivable from original
equipment customers for guaranteed pre-production design and development
arrangements. While we believe that the vehicle programs behind these
arrangements will enter production, these arrangements allow us to recover our
pre-production design and development costs in the event that the programs are
cancelled or do not reach expected production levels. We have not experienced
any material losses on arrangements where we have a contractual guarantee of
reimbursement from our customers.
Income Taxes
We have a U.S. Federal tax net operating loss ("NOL") carryforward at
September 30, 2006, of $588 million, which will expire in varying amounts from
2018 to 2025. The federal tax effect of that NOL is $206 million, and is
recorded as a deferred tax asset on our balance sheet at September 30, 2006. We
also have state NOL carryforwards at September 30, 2006 of $627 million, which
will expire in varying amounts from 2006 to 2025. The tax effect of the state
NOL is $28 million, net of a valuation allowance, and is recorded as a deferred
tax asset on our balance sheet at September 30, 2006. 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
Prior to January 1, 2006, we utilized the intrinsic value method to account
for our stock-based compensation plans in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Using
the modified prospective application method, effective January 1, 2006, we
account for our stock-based compensation plans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment" which
requires a fair value method of accounting for compensation costs related to our
stock-based compensation plans. Under the fair value method recognition
provision of the statement, a share-based payment is measured at the grant date
based upon the value of the award and is recognized as expense over the vesting
period. Determining the fair value of share-based awards requires judgment in
estimating employee and market behavior. If actual results differ significantly
from these estimates, stock-based compensation expense and our results of
operations could be materially impacted. Under APB No. 25, for the nine months
ended September 30, 2005, we estimated that the pro forma net income impact
under SFAS No. 123(R) would have been
49
approximately $2 million or $0.04 per diluted share. For the nine months ended
September 30, 2006, the results of adopting SFAS No. 123(R) on our results of
operations including nonqualified stock options and other stock-based
compensation was additional expense of approximately $2 million or $0.04 per
diluted share. As of September 30, 2006, there is approximately $4 million, net
of tax, of total unrecognized compensation costs related to these stock-based
awards that is expected to be recognized over a weighted average period of 1.2
years.
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 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 September 30, 2006, all legal funding requirements had
been met. Other postretirement benefit obligations, such as retiree medical, and
certain foreign pension plans are not funded.
In August 2006, we announced that we are freezing our current defined
benefit plans and replacing them with additional contributions under defined
contribution plans for nearly all U.S.-based salaried and non-union hourly
employees effective January 1, 2007. We estimate that these changes will save
about $11 million in earnings before taxes annually, starting January 1, 2007.
Additionally, we will realize a one-time benefit of approximately $6 to $7
million in the fourth quarter 2006 related to curtailing the defined benefit
pension plans.
CHANGES IN ACCOUNTING PRONOUNCEMENTS
In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. 46" (revised December
2003). The statement addresses whether a reporting enterprise should consider
whether it holds an implicit variable interest in a variable interest entity
("VIE") or potential VIE when
50
specific conditions exist. The guidance was applied in the first reporting
period beginning after March 3, 2005. The adoption of FSP No. FIN 46(R)-5 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
Conditional Asset Retirement Obligations," 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 was 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 was effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 did not have a material impact on our financial
position or results of operation.
In June 2005, the FASB issued Staff Position No. ("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 operation.
In November 2005, the FASB issued FSP FAS 123(R)-3, "Transition Election to
Accounting for the Tax Effects of Share-Based Payment Awards." This FSP requires
an entity to follow either the transition guidance for the additional paid-in-
capital pool as prescribed in SFAS No. 123(R), Share-Based Payment, or the
alternative transition method as described in the FSP. An entity that adopts
SFAS No. 123(R) using the modified prospective application may make a one-time
election to adopt the transition method described in this FSP. An entity may
take up to one year from the later of its initial adoption of SFAS No. 123(R) or
the effective date of this FSP to evaluate its available transition alternatives
and make its one-time election. This FSP became effective in November 2005. We
continue to evaluate the impact that the adoption of this FSP could have on our
financial statements.
