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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 March 31, 2007
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: 46,290,142 shares as of April 30,
2007.
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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.......................................... 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 48
Item 4. Controls and Procedures....................................... 48
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................. *
Item 1A. Risk Factors.............................................. 50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds... 50
Item 3. Defaults Upon Senior Securities............................... *
Item 4. Submission of Matters to a Vote of Security Holders........... *
Item 5. Other Information............................................. *
Item 6. Exhibits...................................................... 50
--------
* 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 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;
2
- changes in automotive manufacturers' production rates and their actual
and forecasted requirements for our products;
- 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);
- 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;
- 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;
- 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;
- 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;
- 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;
- costs related to product warranties;
- 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;
- 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;
3
- potential legislation, regulatory changes and other governmental actions,
including the ability to receive regulatory approvals and the timing of
such approvals;
- 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 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, 2006,
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 (the "Company") as of March 31, 2007, and the
related consolidated statements of income, cash flows, comprehensive income
(loss) and changes in shareholders' equity for the three-month periods ended
March 31, 2007 and 2006. These interim financial statements are the
responsibility of Tenneco Inc.'s management.
We conducted our reviews 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 reviews, 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 10, effective January 1, 2007, the Company adopted the
measurement date provisions of Statement of Financial Accounting Standards No.
158, Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans--an amendment of FASB Statements No. 87, 88, 106 and 132(R).
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of the Company as of December 31, 2006, 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 1, 2007, we expressed an unqualified opinion on those
consolidated financial statements and financial statement schedule and included
an explanatory paragraph regarding the Company's adoption of Statement of
Financial Accounting Standards No. 123(R), "Share-Based Payment" on January 1,
2006 and the Company's adoption of the recognition and disclosure provisions of
Statement of Financial Accounting Standards No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements No. 87, 88, 106 and 132(R)," on December 31, 2006. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2006 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
May 9, 2007
5
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2007 2006
----------- -----------
(MILLIONS EXCEPT SHARE
AND
PER SHARE AMOUNTS)
REVENUES
Net sales and operating revenues....................... $ 1,399 $ 1,132
----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation and
amortization shown below)........................... 1,179 921
Engineering, research, and development................. 27 22
Selling, general, and administrative................... 95 101
Depreciation and amortization of other intangibles..... 48 44
----------- -----------
1,349 1,088
----------- -----------
OTHER INCOME (EXPENSE)
Loss on sale of receivables............................ (2) (1)
Other income (loss).................................... 2 (1)
----------- -----------
-- (2)
----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND
MINORITY INTEREST...................................... 50 42
Interest expense (net of interest capitalized)......... 42 34
Income tax expense..................................... 3 --
Minority interest...................................... 2 1
----------- -----------
NET INCOME............................................... $ 3 $ 7
=========== ===========
EARNINGS PER SHARE
Weighted average shares of common stock outstanding--
Basic.................................................. 45,425,823 43,921,691
Diluted................................................ 47,320,779 46,723,181
Basic earnings per share of common stock................. $ 0.07 $ 0.15
Diluted earnings per share of common stock............... $ 0.07 $ 0.14
The accompanying notes to financial statements are an integral part of these
statements of income.
6
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents................................... $ 136 $ 202
Receivables--
Customer notes and accounts, net....................... 777 579
Other.................................................. 22 25
Inventories--
Finished goods......................................... 203 191
Work in process........................................ 172 90
Raw materials.......................................... 104 122
Materials and supplies................................. 37 36
Deferred income taxes..................................... 53 52
Prepayments and other..................................... 134 125
------- -------
1,638 1,422
------- -------
Other assets:
Long-term notes receivable, net........................... 25 26
Goodwill.................................................. 204 203
Intangibles, net.......................................... 9 9
Deferred income taxes..................................... 379 376
Other..................................................... 138 134
------- -------
755 748
------- -------
Plant, property, and equipment, at cost..................... 2,688 2,643
Less--Reserves for depreciation and amortization.......... (1,592) (1,550)
------- -------
1,096 1,093
------- -------
$ 3,489 $ 3,263
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term
debt).................................................. $ 29 $ 28
Trade payables............................................ 950 782
Accrued taxes............................................. 41 49
Accrued interest.......................................... 31 40
Accrued liabilities....................................... 210 200
Other..................................................... 33 34
------- -------
1,294 1,133
------- -------
Long-term debt.............................................. 1,424 1,350
------- -------
Deferred income taxes....................................... 107 107
------- -------
Postretirement benefits..................................... 333 349
------- -------
Deferred credits and other liabilities...................... 57 75
------- -------
Commitments and contingencies
Minority interest........................................... 29 28
------- -------
Shareholders' equity:
Common stock.............................................. -- --
Premium on common stock and other capital surplus......... 2,791 2,790
Accumulated other comprehensive loss...................... (227) (253)
Retained earnings (accumulated deficit)................... (2,079) (2,076)
------- -------
484 461
Less--Shares held as treasury stock, at cost.............. 240 240
------- -------
245 221
------- -------
$ 3,489 $ 3,263
======= =======
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
MARCH 31,
------------
2007 2006
----- ----
(MILLIONS)
OPERATING ACTIVITIES
Net income....................................................... $ 3 $ 7
Adjustments to reconcile net income to cash provided (used) by
operating activities--
Depreciation and amortization of other intangibles............. 48 44
Deferred income taxes.......................................... (3) 5
Stock option expense........................................... 1 1
Loss on sale of assets, net.................................... 2 1
Changes in components of working capital
(Increase) decrease in receivables.......................... (198) (82)
(Increase) decrease in inventories.......................... (74) (27)
(Increase) decrease in prepayments and other current
assets.................................................... (13) (14)
Increase (decrease) in payables............................. 150 65
Increase (decrease) in accrued taxes........................ (4) (2)
Increase (decrease) in accrued interest..................... (9) (4)
Increase (decrease) in other current liabilities............ 4 (18)
Other............................................................ (2) (1)
----- ----
Net cash used by operating activities............................ (95) (25)
----- ----
INVESTING ACTIVITIES
Cash payments for plant, property, and equipment................. (38) (36)
Cash payments for software related intangible assets............. (7) (3)
Investments and other............................................ 1 --
----- ----
Net cash used by investing activities............................ (44) (39)
----- ----
FINANCING ACTIVITIES
Issuance of common shares........................................ 2 8
Issuance of long-term debt....................................... 150 --
Debt issuance cost of long-term debt............................. (6) --
Retirement of long-term debt..................................... (357) (1)
Net increase in revolver borrowings and short-term debt excluding
current maturities of long-term debt........................... 280 9
Other............................................................ 1 --
----- ----
Net cash provided by financing activities........................ 70 16
----- ----
Effect of foreign exchange rate changes on cash and cash
equivalents.................................................... 3 3
----- ----
Increase (Decrease) in cash and cash equivalents................. (66) (45)
Cash and cash equivalents, January 1............................. 202 141
----- ----
Cash and cash equivalents, March 31 (Note)....................... $ 136 $ 96
===== ====
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest......................... $ 42 $ 34
Cash paid during the period for income taxes (net of refunds).... $ 8 $ --
NON-CASH INVESTING AND FINANCING ACTIVITIES
Period ended balance of payables for plant, property, and
equipment...................................................... $ 17 $ 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)
THREE MONTHS ENDED MARCH 31,
-------------------------------------------
2007 2006
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- -------
(MILLIONS EXCEPT SHARE AMOUNTS)
COMMON STOCK
Balance January 1............................ 47,085,274 $ -- 44,544,668 $ --
Issued (Reacquired) pursuant to benefit
plans................................... 287,160 -- 1,022,599 --
Stock options exercised.................... 192,563 -- 803,472 --
---------- ------- ---------- -------
Balance March 31............................. 47,564,997 -- 46,370,739 --
==========
PREMIUM ON COMMON STOCK AND OTHER CAPITAL
SURPLUS
Balance January 1............................ 2,790 2,776
Premium on common stock issued pursuant to
benefit plans........................... 1 5
------- -------
Balance March 31............................. 2,791 2,781
-------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance January 1............................ (253) (282)
Other comprehensive income................. 26 17
------- -------
Balance March 31............................. (227) (265)
-------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1............................ (2,076) (2,125)
Net income................................. 3 7
Other...................................... (6) (1)
------- -------
Balance March 31............................. (2,079) (2,119)
------- -------
LESS--COMMON STOCK HELD AS TREASURY STOCK, AT
COST
Balance January 1 and March 31............... 1,294,692 240 1,294,692 240
========== ------- ========== -------
Total................................. $ 245 $ 157
======= =======
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 MARCH 31,
-------------------------------------------------------------
2007 2006
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME COMPREHENSIVE INCOME COMPREHENSIVE
(LOSS) INCOME (LOSS) INCOME
------------- ------------- ------------- -------------
(MILLIONS)
NET INCOME.......................... $ 3 $ 7
--- ---
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance January 1................... $ (54) $(150)
Translation of foreign currency
statements..................... 12 12 17 17
----- -----
Balance March 31.................... (42) (133)
----- -----
ADDITIONAL LIABILITY FOR PENSION
BENEFITS
Balance January 1................... (199) (132)
Measurement date implementation of
SFAS No. 158, net of tax.......... 14 14 -- --
----- -----
Balance March 31.................... (185) (132)
----- -----
Balance March 31.................... $(227) $(265)
===== --- ===== ---
Other comprehensive income (loss)... 26 17
--- ---
COMPREHENSIVE INCOME................ $29 $24
=== ===
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, 2006.