In June 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in
Income Taxes--an interpretation of FASB Statement No. 109." This interpretation
clarifies the accounting for uncertainty in income taxes recognized in and
enterprise's financial statements and prescribes a threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This interpretation is
effective for fiscal years ending after December 15, 2006. We continue to
evaluate the impact that the adoption of this interpretation could have on our
financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement."
This statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. The statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We do not
expect the adoption of this statement to have a material impact to our financial
statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)." Part of this Statement will be
effective as of December 31, 2006, and requires companies that have defined
benefit pension plans and other postretirement benefit plans to recognize the
funded status of those plans on the balance sheet on a prospective basis from
the effective date. The funded status of these plans is determined as of the
plans' measurement dates and represents the difference between the amount of the
obligations owed to participants under each plan (including the effects of
future salary increases for defined benefit plans) and the fair value of each
plan's assets dedicated to paying those obligations. To record the funded status
of those plans, unrecognized prior service costs and net
51
actuarial losses experienced by the plans will be recorded in the Other
Comprehensive Income (OCI) section of shareholders' equity on the balance sheet.
We are currently evaluating the potential impact this standard may have on our
financial position and results of operations, but because we had previously
recorded only a portion of the excess of obligations over plan assets in our
defined benefit plans and retiree health care plans, we expect this will result
in a reduction of OCI in shareholders' equity.
In addition, SFAS No. 158 requires that companies using a measurement date
for their defined benefit pension plans and other postretirement benefit plans
other than their fiscal year end, change the measurement date effective for
fiscal years ending after December 15, 2008. We currently use a September 30
measurement date for substantially all of our defined benefit plans and are
planning to adopt this statement's measurement date change effective for
calendar year 2007. We do not believe the impact of the application of this part
of the statement will be material to our financial position and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
CAPITALIZATION
SEPTEMBER 30, DECEMBER 31,
2006 2005 % CHANGE
------------- ------------ --------
(MILLIONS)
Short-term debt and current maturities............ $ 51 $ 22 132%
Long-term debt.................................... 1,352 1,356 --
------ ------
Total debt........................................ 1,403 1,378 2
------ ------
Total minority interest........................... 28 24 17
Shareholders' equity.............................. 220 129 71
------ ------
Total capitalization.............................. $1,651 $1,531 8
====== ======
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 $29
million primarily related to borrowings outstanding under our credit facilities.
Borrowings under our revolving credit facilities were approximately $28 million
and $55 million as of September 30, 2006 and 2005, respectively. The overall
decrease in long-term debt resulted from payments made on our outstanding long-
term debt and capital leases in addition to our position on interest rate swaps
entered into in 2004. See below for further information on the interest rate
swaps.
The year-to-date increase in shareholders' equity primarily resulted from
$47 million related to the translation of foreign balances into U.S. dollars. In
addition our net income, premium on common stock issued pursuant to benefit
plans and other transactions contributed $44 million to shareholders' equity.
While our book equity balance was small at September 30, 2006, 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.
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. In July 2006 we further increased
the amount of commitments under our revolving credit facility from $300 million
to $320 million. As of September 30, 2006, the senior credit facility
52
consisted of a seven-year, $356 million term loan B facility maturing in
December 2010; a five-year, $320 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 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. Based upon the LIBOR rate as determined under these
agreements of 5.61 percent (which is in effect until January 15, 2007) the
inclusion of these swaps in our financial results is expected to add $1 million
to 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 September 30, 2006, the fair value of the interest rate swaps was a liability
of approximately $7 million which has been recorded as a decrease to long-term
debt and an increase to other long-term liabilities. On September 30, 2006, we
had $996 million in long-term debt obligations that have fixed interest rates.
Of that amount, $475 million is fixed through July 2013 and $500 million through
November 2014, while the remainder is fixed over periods of 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 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 24, 2005, and to exclude up to an
additional $60 million in restructuring-related expenses announced and taken
after February 24, 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.
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 are not required to reduce the commitments under our tranche B-1 letter of
credit/revolving loan facility should we obtain additional revolving credit
commitments. In July 2006, we increased the amount of commitments under the
revolving credit portion of the facility from $300 million to $320 million. We
have not yet sought any increased commitments above the $320 million level, 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.
53
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 is 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
bore interest at an annual rate equal to, at our option, either (i) the London
Interbank Offering Rate plus a margin of 200 basis points (reduced from 300
basis points in February 2005 and further reduced from 225 basis points in April
2006); 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 100 basis
points (reduced from 200 basis points in February 2005 and further reduced from
125 basis points in April 2006). 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 200
basis points (reduced from 300 basis points in February 2005 and further reduced
from 225 basis points in April 2006). 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.
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 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. As described above, we
are highly leveraged. Our 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, as calculated under the facility), consolidated interest coverage ratio
(consolidated EBITDA divided by consolidated cash
54
interest paid, as calculated under the facility), and fixed charge coverage
ratio (consolidated EBITDA less consolidated capital expenditures, divided by
consolidated cash interest paid, as calculated under the facility) at the end of
each period indicated. Failure to maintain these ratios will result in a default
under our senior credit facility. See "Contractual Obligations" below. The
financial ratios required under the amended senior credit facility and, the
actual ratios we achieved for the first, second and third quarters of 2006, are
shown in the following tables:
QUARTER ENDED
------------------------------------------------------
SEPTEMBER
MARCH 31, JUNE 30, 30, DECEMBER 31,
2006 2006 2006 2006
----------- ----------- ----------- ------------
REQ. ACT. REQ. ACT. REQ. ACT. REQ.
---- ---- ---- ---- ---- ---- ------------
Leverage Ratio (maximum).............. 4.25 3.37 4.25 3.35 4.25 3.46 4.25
Interest Coverage Ratio (minimum)..... 2.10 3.27 2.10 3.23 2.10 3.15 2.10
Fixed Charge Coverage Ratio
(minimum)........................... 1.15 2.07 1.15 1.89 1.15 1.79 1.15
QUARTERS ENDING
---------------------------------------------------------
MARCH 31- MARCH 31- MARCH 31- MARCH 31-
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 12,
2007 2008 2009 2010
------------ ------------ ------------ ------------
REQ. REQ. REQ. REQ.
------------ ------------ ------------ ------------
Leverage Ratio (maximum)................ 3.75 3.50 3.50 3.50
Interest Coverage Ratio (minimum)....... 2.20 2.35 2.50 2.75
Fixed Charge Coverage Ratio (minimum)... 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 September 30, 2006, 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. 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
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
55
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 subsidiary guarantor's
domestic subsidiaries is provided as collateral and no assets or capital stock
of our direct or indirect foreign subsidiaries secure the notes or guarantees.
There are no significant restrictions on the ability of the subsidiaries that
have guaranteed these notes to make distributions to us. The senior subordinated
notes rank junior in right of payment to our senior credit facility and any
future senior debt incurred. As of September 30, 2006, 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 $92 million and $97 million at September 30, 2006 and 2005, 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 September 30, 2006, we sold $52 million of accounts
receivable in Europe up from $49 million at September 30, 2005. 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 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.