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. We have reclassified in the statement of cash
flows the net change in payables for acquisitions of plant, property and
equipment (PP&E) from the increase (decrease) in payables included in operating
activities into cash payments for PP&E included in investing activities and
disclosed the period end balance of payables for PP&E in non-cash investing and
financing activities. We do not believe these changes in presentation are
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. Up to 2
million shares of our common stock plus the shares remaining for issuance under
the 2002 Long-Term Incentive Plan are authorized for delivery under the 2006
Long-Term Incentive Plan. As of March 31, 2007, up to 1,320,710 shares of our
common stock remain 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. For 2007, the awards contain a stub-year grant payable in the first
quarter of 2008 annually and a three-year grant payable in the first quarter of
2010. Payment is based on the attainment of specified performance goals. The
grant value is indexed to the stock price. Each employee granted stock
equivalent units will (based on the achievement of the applicable goals) receive
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.
11
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Accounting Methods--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 three months ended March 31, 2007 and 2006,
respectively, 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.
The impact of recognizing compensation expense related to nonqualified
stock options is contained in the table below.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2007 2006
------------ ------------
(MILLIONS) (MILLIONS)
Selling, general and administrative...................... $ 1 $ 1
------ ------
Loss before interest expense, income taxes and minority
interest............................................... (1) (1)
Income tax benefit....................................... -- --
------ ------
Net loss................................................. $ (1) $ (1)
====== ======
Decrease in basic earnings per share..................... $(0.02) $(0.01)
Decrease in diluted earnings per share................... $(0.02) $(0.01)
For stock options awarded to retirement eligible employees we immediately
accelerate the recognition of any outstanding compensation cost when employees
retire before the end of the vesting period. This methodology has not had a
material impact on our recognized compensation cost.
As of March 31, 2007, there was approximately $5 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 1.6 years.
Compensation expense for restricted stock, stock equivalent units and SARs,
net of tax, was approximately $2 million for the three months ended March 31,
2007 compared to approximately $3 million for the three months ended March 31,
2006, and was recorded in selling, general, and administrative expense on the
statement of income at the corporate level.
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. Under SFAS No. 123(R), excess tax
benefits, which are any 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 recorded as an addition to paid-in
capital. We would 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.
Cash received from option exercises for the three months ended March 31,
2007, was approximately $1 million. Stock option exercises during the first
three months of 2007 generated an excess tax benefit of approximately $1
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.
12
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Assumptions--We calculated the fair values of stock option 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.
THREE MONTHS
ENDED
MARCH 31,
-------------
2007 2006
----- -----
Stock Options
Weighted average grant date fair value, per share................ $9.83 $9.27
Weighted average assumptions used:
Expected volatility.............................................. 38.4% 42.6%
Expected lives................................................... 4.1 5.1
Risk-free interest rates......................................... 4.7% 4.2%
Dividend yields.................................................. 0.0% 0.0%
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:
THREE MONTHS ENDED
MARCH 31, 2007
------------------------------------------------------
WEIGHTED AVG.
SHARES WEIGHTED AVG. REMAINING AGGREGATE
UNDER EXERCISE LIFE IN INTRINSIC
OPTION PRICES YEARS VALUE
--------- ------------- ------------- ----------
(MILLIONS)
Outstanding Stock Options
Outstanding, January 1, 2007.............. 3,074,173 $10.13
Granted................................. 589,681 26.68
Canceled................................ -- --
Forfeited............................... (54,730) 23.67
Exercised............................... (192,563) 7.31 $ 3
---------
Outstanding, March 31, 2007............... 3,416,561 $12.93 5.2 $42
=========
Vested or expected to vest, March 31,
2007.................................... 3,375,496 $12.85 5.2 $42
=========
Exercisable, March 31, 2007............... 2,575,092 $ 9.17 5.0 $41
=========
13
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:
THREE MONTHS ENDED
MARCH 31, 2007
------------------------
WEIGHTED AVG.
GRANT DATE
SHARES FAIR VALUE
-------- -------------
Nonvested Restricted Shares
Nonvested balance at January 1, 2007....................... 386,507 $17.10
Granted.................................................. 364,018 26.73
Vested................................................... (222,040) 15.39
Forfeited................................................ (35,972) 22.49
--------
Nonvested balance at March 31, 2007........................ 492,513 $24.60
========
The fair value of restricted stock grants is equal to the average market
price of our stock at the date of grant. As of March 31, 2007, approximately $12
million of total unrecognized compensation costs related to restricted stock
awards is expected to be recognized over a weighted-average period of
approximately 2.4 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 March
31, 2007, approximately $6 million of total unrecognized compensation costs is
expected to be recognized over the weighted-average period of approximately 1.7
years.
(3) In March of 2007 we refinanced our $831 million senior credit facility.
This transaction reduced the interest rates we pay on all portions of the
facility. While the total amount of the new senior credit facility is $830
million, approximately the same as the previous facility, we changed the
components of the facility to enhance our financial flexibility. We increased
the amount of commitments under our revolving loan facility from $320 million to
$550 million, reduced the amount of commitments under our tranche B-1 letter of
credit/revolving loan facility from $155 million to $130 million and replaced
the $356 million term loan B with a $150 million term loan A. As of March 31,
2007, the senior credit facility consisted of a five-year, $150 million term
loan A maturing in March 2012, a five-year, $550 million revolving credit
facility maturing in March 2012, and a seven-year $130 million tranche B-1
letter of credit/revolving loan facility maturing in March 2014.
The refinancing of the prior facility allowed us to: (i) amend the
consolidated net debt to EBITDA ratio from 3.75 to 4.25, (ii) eliminate the
fixed charge coverage ratio, (iii) eliminate the restriction on capital
expenditures, (iv) increase the amount of acquisitions permitted to $250
million, (v) improve the flexibility to repurchase and retire higher cost junior
debt, (vi) increase our ability to enter into capital leases, (vii) increase the
ability of our foreign subsidiaries to incur debt, (viii) increase our ability
to pay dividends and repurchase common stock, (ix) increase our ability to
invest in joint ventures, (x) allow for the increase in the existing tranche B-1
facility and/or the term loan A or the addition of a new term loan of up to $275
million in order to reduce our 10.25 percent senior secured notes, and (xi)
other modifications.
Following the refinancing, the term loan A facility is payable in twelve
consecutive quarterly installments, commencing June 30, 2009 as follows: $6
million due each of June 30, September 30, December 31, 2009 and March 31, 2010,
$15 million due each of June 30, September 30, December 31, 2010 and March 31,
2011, and $17 million due each of June 30, September 30, December 31, 2011 and
March 16, 2012. The revolving credit facility requires that any amounts drawn,
be repaid by March 2012. 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.
14
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by March 2014. We can borrow revolving loans and issue letters of
credit under the $130 million tranche B-1 letter of credit/revolving loan
facility. The tranche B-1 letter of credit/revolving loan facility lenders have
deposited $130 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 $130 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).
We have three fixed-to-floating interest rate swaps covering $150 million
of our 10.25 percent senior secured notes at an annual rate of LIBOR plus 5.68
percent. Based upon the current LIBOR rate of 5.38 percent (which is in effect
until July 15, 2007) these swaps are expected to increase our interest expense
by $2 million in 2007 above what it otherwise would have been. Since entering
into these swaps, we have realized a net cumulative benefit of $3 million. 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. These hedges are effective, so we have not
recognized in earnings any amounts related to the ineffectiveness of the
interest rate swaps. No amounts were excluded from the assessment of hedge
effectiveness. As of March 31, 2007, the fair value of the interest rate swaps
was a liability of $5 million recorded as a decrease to long-term debt and an
increase to other long-term liabilities.
(4) In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109 ("FIN 48")". FIN 48 is a new
interpretation of the Statement of Financial Accounting Standards ("SFAS") No.
109 establishing a new model in accounting for uncertainty in income taxes
recognized in our financial statements. FIN 48 prescribes a recognition
threshold and measurement attributes for financial statement disclosure of tax
positions taken or expected to be taken on our tax returns. Under FIN 48, the
impact of an uncertain income tax position on the income tax return must be
recognized at the largest amount that is more-likely-than-not to be sustained
upon audit by the relevant taxing authority. An uncertain income tax position
will not be recognized if it has less than a 50% likelihood of being sustained.
In addition, FIN 48 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006.
We adopted the provisions of FIN 48 on January 1, 2007. The total amount of
unrecognized tax benefits as of the date of adoption was $42 million. As a
result of the implementation of FIN 48, we recognized an increase to retained
earnings in an amount less than $1 million and a decrease to our accruals for
uncertain tax positions and related interest and penalties by a corresponding
amount.
Included in the balance of unrecognized tax benefits at January 1, 2007,
are $26 million of tax benefits that, if recognized, would impact the effective
tax rate. Also included in the balance of the unrecognized tax benefits at
January 1, 2007, are $14 million of tax benefits that, if recognized, would
result in adjustments to other tax accounts, primarily deferred taxes.
We recognize interest related to unrecognized tax benefits in interest
expense and penalties in the provision for income taxes. Upon adoption of FIN 48
on January 1, 2007, we have an accrual for interest and penalties of $3 million.
15
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Included in the balance of unrecognized tax benefits at January 1, 2007,
are $1 million of unrecognized tax benefits that are expected to settle or for
which the statute of limitations will expire within the next twelve months.
We are subject to taxation in the U.S. and various states and foreign
jurisdictions. Canada and Germany are our significant tax jurisdictions where we
have had recent audit activity. A Canadian tax examination for years ended 2001-
2004 has just been initiated. In 2006 we concluded a German tax examination for
years ended 1998-2001. We have accrued the appropriate amounts and have made the
required cash payments to the German tax authorities. With few exceptions, we
are no longer subject to U.S. federal, state, local or foreign examinations by
tax authorities for years before 2002.
(5) Over the past several years we have adopted plans to restructure
portions of our operations. These plans were approved by the Board of Directors
and were designed to reduce operational and administrative overhead costs
throughout the business. Prior to the change in accounting required for exit or
disposal activities, we recorded charges to income related to these plans for
costs that did not benefit future activities in the period in which the plans
were finalized and approved, while actions necessary to affect these
restructuring plans occurred over future periods in accordance with established
plans.
Our recent restructuring activities began in the fourth quarter of 2001,
when our Board of Directors approved a restructuring plan, a project known as
Project Genesis, which was designed to lower our fixed costs, relocate capacity,
reduce our work force, improve efficiency and utilization, and better optimize
our global footprint. We have undertaken various other restructuring projects
related to Project Genesis since then. We incurred $27 million in restructuring
and restructuring-related costs during 2006, of which $23 million was recorded
in cost of sales and $4 million was recorded in selling, general and
administrative expense. In the first quarter of 2007, we incurred $2 million in
restructuring and restructuring-related costs of which $1 million was recorded
in cost of sales and $1 million in selling, general and administrative expense.
Since Project Genesis was initiated, we have incurred costs of $132 million
through March 31, 2007.
Under the terms of our refinanced senior credit agreement that took effect
on March 16, 2007, we are allowed to exclude $80 million of cash charges and
expenses, before taxes, related to cost reduction initiatives initiated after
March 16, 2007 from the calculation of the financial covenant ratios required
under our senior credit facility. As of March 31, 2007, we have not excluded any
allowable charges relating to restructuring initiatives against the $80 million
available under the terms of the refinanced senior credit facility.
In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will initiate actions that will
reduce our costs through implementing the most appropriate and efficient
logistics, distribution and manufacturing footprint for the future. 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.
(6) We are subject to a variety of environmental and pollution control laws
and regulations in all jurisdictions in which we operate. We expense or
capitalize, as appropriate, expenditures for ongoing compliance with
environmental regulations that relate to current operations. We expense 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
16
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 March 31, 2007, 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 at these facilities to be approximately $8
million. For the Superfund site and the current and former facilities, we have
established reserves that we believe are adequate for these costs. Although we
believe our estimates of remediation costs are reasonable and are based on the
latest available information, the cleanup costs are estimates and are subject to
revision as more information becomes available about the extent of remediation
required. At some sites, we expect that other parties will contribute to the
remediation costs. In addition, at the Superfund site, the Comprehensive
Environmental Response, Compensation and Liability Act provides that our
liability could be joint and several, meaning that we could be required to pay
in excess of our share of remediation costs. Our understanding of the financial
strength of other potentially responsible parties at the Superfund site, and of
other liable parties at our current and former facilities, has been considered,
where appropriate, in our determination of our estimated liability.
We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund site, or as a liable party at our
current or former facilities, will not be material to our results of operations
or consolidated financial position.
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. 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
17
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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:
THREE MONTHS
ENDED
MARCH 31,
-------------
2007 2006
---- ----
(MILLIONS)
Beginning Balance January 1,...................................... $25 $22
Accruals related to product warranties............................ 3 5
Reductions for payments made...................................... (2) (4)
--- ---
Ending Balance March 31,.......................................... $26 $23
=== ===
The current year increase in the warranty accrual is primarily driven by
higher unit pricing and product mix in the North American aftermarket.
(7) In September 2006, the Financial Accounting Standards Board (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 is 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 actuarial losses experienced by
the plans will be recorded in the Accumulated Other Comprehensive Loss section
of shareholders' equity on the balance sheet. The initial adoption as of
December 31, 2006 resulted in a reduction of Accumulated Other Comprehensive
Loss in shareholders' equity of $59 million.
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. Effective January 1, 2007, Tenneco
elected to early adopt the measurement date provision of SFAS No. 158. See Note
10. Adoption of this part of the statement was not material to our financial
position and results of operations.
18
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, which hereby added Section N to Topic 1, "Financial
Statements", of the Staff Accounting Bulletin Series. Section N provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. The bulletin is effective for an interim period of the first fiscal
year ending after November 15, 2006. The adoption of this bulletin did not have
a material impact to our financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." The statement permits companies to
choose to measure at fair value many financial instruments and certain other
items that are not currently required to be measured at fair value. SFAS No. 159
is effective for financial statements issued for fiscal years beginning on or
after November 15, 2007. We do not believe the statement will have a material
effect on our financial statements and related disclosures.
(8) 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 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 $145 million and $147 million at March 31, 2007
and 2006, respectively. We recognized a loss of approximately $2 million for the
three months ended March 31, 2007, and approximately $1 million for the three
months ended March 31, 2006, 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 2007. 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.
(9) Earnings per share of common stock outstanding were computed as
follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2007 2006
----------- -----------
(MILLIONS EXCEPT SHARE
AND PER SHARE AMOUNTS)
Basic earnings per share--
Income................................................. $ 3 $ 7
=========== ===========
Average shares of common stock outstanding............. 45,425,823 43,921,691
=========== ===========
Earnings per average share of common stock............. $ 0.07 $ 0.15
=========== ===========
Diluted earnings per share--
Income................................................. $ 3 $ 7
=========== ===========
Average shares of common stock outstanding............. 45,425,823 43,921,691
Effect of dilutive securities:
Restricted stock.................................... 245,270 456,601
Stock options....................................... 1,649,686 2,344,889
----------- -----------
Average shares of common stock outstanding including
dilutive securities................................. 47,320,779 46,723,181
=========== ===========
Earnings per average share of common stock............. $ 0.07 $ 0.14
=========== ===========
19
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Options to purchase 770,848 and 630,992 shares of common stock were
outstanding at March 31, 2007 and 2006, respectively, but were not included in
the computation of diluted EPS because the options were anti-dilutive for the
quarters ended March 31, 2007 and 2006, respectively.
(10) Net periodic pension costs (income) and postretirement benefit costs
(income) consist of the following components:
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
POSTRETIREME-
PENSION NT
----------------------------- -------------
2007 2006 2007 2006
------------- ------------- ---- ----
US FOREIGN US FOREIGN US US
--- ------- --- ------- ---- ----
(MILLIONS)
Service cost--benefits earned during the
year........................................ $-- $ 2 $ 4 $ 2 $ 1 $ 1
Interest cost................................. 5 4 5 4 2 2
Expected return on plan assets................ (5) (4) (5) (4) -- --
Net amortization:
Actuarial loss.............................. 1 1 1 1 1 2
Prior service cost.......................... -- -- 1 -- (1) (2)
--- --- --- --- --- ---
Net pension and postretirement costs.......... $ 1 $ 3 $ 6 $ 3 $ 3 $ 3
=== === === === === ===
Effective January 1, 2007, we froze our defined benefit plans and replaced
them with additional contributions under defined contribution plans for nearly
all U.S.-based salaried and non-union hourly employees.
In September 2006, the FASB issued Statement No. 158 "Employers' Accounting
for Defined Benefit and Other Postretirement Plans." Effective January 1, 2007,
Tenneco elected to early-adopt the measurement date provisions of SFAS No. 158.
As a result, during the first quarter of 2007, the following adjustments were
made to retained earnings and other comprehensive income (both net of tax
effects):
US FOREIGN
--- -------
Retained earnings................................................. (3) (2)
Accumulated other comprehensive income............................ 8 6
For the three months ended March 31, 2007, we made pension contributions of
approximately $1 million for our domestic pension plans and $5 million for our
foreign pension plans. Based on current actuarial estimates, we believe we will
be required to make approximately $22 million in contributions for the remainder
of 2007.
We made postretirement contributions of approximately $2 million during the
first three months of 2007. Based on current actuarial estimates, we believe we
will be required to make approximately $8 million in contributions for the
remainder of 2007.
(11) 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 March 31, 2007 and 2006,
respectively. We have no recourse in the event of default by the former
affiliate. However, we have not been required to make any payments under this
guarantee.
Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our existing and future material
domestic wholly-owned subsidiaries fully and unconditionally guarantee our
senior credit facility, our senior secured notes and our senior subordinated
notes on a joint and several basis. The arrangement for the senior credit
facility is also
20
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
secured by first-priority liens on substantially all our domestic assets and
pledges of 66 percent of the stock of certain first-tier foreign subsidiaries.
The arrangement for the $475 million senior secured notes is also secured by
second-priority liens on substantially all our domestic assets, excluding some
of the stock of our domestic subsidiaries. No assets or capital stock of our
direct or indirect foreign subsidiaries secure these notes. You should also read
Note 13 where we present the Supplemental Guarantor Condensed Consolidating
Financial Statements.
We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have issued $18 million in letters of credit
to support some of our subsidiaries' insurance arrangements. In addition, we
have issued $6 million in guarantees through letters of credit to guarantee
other obligations of subsidiaries primarily related to environmental remediation
activities.
Negotiable Financial Instruments--One of our European subsidiaries receives
payment from one of its OE customers whereby the account receivables are
satisfied through the delivery of negotiable financial instruments. These
financial instruments are then sold at a discount to a European bank. The sales
of these financial instruments are not included in the account receivables sold.
Any of these financial instruments which were not sold as of March 31, 2007 and
2006 are classified as other current assets and are excluded from our definition
of cash equivalents. We had sold approximately $27 million of these instruments
at March 31, 2007 and $26 million at March 31, 2006.
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 $11 million and $4 million at March 31,
2007 and 2006, respectively, and were classified as notes payable. Financial
instruments received from OE customers and not redeemed totaled $5 million and
$8 million at March 31, 2007 and 2006, respectively, and were classified as
other current assets. One of our Chinese subsidiaries is required to maintain a
cash balance at a financial institution issuing the financial instruments which
are used to satisfy vendor payments. The balance totaled approximately $1
million at both March 31, 2007 and 2006, respectively, and was classified as
cash and cash equivalents.
(12) 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.