56
CONTRACTUAL OBLIGATIONS
Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments as of September 30, 2006,
are shown in the following table:
PAYMENTS DUE IN:
--------------------------------------------------
BEYOND
2006 2007 2008 2009 2010 2010 TOTAL
---- ---- ---- ---- ---- ------ ------
(MILLIONS)
Obligations:
Revolver borrowings................. $ 28 $ -- $ -- $ -- $ -- $ -- $ 28
Senior long-term debt............... -- -- -- -- 356 -- 356
Long-term notes..................... -- 1 2 -- -- 470 473
Capital leases...................... 1 3 2 2 3 -- 11
Subordinated long-term debt......... -- -- -- -- -- 500 500
Other subsidiary debt............... 1 -- -- -- -- 2 3
Short-term debt..................... 19 -- -- -- -- -- 19
---- ---- ---- ---- ---- ------ ------
Debt and capital lease obligations.... 49 4 4 2 359 972 1,390
Operating leases...................... 4 15 11 9 6 7 52
Interest payments..................... 39 132 131 131 129 294 856
Capital commitments................... 10 -- -- -- -- -- 10
---- ---- ---- ---- ---- ------ ------
Total Payments........................ $102 $151 $146 $142 $494 $1,273 $2,308
==== ==== ==== ==== ==== ====== ======
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 certain events of default 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
200 basis points plus LIBOR of 5.32 percent which was the rate at September 30,
2006. We have assumed that LIBOR will remain unchanged for the outlying years.
See "--Capitalization." In addition we have included the impact of our interest
rate swaps entered into in April 2004. See "Interest Rate Risk" below.
We have also included an estimate of expenditures required after September
30, 2006 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 $52 million to those plans in 2006, of which
approximately $42 million has
57
been contributed as of September 30, 2006. In the third quarter of 2006, an
additional $4 million in pension contributions were made following the adoption
of the Pension Protection Act of 2006. As a result, we expect our 2007
contributions to be approximately $30 million. 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 less than $1 million at both September 30, 2006 and 2005. 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 then 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 12 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.
CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
THREE
MONTHS
ENDED
SEPTEMBER
30,
-----------
2006 2005
---- ----
(MILLIONS)
Cash provided (used) by:
Operating activities............................................ $ 3 $ 38
Investing activities............................................ (44) (42)
Financing activities............................................ 34 25
Operating Activities
For the three months ended September 30, 2006, operating activities
provided $3 million in cash compared to $38 million in cash during the same
period last year. For the three months ended September 30, 2006, cash used for
working capital was $45 million versus $11 million for the three months ended
September 30, 2005. Receivables provided cash of $17 million compared to a cash
outflow of $9 million, a $26 million improvement from last year due to an
improvement in days sales outstanding in the current year and the prior year
discontinuation of accelerated payment programs with a North American OE
customer. Inventory represented a cash outflow of $7 million during the three
months ended September 30, 2006, an increase of $18 million over the prior year.
This was primarily a result of preparing for platform launches in North America.
Accounts payable cash outflow of $39 million was an
58
increase from last year's cash outflow of $12 million. Cash taxes were $11
million for the three months ended September 30, 2006, compared to $5 million in
the prior year, primarily due to the timing of foreign tax payments.
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.
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 $20 million for the three months ended September 30, 2006, compared
with $26 million for the same period in 2005.
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 $9 million for the three months ended
September 30, 2006 and are classified as notes payable. Financial instruments
received from OE customers and not redeemed totaled $7 million for the three
months ended September 30, 2006 and are 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 was immaterial at September 30, 2006 and is
classified as cash and cash equivalents.
Investing Activities
Cash used for investing activities was $2 million higher in the three
months ended September 30, 2006 as compared to the same period one year ago.
This increase was primarily driven by capital expenditures which were $43
million in the three months ended September 30, 2006 compared to $37 million a
year ago. This increase of $6 million in capital expenditures was partially
offset by net proceeds from the sale of assets of $4 million primarily due to
the sale of the old Beijing facility.
Financing Activities
Cash flow from financing activities was a $34 million inflow in the three
months ended September 30, 2006 compared to an inflow of $25 million in the same
period of 2005. The increase is primarily related to short-term borrowings.
CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
2006 2005
----- -----
(MILLIONS)
Cash provided (used) by:
Operating activities........................................... $ 60 $ (26)
Investing activities........................................... (134) (118)
Financing activities........................................... 41 21
Operating Activities
For the nine months ended September 30, 2006, operating activities provided
$60 million in cash compared to a use of $26 million in cash during the same
period last year. For the first nine months of 2006, cash used for working
capital was $127 million versus $188 million for the first nine months of 2005.