21
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)
AT MARCH 31, 2007 AND FOR THE THREE MONTHS
THEN ENDED
Revenues from external customers.......... $ 643 $ 643 $113 $ -- $1,399
Intersegment revenues..................... 2 99 3 (104) --
Income before interest expense, income
taxes, and minority interest............ 29 15 6 -- 50
Total assets.............................. 1,499 1,581 312 97 3,489
AT MARCH 31, 2006 AND FOR THE THREE MONTHS
THEN ENDED
Revenues from external customers.......... $ 515 $ 526 $ 91 $ -- $1,132
Intersegment revenues..................... 2 16 3 (21) --
Income before interest expense, income
taxes, and minority interest............ 34 8 -- -- 42
Total assets.............................. 1,363 1,366 256 47 3,032
(13) 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.
22
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2007
---------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External..................... $614 $785 $ -- $ -- $1,399
Affiliated companies......... 28 206 -- (234) --
---- ---- ---- ----- ------
642 991 -- (234) 1,399
---- ---- ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below).... 561 852 -- (234) 1,179
Engineering, research, and
development.................. 11 16 -- -- 27
Selling, general, and
administrative............... 37 58 -- 95
Depreciation and amortization of
other intangibles............ 18 30 -- -- 48
---- ---- ---- ----- ------
627 956 1,349
---- ---- ---- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables..... -- (2) -- -- (2)
Other income (loss)............. 3 (2) -- 1 2
---- ---- ---- ----- ------
3 (4) -- 1 --
---- ---- ---- ----- ------
INCOME BEFORE INTEREST EXPENSE,
INCOME TAXES, MINORITY INTEREST,
AND EQUITY IN NET INCOME FROM
AFFILIATED COMPANIES............ 18 31 -- 1 50
Interest expense--
External (net of interest
capitalized)............... (1) 1 42 -- 42
Affiliated companies (net of
interest income)........... 45 (3) (42) -- --
Income tax expense (benefit).... (11) 9 -- 5 3
Minority interest............... -- 2 -- -- 2
---- ---- ---- ----- ------
Equity in net income (loss) from
affiliated companies......... 21 -- 3 (24) --
---- ---- ---- ----- ------
NET INCOME (LOSS)................. $ 6 $ 22 $ 3 $ (28) $ 3
==== ==== ==== ===== ======
23
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2006
---------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External..................... $504 $628 $ -- $ -- $1,132
Affiliated companies......... 21 122 -- (143) --
---- ---- ---- ----- ------
525 750 -- (143) 1,132
---- ---- ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below).... 419 645 -- (143) 921
Engineering, research, and
development.................. 8 14 -- -- 22
Selling, general, and
administrative............... 44 57 -- -- 101
Depreciation and amortization of
other intangibles............ 17 27 -- -- 44
---- ---- ---- ----- ------
488 743 -- (143) 1,088
---- ---- ---- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables..... -- (1) -- -- (1)
Other income (loss)............. 2 (3) -- -- (1)
---- ---- ---- ----- ------
2 (4) -- -- (2)
---- ---- ---- ----- ------
INCOME BEFORE INTEREST EXPENSE,
INCOME TAXES, MINORITY INTEREST,
AND EQUITY IN NET INCOME FROM
AFFILIATED COMPANIES............ 39 3 -- -- 42
Interest expense--
External (net of interest
capitalized)............... -- 1 33 -- 34
Affiliated companies (net of
interest income)........... 37 (3) (34) -- --
Income tax expense (benefit).... 4 2 12 (18) --
Minority interest............... -- 1 -- -- 1
---- ---- ---- ----- ------
(2) 2 (11) 18 7
Equity in net income (loss) from
affiliated companies......... 3 -- 18 (21) --
---- ---- ---- ----- ------
NET INCOME (LOSS)................. $ 1 $ 2 $ 7 $ (3) $ 7
==== ==== ==== ===== ======
24
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
BALANCE SHEET
MARCH 31, 2007
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents........ $ 1 $ 135 $ -- $ -- $ 136
Receivables, net................. 456 1,073 27 (757) 799
Inventories...................... 203 313 -- -- 516
Deferred income taxes............ 34 14 6 (1) 53
Prepayments and other............ 25 109 -- -- 134
------ ------ ------ -------- ------
719 1,644 33 (758) 1,638
------ ------ ------ -------- ------
Other assets:
Investment in affiliated
companies..................... 594 -- 1,101 (1,695) --
Notes and advances receivable
from affiliates............... 3,422 215 5,061 (8,698) --
Long-term notes receivable, net.. 2 23 -- -- 22
Goodwill......................... 136 68 -- -- 203
Intangibles, net................. 4 10 -- -- 14
Deferred income taxes............ 315 64 197 (197) 380
Other............................ 36 69 28 -- 134
------ ------ ------ -------- ------
4,509 449 6,387 (10,590) 753
------ ------ ------ -------- ------
Plant, property, and equipment, at
cost............................. 956 1,732 -- -- 2,688
Less--Reserves for depreciation
and amortization.............. 630 962 -- -- 1,592
------ ------ ------ -------- ------
326 770 -- -- 1,096
------ ------ ------ -------- ------
$5,554 $2,863 $6,420 $(11,348) $3,489
====== ====== ====== ======== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including
current maturities of long-
term debt)
Short-term debt--non-
affiliated.................. $ -- $ 26 $ 284 $ -- $ 310
Short-term debt--affiliated... 198 392 10 (600) --
Trade payables................... 362 743 -- (155) 950
Accrued taxes.................... 44 27 (15) (1) 55
Other............................ 132 113 30 (2) 273
------ ------ ------ -------- ------
736 1,301 309 (758) 1,588
Long-term debt--non-affiliated..... -- 10 1,133 -- 1,143
Long-term debt--affiliated......... 3,930 39 4,729 (8,698) --
Deferred income taxes.............. 195 92 -- (179) 108
Postretirement benefits and other
liabilities...................... 279 100 7 7 393
Commitments and contingencies
Minority interest.................. -- 30 -- -- 30
Shareholder's equity............... 414 1,291 242 (1,720) 228
------ ------ ------ -------- ------
$5,554 $2,863 $6,420 $(11,348) $3,489
====== ====== ====== ======== ======
25
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
BALANCE SHEET
DECEMBER 31, 2006
----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ -------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents........ $ 57 $ 146 $ (1) $ -- $ 202
Receivables, net................. 334 829 30 (589) 604
Inventories...................... 136 303 -- -- 439
Deferred income taxes............ 34 13 6 (1) 52
Prepayments and other............ 24 101 -- -- 125
------ ------ ------ -------- ------
585 1,392 35 (590) 1,422
------ ------ ------ -------- ------
Other assets:
Investment in affiliated
companies..................... 587 -- 1,097 (1,684) --
Notes and advances receivable
from affiliates............... 3,442 215 5,012 (8,669) --
Long-term notes receivable, net.. 2 27 (3) -- 26
Goodwill......................... 135 68 -- -- 203
Intangibles, net................. 1 9 (1) -- 9
Deferred income taxes............ 308 65 200 (197) 376
Other............................ 36 70 28 -- 134
------ ------ ------ -------- ------
4,511 454 6,333 (10,550) 748
------ ------ ------ -------- ------
Plant, property, and equipment, at
cost............................. 949 1,694 -- -- 2,643
Less--Accumulated depreciation
and amortization.............. 621 929 -- -- 1,550
------ ------ ------ -------- ------
328 765 -- -- 1,093
------ ------ ------ -------- ------
$5,424 $2,611 $6,368 $(11,140) $3,263
====== ====== ====== ======== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including
current maturities of long-
term debt)
Short-term debt--non-
affiliated.................. $ -- $ 26 $ 2 $ -- $ 28
Short-term debt--affiliated... 211 281 10 (502) --
Trade payables................... 249 618 (1) (84) 782
Accrued taxes.................... 16 33 1 (1) 49
Other............................ 122 116 39 (3) 274
------ ------ ------ -------- ------
598 1,074 51 (590) 1,133
Long-term debt-non-affiliated...... -- 10 1,340 -- 1,350
Long-term debt-affiliated.......... 3,872 49 4,748 (8,669) --
Deferred income taxes.............. 212 92 -- (197) 107
Postretirement benefits and other
liabilities...................... 300 109 8 7 424
Commitments and contingencies
Minority interest................ -- 28 -- -- 28
Shareholders' equity............... 442 1,249 221 (1,691) 221
------ ------ ------ -------- ------
$5,424 $2,611 $6,368 $(11,140) $3,263
====== ====== ====== ======== ======
26
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2007
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $ 23 $(34) $ (82) $ (2) $ (95)
---- ---- ----- ---- -----
INVESTING ACTIVITIES
Cash payments for plant, property,
and equipment..................... (15) (24) -- 1 (38)
Cash payments for software related
intangible assets................. (5) (2) -- -- (7)
Investments and other............... -- -- -- 1 1
---- ---- ----- ---- -----
Net cash used by investing
activities........................ (20) (26) -- 2 (44)
---- ---- ----- ---- -----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- 2 -- 2
Issuance of long-term debt.......... -- -- 150 -- 150
Debt issuance cost of long-term
debt.............................. -- -- (6) -- (6)
Retirement of long-term debt........ -- -- (357) -- (357)
Net increase (decrease) in revolver
borrowing and short-term debt
excluding current maturities of
long-term debt.................... -- 106 218 (44) 280
Intercompany dividends and net
increase (decrease) in
intercompany obligations.......... (59) (59) 74 44 --
Other............................... -- -- 1 -- 1
---- ---- ----- ---- -----
Net cash provided (used) by
financing activities.............. (59) 47 82 -- 70
---- ---- ----- ---- -----
Effect of foreign exchange rate
changes on cash and cash
equivalents....................... -- 3 -- -- 3
---- ---- ----- ---- -----
Increase (decrease) in cash and cash
equivalents....................... (56) (10) -- -- (66)
Cash and cash equivalents, January
1................................. 56 146 -- -- 202
---- ---- ----- ---- -----
Cash and cash equivalents, March 31
(Note)............................ $ -- $136 $ -- $ -- $ 136
==== ==== ===== ==== =====
NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
27
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $ 33 $ 10 $(68) $-- $(25)
---- ---- ---- --- ----
INVESTING ACTIVITIES
Cash payments for plant, property,
and equipment..................... (21) (15) -- -- (36)
Cash payments for software related
intangible assets................. (1) (2) -- -- (3)
Investments and other............... -- -- -- -- --
---- ---- ---- --- ----
Net cash used by investing
activities........................ (22) (17) -- -- (39)
---- ---- ---- --- ----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- 8 -- 8
Retirement of long-term debt........ -- (1) -- -- (1)
Net increase (decrease) in revolver
borrowing and short-term debt
excluding current maturities of
long-term debt.................... -- (3) 12 -- 9
Intercompany dividends and net
increase (decrease) in
intercompany obligations.......... (42) (6) 48 -- --
Other............................... -- -- -- -- --
---- ---- ---- --- ----
Net cash provided (used) by
financing activities.............. (42) (10) 68 -- 16
---- ---- ---- --- ----
Effect of foreign exchange rate
changes on cash and cash
equivalents....................... -- 3 -- -- 3
---- ---- ---- --- ----
Decrease in cash and cash
equivalents....................... (31) (14) -- -- (45)
Cash and cash equivalents, January
1................................. 31 110 -- -- 141
---- ---- ---- --- ----
Cash and cash equivalents, March 31
(Note)............................ $ -- $ 96 $ -- $-- $ 96
==== ==== ==== === ====
NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
28
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 designers and 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 35 different original equipment manufacturers, and our products or systems
are included on nine of the top 10 passenger car models produced for sale in
Europe and nine of the top 10 light truck and SUV models produced for sale in
North America for 2006. Our aftermarket customers are comprised of full-line and
specialty warehouse distributors, retailers, jobbers, installer chains and car
dealers. We operate more than 80 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 industry 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 first quarter of 2007 were $1,399 million, compared
to $1,132 million in the first quarter of 2006. Excluding the impact of currency
and substrate sales, revenue was up $87 million driven primarily by new launches
in North America. In addition to the benefit of the new launches, our geographic
balance and diverse customer base helped offset the overall North American
industry production decline.
Gross margin in the first quarter of 2007 was 15.7 percent, down 2.9
percentage points from 18.6 percent in 2006. Higher substrate sales, driven by
significant diesel platform launches in North America, which typically carry
lower margins, diluted gross margin. As these high volume new platforms
launched, we also saw our revenue mix shift from higher-margin aftermarket
revenues to OE revenues. Also impacting gross margin were increased steel and
other material costs, all of which more than offset savings and improved
efficiencies from Lean manufacturing, Six Sigma programs, cost recoveries and
other cost reduction initiatives.
We reported selling, general, administrative and engineering expenses in
the first three months of 2007 of 8.7 percent of revenues, as compared to 10.9
percent of revenues for the first three months of 2006. The improvement was due
to leveraging our higher value-added revenues and reducing our SG&A expenses,
despite higher investments in engineering.
Earnings before interest expense, taxes and minority interest ("EBIT") was
$50 million for the first quarter of 2007, up $8 million from the $42 million
reported in 2006. Increased volumes in Europe and Asia, benefits from the
company's ongoing manufacturing efficiency programs, favorable currency and
lower restructuring charges more than offset higher material costs and reduced
North American production volumes.
During the first quarter, our Valencia, Spain facility was awarded the Ford
Motor Company's Silver World Excellence Award for quality, cost and delivery
leadership in supplying emission control systems. In addition, we also won the
Automotive News PACE award for leading design capabilities for our emission
control predictive development process.
29
RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NET SALES AND OPERATING REVENUES
The following tables reflect our revenues for the years of 2007 and 2006.
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. We have not
reflected any currency impact in the 2006 table since this is the base period
for measuring the effects of currency during 2007 on our operations. We believe
investors find this information useful in understanding period-to-period
comparisons in our revenues.
Additionally, we show the component of our revenue represented by substrate
sales (previously referred to as "pass-through" catalytic converter sales) in
the following table. While we generally have primary design, engineering and
manufacturing responsibility for OE emission control systems, we do not
manufacture substrates. Substrates are porous ceramic filters coated with a
catalyst -- precious metals such as platinum, palladium and rhodium. These are
supplied to us by Tier 2 suppliers and directed by our OE customers. We
generally earn a small margin on these components of the system. As the need for
more sophisticated emission control solutions increases to meet more stringent
environmental regulations, and as we capture more diesel after treatment
business, these substrate components have been increasing as a percentage of our
revenue. While these substrates dilute our gross margin percentage they are a
necessary component of an emission control system. We view the growth of
substrates as a key indicator that our value add content in an emission control
system is moving toward the higher technology hot-end gas and diesel business.
Our value-add content in an emission control system includes designing the
system to meet environmental regulations through integration of the substrates
into the system, maximizing use of thermal energy to heat up the catalyst
quickly, efficiently managing airflow to reduce back pressure as the exhaust
stream moves past the catalyst, managing the expansion and contraction of the
emission control system components due to temperature extremes experienced by an
emission control system, using advanced acoustic engineering tools to design the
desired exhaust sound, minimizing the opportunity for the fragile components of
the substrate to be damaged when we integrate it into the emission control
system and reducing unwanted noise, vibration and harshness transmitted through
the emission control system.
We present these substrate sales separately in the following table because
we believe investors utilize this information to understand the impact of this
portion of our revenues on our overall business and because it removes the
impact of potentially volatile precious metals pricing from our revenues. While,
generally, our original equipment customers assume the risk of precious metals
pricing volatility, it impacts our reported revenues. Excluding "substrate"
catalytic converter and diesel particulate filters sales removes this impact.
30
THREE MONTHS ENDED MARCH 31, 2007
----------------------------------------------------------
SUBSTRATE REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY SUBSTRATE
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control........................ $ 133 $-- $ 133 $ -- $ 133
Emission Control.................... 376 -- 376 166 210
------ --- ------ ---- ------
Total North America Original
Equipment...................... 509 -- 509 166 343
North America Aftermarket
Ride Control........................ 98 -- 98 -- 98
Emission Control.................... 36 -- 36 -- 36
------ --- ------ ---- ------
Total North America Aftermarket.. 134 -- 134 -- 134
Total North America............ 643 -- 643 166 477
Europe Original Equipment
Ride Control........................ 107 10 97 -- 97
Emission Control.................... 387 29 358 122 236
------ --- ------ ---- ------
Total Europe Original Equipment.. 494 39 455 122 333
Europe Aftermarket
Ride Control........................ 39 2 37 -- 37
Emission Control.................... 40 4 36 -- 36
------ --- ------ ---- ------
Total Europe Aftermarket......... 79 6 73 -- 73
South America & India................. 70 1 69 8 61
Total Europe, South America &
India.......................... 643 46 597 130 467
Asia.................................. 70 -- 70 26 44
Australia............................. 43 3 40 5 35
------ --- ------ ---- ------
Total Asia Pacific............... 113 3 110 31 79
------ --- ------ ---- ------
Total Tenneco......................... $1,399 $49 $1,350 $327 $1,023
====== === ====== ==== ======
31
THREE MONTHS ENDED MARCH 31, 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........................ $ 131 $-- $ 131 $ -- $131
Emission Control.................... 243 -- 243 66 177
------ --- ------ ---- ----
Total North America Original
Equipment...................... 374 -- 374 66 308
North America Aftermarket
Ride Control........................ 101 -- 101 -- 101
Emission Control.................... 40 -- 40 -- 40
------ --- ------ ---- ----
Total North America Aftermarket.. 141 -- 141 -- 141
Total North America............ 515 -- 515 66 449
Europe Original Equipment
Ride Control........................ 95 -- 95 -- 95
Emission Control.................... 292 -- 292 102 190
------ --- ------ ---- ----
Total Europe Original Equipment.. 387 -- 387 102 285
Europe Aftermarket
Ride Control........................ 36 -- 36 -- 36
Emission Control.................... 39 -- 39 -- 39
------ --- ------ ---- ----
Total Europe Aftermarket......... 75 -- 75 -- 75
South America & India................. 65 -- 65 7 58
Total Europe, South America &
India....................... 527 -- 527 109 418
Asia.................................. 50 -- 50 17 33
Australia............................. 40 -- 40 4 36
------ --- ------ ---- ----
Total Asia Pacific............. 90 -- 90 21 69
------ --- ------ ---- ----
Total Tenneco......................... $1,132 $-- $1,132 $196 $936
====== === ====== ==== ====
Revenues from our North American operations increased $128 million in the
first quarter of 2007 compared to the same period last year. Higher sales from
North American OE revenues more than offset lower aftermarket revenues. North
American OE emission control revenues were up $133 million in the first quarter
of 2007; excluding substrate sales, revenues were up $33 million compared to
last year. This increase was primarily due to significant new OE platform
launches which included the Ford Superduty gas and diesel pick up trucks, GM's
light duty trucks and vans with the Duramax diesel engines, the International
Truck and Engine medium duty diesel platform, Toyota's Tundra gasoline pick-up
truck and the Dodge Ram three-quarter ton diesel truck. North American OE ride
control revenues for the first quarter of 2007 were up $2 million from the prior
year. Increased ride-control content on the GMT900 platform more than offset
lower heavy duty and commercial volumes. Our total North American OE revenues,
excluding substrate sales and currency, increased 12 percent in the first
quarter of 2007 compared to first quarter of 2006 despite the North American
light vehicle production rate decrease of eight percent. Aftermarket revenues
for North America were $134 million in the first quarter of 2007, a decrease of
$7 million compared to the prior year, driven by lower sales in both product
lines due to soft market conditions. Aftermarket ride control revenues decreased
two percent in the first quarter of 2007 while aftermarket emission control
revenues decreased 11 percent in the first quarter of 2007.