Receivables were a cash outflow of $85 million compared to a cash outflow of
$209 million, a $124 million improvement from last year primarily due to the
discontinuation of accelerated payment programs with three major OE customers in
North America in the prior year. Inventory represented a cash outflow of $47
million during the first nine months of 2006, an increase of $25 million over
the prior year. This primarily resulted from building higher inventories in
preparation of platform launches. Accounts payable provided cash of $51 million,
down from last year's cash inflow
59
of $52 million. Cash taxes were an $18 million outflow for the nine months ended
September 30, 2006, compared with a $16 million outflow of cash in the prior
year, primarily due to the timing of foreign tax payments. See also -- "Cash
Flows for the Three Months Ended September 30, 2006 and 2005".
Investing Activities
Cash used for investing activities was $16 million higher in the first nine
months of 2006 compared to the same period one year ago. This increase was
primarily driven by capital expenditures which were $130 million in the first
nine months of 2006 compared to $100 million a year ago. This increase of $30
million in capital expenditures was primarily due to the timing of future OE
customer platform launches. During the first nine months of 2005, we used $11
million in cash to acquire the exhaust operations of Gabilan Manufacturing,
partially offset by net proceeds from the sale of assets of $4 million.
Financing Activities
Cash flow from financing activities was a $41 million inflow in the first
nine months of 2006 compared to an inflow of $21 million in the same period of
2005. The 2006 inflow was related to short-term debt borrowings and the exercise
of stock options. The 2005 inflow is primarily attributable to $56 million
increased borrowings from our revolving credit facility partially offset by $43
million in cash used to reduce our long-term debt.
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 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. Based upon the LIBOR rate as determined under these
agreements of 5.61 percent (which is in effect until January 15, 2007) the
inclusion of these swaps in our financial results is expected to add $1 million
to 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 September 30, 2006, the fair value of the interest rate swaps was a liability
of approximately $7 million which has been recorded as a decrease to long-term
debt and an increase to other long-term liabilities. On September 30, 2006, we
had $996 million in long-term debt obligations that have fixed interest rates.
Of that amount, $475 million is fixed through July 2013 and $500 million through
November 2014, while the remainder is fixed over periods of 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 September 30, 2006
was about 103 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.
OUTLOOK
Continued high oil prices and rising interest rates make this an uncertain
and challenging environment for automotive suppliers. During the third quarter,
North American light vehicle production levels were down eight percent over the
prior year and current estimates for the fourth quarter are that North American
light vehicle
60
production levels will be down significantly year-over-year, primarily in the
light truck and SUV segment, despite an increase in passenger car production.
Our North American business is sensitive to customer preferences as we have a
greater percentage of our total North American OE revenues related to light
vehicle build rate represented by light trucks and SUVs. We remain cautious
about the outlook for North American production rates due to the overall
financial condition of original equipment manufacturers, especially Ford and
General Motors who have announced production 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, the ability to flex
our operations in line with the revised production schedules, our market
position with Japanese OE customers, and a strong new product and technology
pipeline will help us to partially mitigate pressures from North American
production rates. European light vehicle production is expected to increase
about four percent in the fourth quarter as compared to the prior year. Heavy
duty truck production rates for 2006 are expected to remain at the same levels
as 2005, primarily due to the pull forward of production ahead of the
introduction of stricter emission regulations in 2007. In China, light vehicle
production is projected to grow to 1.8 million units in the fourth quarter,
significantly up from 1.4 million units in the same quarter for the prior year.
In the aftermarket, longer product replacement cycles are expected to continue
to negatively impact volumes. Efforts to increase new and existing sales are
ongoing in our global aftermarket business.
Raw material prices, and in particular stainless steel prices, continue to
be a concern with price pressures expected to continue into the foreseeable
future. We are leveraging our supply of scrap steel and our anticipated larger
steel buy in 2007 as we prepare for our new product launches to negotiate the
best possible pricing. Where appropriate, we have sought to mitigate short-term
volatility in steel prices through supply commitments with firm base and
surcharge pricing. These commitments generally extend for one year and are
staggered to further mitigate short-term volatility. We are also working to
address this issue by evaluating alternative materials and processes, increasing
component and assembly outsourcing to low cost countries, identifying
opportunities for new sources of supply in 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.
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 costs related to an
existing condition caused by past operations and that do not contribute to
current or future revenue generation. We record liabilities when environmental
assessments indicate that remedial efforts are probable and the costs can be
reasonably estimated. Estimates of the liability are based upon currently
available facts, existing technology, and presently enacted laws and regulations
taking into consideration the likely effects of inflation and other societal and
economic factors. We consider all available evidence including prior experience
in remediation of contaminated sites, other companies' cleanup experiences and
data released by the United States Environmental Protection Agency or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new information. Where future cash flows are
fixed or reliably determinable, we have discounted the liabilities. All other
environmental liabilities are recorded at their undiscounted amounts. We
evaluate recoveries separately from the liability and, when they are assured,
recoveries are recorded and reported separately from the associated liability in
our financial statements.
As of September 30, 2006, we are designated as a potentially responsible
party in one Superfund site. Including the Superfund site, we may have the
obligation to remediate current or former facilities, and we estimate our share
of environmental remediation costs 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
61
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 current
liabilities on the balance sheet. See Note 5 to our consolidated financial
statements included under Item 1 for information regarding our warranty
reserves.
We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental 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 defending a legal proceeding by Chinese government 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. A small percentage of claims have been asserted by
railroad workers alleging exposure to asbestos products in railroad cars
manufactured by The Pullman Company, one of our subsidiaries. Nearly all of the
claims are related to alleged exposure to asbestos in our automotive emission
control products. Only a small percentage of these claimants allege that they
were automobile mechanics 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. 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 $5 million
for each of the nine months ended September 30, 2006 and 2005, respectively. All
contributions vest immediately.
62
In connection with freezing the defined benefit pension plans for nearly
all U.S. based salaried and hourly employees effective December 31, 2006, and
the related replacement of those defined benefit plans with defined contribution
plans, we expect contributions to the Employee Stock Option Plans will increase
significantly beginning in 2007.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to interest rate risk, see the
caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations," which is
incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the
participation of our management, including the members of our Office of the
Chief Executive and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-
15(e) under the Securities Exchange Act of 1934) as of the end of the quarter
covered by this report. Based on their evaluation, the Office of the Chief
Executive 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.
63
PART II
ITEM 1A. RISK FACTORS
We are exposed to certain risks and uncertainties that could have a
material adverse impact on our business, financial condition and operating
results. There have been no material changes to the Risk Factors described in
Part I, Item 1A of our Annual Report on Form 10-K for the year ended December
31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) Not applicable.
(c) Purchase of equity securities by the issuer and affiliated
purchasers. The following table provides information relating to our purchase
of shares of our common stock in the second quarter of 2006. All of these
purchases reflect shares withheld upon vesting of restricted stock, to satisfy
statutory minimum tax withholding obligations.
TOTAL NUMBER OF AVERAGE
PERIOD SHARES PURCHASED PRICE PAID
------ ---------------- ----------
July 2006................................................. 154 $25.94
August 2006............................................... -- --
September 2006............................................ -- --
---
Total................................................... 154 $25.94
We presently have no publicly announced repurchase plan or program, but
intend to continue to satisfy statutory minimum tax withholding obligations in
connection with the vesting of outstanding restricted stock through the
withholding of shares.
ITEM 6. EXHIBITS
(a) Exhibits. The exhibits filed with this report are listed on the
Exhibit Index following the signature page of this report, which is incorporated
herein by reference.
64
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Tenneco Inc. has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TENNECO INC.