Our European, South American and Indian segment's revenues increased $116
million, or 22 percent, in the first quarter of 2007 compared to last year. The
first quarter total European light vehicle industry production increased four
percent from the first quarter of 2006. Europe OE emission control revenues of
$387 million in the
32
first quarter of 2007 were up 32 percent as compared to the first quarter of
last year. Excluding a $20 million increase in substrate sales and $29 million
due to the impact of currency, Europe OE emission control revenues increased 24
percent over 2006, due to a growing position on the hot-end of exhaust platforms
and new launches of the BMW 5-Series and Mini and the DaimlerChrysler's Smart.
In addition, higher volumes on the BMW 1 and 3 Series, Mercedes E-class and
Sprinter, the Nissan Pathfinder and Navara and Volvo's S80, C30 and C70 drove
the improvement. Europe OE ride control revenues of $107 million in the first
quarter of 2007 were up 13 percent year-over-year. Excluding currency, revenues
increased by three percent in the 2007 first quarter due to improved volumes on
the Ford Focus and the Audi A6 for both conventional and electronic shocks, and
the Ford Galaxy and Mondeo for electronic shocks. European aftermarket revenues
increased $4 million in the first quarter of 2007 compared to last year. When
adjusted for currency, aftermarket revenues were down three percent. Excluding
the $2 million impact of currency, ride control aftermarket revenues were up two
percent due to strong volumes and improved pricing. Emission control aftermarket
revenues were down seven percent, excluding $4 million in currency benefit, due
to lower volumes which more than offset improved pricing. South American and
Indian revenues were $70 million during the first quarter of 2007, compared to
$65 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 $23 million to $113 million in the first quarter of 2007 compared to
the same period last year. Excluding the impact of substrate sales and currency,
revenues increased to $79 million from $69 million in the prior year. Asian
revenues for the first quarter of 2007 were $70 million, up 39 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 existing platforms. First
quarter revenues for Australia increased six percent to $43 million. Excluding
higher substrate sales and favorable currency of $3 million, Australian revenue
was down $1 million due to lower volumes.
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST ("EBIT")
THREE
MONTHS
ENDED
MARCH 31,
-----------
2007 2006 CHANGE
---- ---- ------
(MILLIONS)
North America................................................ $29 $34 $(5)
Europe, South America & India................................ 15 8 7
Asia Pacific................................................. 6 -- 6
--- --- ---
$50 $42 $ 8
=== === ===
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
MARCH 31,
-------------
2007 2006
---- ----
(MILLIONS)
North America
Restructuring and restructuring-related expenses................ $ 1 $3
Europe, South America & India
Restructuring and restructuring-related expenses................ 1 1
Asia Pacific
Restructuring and restructuring-related expenses................ -- 2
EBIT for North American operations decreased to $29 million in the first
quarter of 2007, from $34 million one year ago. The benefits from our new
platform launches were more than offset by lower OE industry volumes, higher
steel costs of $8 million, incremental costs of $2 million due to the new
launches, increased spending on engineering of $4 million and a softer
aftermarket. These decreases were partially offset by lower selling, general,
and
33
administrative expenses of $3 million and manufacturing efficiencies driven by
Lean and Six Sigma of $6 million. Included in North America's first quarter 2007
EBIT was $1 million in restructuring and restructuring-related expenses compared
to $3 million in the first quarter of 2006.
Our European, South American and Indian segment's EBIT was $15 million for
the first quarter of 2007 compared to $8 million during the same period last
year. Higher European OE volumes on existing business, new platform launches,
favorable currency of $2 million and manufacturing efficiencies of $4 million
gained through Lean manufacturing and Six Sigma programs drove the improvement.
These increases were partially offset by higher material costs. Restructuring
and restructuring-related expenses of $1 million were included in first quarter
EBIT for both periods.
EBIT for our Asia Pacific segment in the first quarter of 2007 was $6
million compared to break-even in the first quarter of 2006. Volume increases in
China improved EBIT by $2 million. In Australia, light vehicle production was
flat year over year, but primarily due to our 2006 restructuring activities to
reduce headcount, EBIT for Australia improved $4 million, including $1 million
of favorable currency. Included in the first 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 March 31, 2007, as compared to the prior year.
EBIT AS A PERCENTAGE OF REVENUE
THREE MONTHS
ENDED
MARCH 31,
-------------
2007 2006
---- ----
North America..................................................... 4% 7%
Europe, South America & India..................................... 2% 2%
Asia Pacific...................................................... 5% 0%
Total Tenneco................................................... 4% 4%
In North America, EBIT as a percentage of revenue for the first quarter of
2007 was three percentage points less than last year. The benefits from our new
platform launches, lower selling, general, and administrative expenses and
manufacturing efficiencies were more than offset by lower OE industry volumes,
higher material costs, incremental costs due to the new launches, increased
investments in engineering and soft aftermarket conditions. During the first
quarter of 2007, North American results included lower restructuring and
restructuring-related charges. In Europe, South America and India, EBIT margin
for the first quarter of 2007 was even with prior year. Higher European OE
volumes on existing business, new platform launches, favorable currency and
manufacturing efficiencies were partially offset by higher material costs.
Restructuring and restructuring-related expenses were the same as prior year.
EBIT as a percentage of revenue for our Asia Pacific segment increased five
percentage points in the first quarter of 2007 versus the prior year. Volume
increases in China, favorable currency and benefits from last year's
restructuring activities drove the improvement. Lower restructuring and
restructuring-related expenses also benefited EBIT margin.
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $42 million in the first quarter of 2007
compared to $34 million in the prior year. Included in the first quarter of 2007
results was a $5 million charge to expense the unamortized portion of debt
issuance costs related to our previous senior credit facility due to our debt
refinancing in the first quarter of 2007. Interest expense also rose as a result
of higher LIBOR rates on the variable interest rate portion of our debt and
increased borrowings year-over-year.
We have three fixed-to-floating interest rate swaps covering $150 million
of our 10.25 percent senior secured notes at an annual rate of LIBOR plus 5.68
percent. Based upon the current LIBOR rate of 5.38 percent (which is in effect
until July 15, 2007) these swaps are expected to increase our interest expense
by $2 million in 2007 above what it otherwise would have been. Since entering
into these swaps, we have realized a net cumulative benefit of $3 million. On
March 31, 2007, we had $997 million in long-term debt obligations that have
fixed interest rates. Of
34
that amount, $475 million is fixed through July 2013 and $500 million through
November 2014, while the remainder is fixed from 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 $431
million in long-term debt obligations outstanding under our senior secured
credit facility that are subject to variable interest rates. See Note 3.
INCOME TAXES
We reported income tax expense of $3 million in the first quarter of 2007.
The effective tax rate for the first quarter of 2007 was 33 percent. We did not
have any income tax expense in the first quarter of 2006 after recording a $3
million tax benefit primarily related to the resolution of certain tax issues
with former affiliates.
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.
Our recent restructuring activities began in the fourth quarter of 2001,
when our Board of Directors approved a restructuring plan, a project known as
Project Genesis, which was designed to lower our fixed costs, relocate capacity,
reduce our work force, improve efficiency and utilization, and better optimize
our global footprint. We have undertaken various other restructuring projects
related to Project Genesis since then. We incurred $27 million in restructuring
and restructuring-related costs during 2006, of which $23 million was recorded
in cost of sales and $4 million was recorded in selling, general and
administrative expense. In the first quarter of 2007, we incurred $2 million
restructuring and restructuring-related costs of which $1 million was recorded
in cost of sales and $1 million in selling, general and administrative expense.
Since Project Genesis was initiated, we have incurred costs of $132 million
through March 31, 2007. The current annual savings rate for completed projects
has grown to $88 million. When all actions are complete, we expect an additional
$16 million of annual savings.
Under the terms of our amended and restated senior credit agreement that
took effect on March 16, 2007, we are allowed to exclude $80 million of cash
charges and expenses, before taxes, related to cost reduction initiatives
initiated after March 16, 2007 from the calculation of the financial covenant
ratios required under our senior credit facility. As of March 31, 2007, we have
not excluded any allowable charges relating to restructuring initiatives against
the $80 million available under the terms of the March 2007 amendment to the
senior credit facility.
In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will initiate actions that will
reduce our costs through implementing the most appropriate and efficient
logistics, distribution and manufacturing footprint for the future. 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.
EARNINGS PER SHARE
We reported net income of $3 million or $0.07 per diluted common share for
the first quarter of 2007, as compared to net income of $7 million or $0.14 per
diluted common share for the first quarter of 2006. Included in the results for
the first quarter of 2007 were negative impacts from expenses related to our
restructuring activities. The net impact of these items decreased earnings per
diluted share by $0.03. Included in the results for the first 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 $0.09. Please
read the Notes to the consolidated financial statements for more detailed
information on earnings per share.
35
OUTLOOK
We believe that for the second quarter and the remainder of the year, based
on current production schedules, the new platforms we launched in the first
quarter will reach our customers' target production rates. Also, we anticipate
completing negotiations for steel price recovery with our OE customers over the
next few months that should help mitigate, in part, the impact of recent steel
price increases. In addition, we will continue to focus globally on increasing
productivity and cost improvements through Six Sigma, Lean manufacturing and
restructuring activities.
Current industry production estimates for the second quarter are that North
American light vehicle production levels will be down three percent year-over-
year, primarily in the passenger car segment. European production levels are
estimated to remain flat with last year while China's production levels are
estimated to be up significantly compared to last year.
For the second half of the year, industry projections show production
volumes improving in North America, Europe and China. We expect continued
revenue growth from our emission control truck business as the ramp-up on these
major platforms accelerates. We also expect the European segment and China
operations will continue to perform well.
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
THREE
MONTHS
ENDED
MARCH 31,
-----------
2007 2006
---- ----
(MILLIONS)
Cash provided (used) by:
Operating activities............................................ $(95) $(25)
Investing activities............................................ (44) (39)
Financing activities............................................ 70 16
Operating Activities
For the three months ended March 31, 2007, operating activities used $95
million in cash compared to $25 million in cash used during the same period last
year. For the three months ended March 31, 2007, cash used for working capital
was $144 million versus $82 million for the three months ended March 31, 2006
because of working capital needs for new business launches. Receivables were a
use of cash of $198 million compared to a cash use of $82 million in the prior
year. Inventory represented a cash outflow of $74 million during the three
months ended March 31, 2007, an increase of $47 million over the prior year. The
year-over-year increase in the use of cash for both accounts receivable and
inventory was primarily a result of working capital requirements for our new
platform launches in North America. In addition to the higher level of
receivables related to the revenue increase, we must carry higher inventory
levels for these new platforms, a portion of which relates to higher value
substrates sourced from South Africa. This inventory in transit from South
Africa to the U.S. increased our cash outflow from operating activities during
the first quarter of 2007 by $41 million. Accounts payable provided cash of $150
million, an increase from last year's cash inflow of $65 million. This increase
also primarily resulted from the working capital need for our new platform
launches in North America. Cash taxes were $8 million for the three months ended
March 31, 2007, compared to a net zero amount in the prior year.
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 are not sold are classified as other
current assets as they do not meet our definition of cash equivalents. The
amount of these financial instruments that was collected before their maturity
date totaled $27 million for the three months ended March 31, 2007, compared
with $26 million for the same period in 2006.
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
36
vendor payables and not redeemed totaled $11 million and $4 million at March 31,
2007 and 2006, respectively, and were classified as notes payable. Financial
instruments received from OE customers and not redeemed totaled $5 million and
$8 million at March 31, 2007 and 2006, respectively, and were classified as
other current assets. One of our Chinese subsidiaries is required to maintain a
cash balance at a financial institution issuing the financial instruments which
are used to satisfy vendor payments. The balance totaled approximately $1
million at both March 31, 2007 and 2006, respectively, and was classified as
cash and cash equivalents.
Investing Activities
Cash used for investing activities was $5 million higher in the first
quarter of 2007 compared to the same period a year ago. Cash payments for plant,
property and equipment were $38 million in the first quarter of 2007 versus
payments of $36 million in the first quarter of 2006. The increase of $2 million
in cash payments for plant, property and equipment was primarily due to the
timing of investment in OE customer platform launches. See Reclassifications in
Note 1 in Item 1 "Financial Statements (Unaudited)" for further information.
Cash payments for software-related intangible assets were $7 million in the
first three months of 2007 compared to $3 million in the first three months of
2006.
Financing Activities
Cash flow from financing activities was a $70 million inflow in the first
quarter of 2007 compared to an inflow of $16 million in the same period of 2006.
The primary reason for the change is attributable to an increase in borrowings
of $73 million partially offset by debt issuance costs due to our debt
refinancing in the first quarter of 2007.
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing our
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required.
Revenue Recognition
We recognize revenue for sales to our original equipment and aftermarket
customers when title and risk of loss passes to the customers under the terms of
our arrangements with those customers, which is usually at the time of shipment
from our plants or distribution centers. In connection with the sale of exhaust
systems to certain original equipment manufacturers, we purchase catalytic
converters or components thereof 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 $339 million, and
$196 million for the first quarter of 2007 and 2006, 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.
37
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 March 31, 2007, we had
approximately $21 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 carryforward ("NOL") as of
December 31, 2006, of $634 million, which will expire in varying amounts from
2018 to 2026. The federal tax effect of that NOL is $222 million, and is
recorded as a deferred tax asset on our balance sheet as of December 31, 2006.
We also have state NOL carryforwards of $585 million, which will expire in
various years through 2026. The tax effect of the state NOL, net of a valuation
allowance, is $29 million and is recorded as a deferred tax asset on our balance
sheet as of December 31, 2006. In the quarter ended March 31, 2007, we have a
loss for U.S. Federal tax of $22 million for which we recorded an additional $8
million of deferred tax asset. 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
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. As of March 31, 2007, there is approximately $5 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 1.6 years as
compared to $4 million, net of tax and a weighted average period of 1.7 years as
of March 31, 2006.
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
38
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 2007 we raised the weighted average discount rate for all of our
pension plans to 5.6 percent, from 5.5 percent. The discount rate for
postretirement benefits was raised from approximately 5.9 percent for 2006 to
approximately 6.0 percent for 2007.
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 left
unchanged at 8.2 percent for 2007.
Except in the U.K., our pension plans generally 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 March 31, 2007, all legal funding requirements had been
met. Other postretirement benefit obligations, such as retiree medical, and
certain foreign pension plans are not funded.
Effective December 31, 2006, we froze future accruals under our defined
benefit plans for substantially all U.S. salaried and non-union hourly employees
and replaced these benefits with additional contributions under our defined
contribution plans. We estimate that these changes will save about $11 million
in earnings before taxes annually, starting January 1, 2007.
CHANGES IN ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (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 is 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 actuarial losses experienced by
the plans will be recorded in the Accumulated Other Comprehensive Loss section
of shareholders' equity on the balance sheet. The initial adoption as of
December 31, 2006 resulted in a reduction of Accumulated Other Comprehensive
Loss in shareholders' equity of $59 million.
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. Effective January 1, 2007, Tenneco
elected to early adopt the measurement date provision of SFAS No. 158. See Note
10. Adoption of this part of the statement was not material to our financial
position and results of operations.
39
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, which hereby added Section N to Topic 1, "Financial
Statements", of the Staff Accounting Bulletin Series. Section N provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. The bulletin is effective for an interim period of the first fiscal
year ending after November 15, 2006. The adoption of this bulletin did not have
a material impact to our financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." The statement permits companies to
choose to measure at fair value many financial instruments and certain other
items that are not currently required to be measured at fair value. SFAS No. 159
is effective for financial statements issued for fiscal years beginning on or
after November 15, 2007. We do not believe the statement will have a material
effect on our financial statements and related disclosures.
LIQUIDITY AND CAPITAL RESOURCES
CAPITALIZATION
MARCH 31, DECEMBER 31,
2007 2006 % CHANGE
--------- ------------ --------
(MILLIONS)
Short-term debt and current maturities.............. $ 29 $ 28 4%
Long-term debt...................................... 1,424 1,350 5
------ ------
Total debt.......................................... 1,453 1,378 5
------ ------
Total minority interest............................. 29 28 4
Shareholders' equity................................ 245 221 11
------ ------
Total capitalization................................ $1,727 $1,627 6
====== ======
General. Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries, was $29 million. Borrowings
under our revolving credit facilities were approximately $281 million and $12
million as of March 31, 2007 and 2006, respectively. The overall increase in
long-term debt resulted from increased working capital levels, offset by
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
$12 million related to the translation of foreign balances into U.S. dollars. In
addition our net income, the implementation of the measurement date provision of
SFAS No. 158 and other transactions contributed $12 million to shareholders'
equity. While our book equity balance was small at March 31, 2007, 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.
In March of 2007 we refinanced our $831 million senior credit facility.
This transaction reduced the interest rates we pay on all portions of the
facility. While the total amount of the new senior credit facility is $830
million, approximately the same as the previous facility, we changed the
components of the facility to enhance our financial flexibility. We increased
the amount of commitments under our revolving loan facility from $320 million to
$550 million, reduced the amount of commitments under our tranche B-1 letter of
credit/revolving loan facility from $155 million to $130 million and replaced
the $356 million term loan B with a $150 million term loan A. As of March 31,
2007, the senior credit facility consisted of a five-year, $150 million term
loan A maturing in March 2012, a five-year, $550 million revolving credit
facility maturing in March 2012, and a seven-year $130 million tranche B-1
letter of credit/revolving loan facility maturing in March 2014.
40
The refinancing of the prior facility allowed us to: (i) amend the
consolidated net debt to EBITDA ratio from 3.75 to 4.25, (ii) eliminate the
fixed charge coverage ratio, (iii) eliminate the restriction on capital
expenditures, (iv) increase the amount of acquisitions permitted to $250
million, (v) improve the flexibility to repurchase and retire higher cost junior
debt, (vi) increase our ability to enter into capital leases, (vii) increase the
ability of our foreign subsidiaries to incur debt, (viii) increase our ability
to pay dividends and repurchase common stock, (ix) increase our ability to
invest in joint ventures, (x) allow for the increase in the existing tranche B-1
facility and/or the term loan A or the addition of a new term loan of up to $275
million in order to reduce our 10.25 percent senior secured notes, and (xi)
other modifications.
Following the refinancing, the term loan A facility is payable in twelve
consecutive quarterly installments, commencing June 30, 2009 as follows: $5.625
million due each of June 30, September 30, December 31, 2009 and March 31, 2010,
$15 million due each of June 30, September 30, December 31, 2010 and March 31,
2011, and $16.875 million due each of June 30, September 30, December 31, 2011
and March 16, 2012. The revolving credit facility requires that any amounts
drawn, be repaid by March 2012. 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 March 2014. We can borrow revolving loans and issue letters of
credit under the $130 million tranche B-1 letter of credit/revolving loan
facility. The tranche B-1 letter of credit/revolving loan facility lenders have
deposited $130 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 $130 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).
We have three fixed-to-floating interest rate swaps covering $150 million
of our 10.25 percent senior secured notes at an annual rate of LIBOR plus 5.68
percent. Based upon the current LIBOR rate of 5.38 percent (which is in effect
until July 15, 2007) the inclusion of these swaps in our financial results is
expected to add $2 million to our 2007 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 March 31, 2007, the fair value of
the interest rate swaps was a liability of $5 million recorded as a decrease to
long-term debt and an increase to other long-term liabilities. See Note (3).