By: /s/ KENNETH R. TRAMMELL
------------------------------------
Kenneth R. Trammell
Office of the Chief Executive and
Executive Vice
President and Chief Financial
Officer
Dated: November 9, 2006
65
INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2006
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 July 10, 2006 (incorporated
herein by reference from Exhibit 99.1 of the registrant's Current
Report on Form 8-K dated July 10, 2006, File No. 1-12387).
3.3 -- Certificate of Incorporation of Tenneco Global Holdings Inc.
("Global"), as amended (incorporated herein by reference to Exhibit
3.3 to the registrant's Registration Statement on Form S-4, Reg. No.
333-93757).
3.4 -- By-laws of Global (incorporated herein by reference to Exhibit 3.4
to the registrant's Registration Statement on Form S-4, Reg. No.
333-93757).
3.5 -- Certificate of Incorporation of TMC Texas Inc. ("TMC") (incorporated
herein by reference to Exhibit 3.5 to the registrant's Registration
Statement on Form S-4, Reg. No. 333-93757).
3.6 -- By-laws of TMC (incorporated herein by reference to Exhibit 3.6 to
the registrant's Registration Statement on Form S-4, Reg. No. 333-
93757).
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).
66
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.8 -- Amended and Restated By-laws of TIHC (incorporated herein by
reference to Exhibit 3.8 to the registrant's Registration Statement
on Form S-4, Reg. No. 333-93757).
3.9 -- Certificate of Incorporation of Clevite Industries Inc. ("Clevite"),
as amended (incorporated herein by reference to Exhibit 3.9 to the
registrant's Registration Statement on Form S-4, Reg. No. 333-
93757).
3.10 -- By-laws of Clevite (incorporated herein by reference to Exhibit 3.10
to the registrant's Registration Statement on Form S-4, Reg. No.
333-93757).
3.11 -- Amended and Restated Certificate of Incorporation of the Pullman
Company ("Pullman") (incorporated herein by reference to Exhibit
3.11 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
3.12 -- By-laws of Pullman (incorporated herein by reference to Exhibit 3.12
to the registrant's Registration Statement on Form S-4, Reg. No.
333-93757).
3.13 -- Certificate of Incorporation of Tenneco Automotive Operating Company
Inc. ("Operating") (incorporated herein by reference to Exhibit 3.13
to the registrant's Registration Statement on Form S-4, Reg. No.
333-93757).
3.14 -- By-laws of Operating (incorporated herein by reference to Exhibit
3.14 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
4.1(a) -- Rights Agreement dated as of September 8, 1998, by and between the
registrant and First Chicago Trust Company of New York, as Rights
Agent (incorporated herein by reference from Exhibit 4.1 of the
registrant's Current Report on Form 8-K dated September 24, 1998,
File No. 1-12387).
4.1(b) -- Amendment No. 1 to Rights Agreement, dated March 14, 2000, by and
between the registrant and First Chicago Trust Company of New York,
as Rights Agent (incorporated herein by reference from Exhibit
4.4(b) of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1999, File No. 1-12387).
4.1(c) -- Amendment No. 2 to Rights Agreement, dated February 5, 2001, by and
between the registrant and First Union National Bank, as Rights
Agent (incorporated herein by reference from Exhibit 4.4(b) of the
registrant's Post-Effective Amendment No. 3, dated February 26,
2001, to its Registration Statement on Form 8-A dated September 17,
1998).
4.2(a) -- Indenture, dated as of November 1, 1996, between the registrant and
The Chase Manhattan Bank, as Trustee (incorporated herein by
reference from Exhibit 4.1 of the registrant's Registration
Statement on Form S-4, Registration No. 333-14003).
4.2(b) -- First Supplemental Indenture dated as of December 11, 1996 to
Indenture dated as of November 1, 1996 between the registrant and
The Chase Manhattan Bank, as Trustee (incorporated herein by
reference from Exhibit 4.3(b) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
4.2(c) -- 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).
67
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
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).
68
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
4.5(j) -- New Lender Supplement, dated as of July 27, 2006, by and among
LaSalle Bank National Association, Tenneco Inc. and JPMorgan Chase
Bank, N.A. (incorporated herein by reference to Exhibit 4.5(j) to
the registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006, 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).
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.
69
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 -- Distribution Agreement, dated November 1, 1996, by and among El Paso
Tennessee Pipeline Co., the registrant, and Newport News
Shipbuilding Inc. (incorporated herein by reference from Exhibit 2
of the registrant's Form 10, File No. 1-12387).
10.2 -- Amendment No. 1 to Distribution Agreement, dated as of December 11,
1996, by and among El Paso Tennessee Pipeline Co., the registrant,
and Newport News Shipbuilding Inc. (incorporated herein by reference
from Exhibit 10.2 of the registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, File No. 1-12387).
10.3 -- Debt and Cash Allocation Agreement, dated December 11, 1996, by and
among El Paso Tennessee Pipeline Co. , the registrant, and Newport
News 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).
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).
70
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
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).
71
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 (incorporated herein
by reference from Exhibit 10.37 to the registrant's Annual Report on
Form 10-K for the year ended December 31, 2005, file No. 1-12387).
10.38 -- Summary of 2006 Named Executive Officer Compensation (incorporated
herein by reference from Exhibit 10.38 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2005, file No.
1-12387).
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).
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 (incorporated herein by reference
from Exhibit 10.47 to the registrant's Annual Report on Form 10-K
for the year ended December 31, 2005, file No. 1-12387).
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) (incorporated herein by reference from
Exhibit 10.48 to the registrant's Annual Report on Form 10-K for the
year ended December 31, 2005, file No. 1-12387).
10.49 -- Form of Stock Equivalent Unit Award Agreement, as amended, under the
2002 Long-Term Incentive Plan, as amended (incorporated herein by
reference from Exhibit 10.49 to the registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2006, File No. 1-12387).
72
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.50 -- Summary of Amendments to Deferred Compensation Plan and Incentive
Deferral Plan (incorporated herein by reference from Exhibit 10.50
to the registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006, File No. 1-12387).
10.51 -- Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated by
reference to Exhibit 99.1 to the registrant's Current Report on Form
8-K, dated May 9, 2006).
10.52 -- Form of Restricted Stock Award Agreement for non-employee directors
under the Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated
by reference to Exhibit 99.2 to the registrant's Current Report on
Form 8-K, dated May 9, 2006).
10.53 -- Form of Stock Option Agreement for employees under the Tenneco Inc.
2006 Long-Term Incentive Plan (incorporated by reference to Exhibit
99.3 to the registrant's Current Report on Form 8-K, dated May 9,
2006).
10.54 -- Form of Restricted Stock Award Agreement for employees under the
Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated by
reference to Exhibit 99.4 to the registrant's Current Report on Form
8-K, dated May 9, 2006).
*10.55 -- Summary of Amendments to the Company's excess defined benefit plans,
the terms of a new excess defined contribution plan and Amendments
to certain executives' employment agreements.
11 -- None.
*12 -- Computation of Ratio of Earnings to Fixed Charges.
*15 -- Letter of Deloitte & Touche LLP regarding interim financial
information.
18 -- None.
19 -- None.
22 -- None.
23 -- None.
24 -- None.
*31.1 -- Certification of Timothy R. Donovan under Section 302 of the
Sarbanes-Oxley Act of 2002.
*31.2 -- Certification of Hari N. Nair under Section 302 of the Sarbanes-
Oxley Act of 2002.
*31.3 -- Certification of Neal Yanos under Section 302 of the Sarbanes-Oxley
Act of 2002.
*31.4 -- Certification of Kenneth R. Trammell under Section 302 of the
Sarbanes-Oxley Act of 2002.
*32.1 -- Certification of Timothy R. Donovan, Hari N. Nair, Neal Yanos and
Kenneth R. Trammell under Section 906 of the Sarbanes-Oxley Act of
2002.
99 -- None.
100 -- None.
--------
* Filed herewith.
73