Senior Credit Facility -- Forms of Credit Provided. Following the March
2007 refinancing, the term loan A facility is payable in twelve consecutive
quarterly installments, commencing June 30, 2009 as follows: $6 million due each
of June 30, September 30, December 31, 2009 and March 31, 2010, $15 million due
each of June 30, September 30, December 31, 2010 and March 31, 2011, and $17
million due each of June 30, September 30, December 31, 2011 and March 16, 2012.
The revolving credit facility requires that if any amounts are drawn, they be
repaid by March 2012. 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 March 2014. We can borrow revolving loans from the $130 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 $130 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 $130 million on deposit with the administrative agent.
When we make repayments, the repayments are redeposited with the administrative
agent.
41
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. Prior to the March 2007
refinancing 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; 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. As of March 31, 2007 borrowings under the term loan A 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 150 basis points; 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 50 basis points. The interest margin for borrowings
under the term loan A are subject to adjustment based on the consolidated net
leverage ratio (consolidated indebtedness net of cash divided by consolidated
EBITDA as defined in the senior credit facility agreement). The margin we pay on
the term loan A is reduced by 25 basis points following each fiscal quarter for
which the consolidated net leverage ratio is less than 2.5 and will increase by
25 basis points should our consolidated leverage ratio exceed 3.5 beginning in
March 2007. 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 150
basis points. 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.
Prior to the March 2007 refinancing 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; 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, plus a margin of 175 basis points. As of March 31,
2007 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 150 basis points; 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 50 basis points. Letters of credit issued under the revolving credit
facility accrue a letter of credit fee at a per annum rate of 150 basis points
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. We also pay a commitment fee of
35 basis points on the unused portion of the revolving credit facility. The
interest margins for borrowings and letters of credit issued under the revolving
credit facility are subject to adjustment based on the consolidated net leverage
ratio (consolidated indebtedness net of cash 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 will be reduced by
25 basis points and the commitment fee we pay on the revolving credit facility
will be reduced by 5 basis points following each fiscal quarter for which the
consolidated net leverage ratio is less than 2.5 while the margin will increase
by 25 basis points and the commitment fee will increase by 2.5 basis points
following each fiscal quarter for which our consolidated net leverage ratio is
greater than 3.5 beginning in March 2007.
42
Senior Credit Facility -- Other Terms and Conditions. As described above,
we are highly leveraged. Our refinanced senior credit facility requires that we
maintain financial ratios equal to or better than the following consolidated net
leverage ratio (consolidated indebtedness net of cash divided by consolidated
EBITDA, as defined in the senior credit facility agreement), and consolidated
interest coverage ratio (consolidated EBITDA divided by consolidated interest
expense, as defined under the senior credit facility agreement) 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 and restated senior credit facility
and, the actual ratios we achieved for the first quarter of 2007, are shown in
the following tables:
QUARTER ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2007 2007 2007 2007
----------- -------- ------------- ------------
REQ. ACT. REQ. REQ. REQ.
---- ---- -------- ------------- ------------
Leverage Ratio (maximum).................. 4.25 3.26 4.25 4.25 4.25
Interest Coverage Ratio (minimum)......... 2.10 3.05 2.10 2.10 2.10
2008 2009 2010 2011 2012
REQ. REQ. REQ. REQ. REQ.
---- ---- ---- ---- ----
Leverage Ratio (maximum)............................ 4.00 3.75 3.50 3.50 3.50
Interest Coverage Ratio (minimum)................... 2.10 2.25 2.40 2.55 2.75
The senior credit facility agreement provides the ability to purchase our
senior subordinated notes and/or our senior secured notes in an amount equal to
the sum of (i) the net cash proceeds of equity issued after the closing date
plus (ii) the portion of annual excess cash flow (as defined in the senior
credit facility agreement) that is not required to be applied to the payment of
the credit facilities and which is not used for other purposes, provided that
the amount of the subordinated notes and the aggregate amount of the senior
secured notes and the subordinated notes that may be refinanced is capped based
on the pro forma consolidated leverage ratio after giving effect to such
refinancing as shown in the following table:
AGGREGATE SENIOR SECURED
PRO FORMA CONSOLIDATED SUBORDINATED NOTES AND SUBORDINATED NOTES
LEVERAGE RATIO MAXIMUM AMOUNT MAXIMUM AMOUNT
---------------------- ------------------ ------------------------
Greater than or equal to 3.0x $ 50 million $150 million
Greater than or equal to 2.5x $100 million $300 million
Less than 2.5x $125 million $375 million
In addition, the senior secured notes may be refinanced with (i) the net
cash proceeds of incremental facilities and permitted refinancing indebtedness
(as defined in the senior credit facility agreement), (ii) the net cash proceeds
of any new senior or subordinated unsecured indebtedness, (iii) proceeds of
revolving credit loans (as defined in the senior credit facility agreement),
(iv) up to $200 million of unsecured indebtedness of the company's foreign
subsidiaries and (v) cash generated by the company's operations.
The refinanced 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
agreement); (iii) liquidations and dissolutions; (iv) incurring additional
indebtedness or guarantees; (v) investments and acquisitions; (vi) dividends and
share repurchases; (vii) mergers and consolidations; and (viii) refinancing of
subordinated and 10.25 percent senior secured notes. 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 March 31, 2007, 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 10.25 percent senior secured notes due July 15, 2013, in
addition to $500 million of 8 5/8 percent senior subordinated notes due
43
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 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 March 31, 2007, 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 $94 million and $95 million at March 31, 2007 and 2006, 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 2007,
this program was renewed for 364 days to January 28, 2008 at a facility size of
$100 million. We also sell some receivables in our European operations to
regional banks in Europe. At March 31, 2007, we sold $51 million of accounts
receivable in Europe down from $52 million at March 31, 2006. 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.
44
CONTRACTUAL OBLIGATIONS
Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments as of March 31, 2007, are
shown in the following table:
PAYMENTS DUE IN:
--------------------------------------------------
BEYOND
2007 2008 2009 2010 2011 2011 TOTAL
---- ---- ---- ---- ---- ------ ------
(MILLIONS)
Obligations:
Revolver borrowings................. $ -- $ -- $ -- $ -- $ -- $ 281 $ 281
Senior long-term debt............... -- -- 17 50 66 17 150
Long-term notes..................... 1 2 -- -- -- 471 474
Capital leases...................... 2 3 3 3 -- -- 11
Subordinated long-term debt......... -- -- -- -- -- 500 500
Other subsidiary debt............... 1 -- -- -- -- 2 3
Short-term debt..................... 22 -- -- -- -- -- 22
---- ---- ---- ---- ---- ------ ------
Debt and capital lease obligations.... 26 5 20 53 66 1,271 1,441
Operating leases...................... 13 13 10 7 6 4 53
Interest payments..................... 78 112 112 112 103 204 721
Capital commitments................... 32 -- -- -- -- -- 32
---- ---- ---- ---- ---- ------ ------
Total Payments........................ $149 $130 $142 $172 $175 $1,479 $2,247
==== ==== ==== ==== ==== ====== ======
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
150 basis points plus LIBOR of 5.32 percent which was the rate at March 31,
2007. 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 March 31,
2007 to complete the facilities and projects authorized at December 31, 2006, 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 $38 million to those plans in 2007, of which
approximately $8 million has been contributed as of March 31, 2007. Pension and
postretirement contributions beyond 2007 will be required but
45
those amounts will vary based upon many factors, including the performance of
our pension fund investments during 2007. 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 March 31, 2007 and 2006. 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 13 where we present the Supplemental Guarantor
Condensed Consolidating Financial Statements.
We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed $18 million in letters of
credit to support some of our subsidiaries' insurance arrangements. In addition,
we have issued $6 million in guarantees through letters of credit to guarantee
other obligations of subsidiaries primarily related to environmental remediation
activities.
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.
We have three fixed-to-floating interest rate swaps covering $150 million
of our 10.25 percent senior secured notes at an annual rate of LIBOR plus 5.68
percent. Based upon the current LIBOR rate of 5.38 percent (which is in effect
until July 15, 2007) these swaps are expected to increase our interest expense
by $2 million in 2007 above what it otherwise would have been. Since entering
into these swaps, we have realized a net cumulative benefit of $3 million. On
March 31, 2007, we had $997 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 from 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 $431 million in long-term debt obligations outstanding
under our senior secured credit facility that are subject to variable interest
rates. See Note 3.
We estimate that the fair value of our long-term debt at March 31, 2007 was
about 106 percent of its book value. A one percentage point increase or decrease
in interest rates would increase or decrease the annual interest expense we
recognize in the income statement and the cash we pay for interest expense by
about $3 million after tax, excluding the effect of the interest rate swaps we
completed in April 2004. A one percentage point increase or decrease in interest
rates on the swaps we completed in April 2004 would increase or decrease the
annual interest expense we recognize in the income statement and the cash we pay
for interest expense by approximately $1 million after tax.
46
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 March 31, 2007, 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 at these facilities to be approximately $8
million. For the Superfund site and the current and former facilities, we have
established reserves that we believe are adequate for these costs. Although we
believe our estimates of remediation costs are reasonable and are based on the
latest available information, the cleanup costs are estimates and are subject to
revision as more information becomes available about the extent of remediation
required. At some sites, we expect that other parties will contribute to the
remediation costs. In addition, at the Superfund site, the Comprehensive
Environmental Response, Compensation and Liability Act provides that our
liability could be joint and several, meaning that we could be required to pay
in excess of our share of remediation costs. Our understanding of the financial
strength of other potentially responsible parties at the Superfund site, and of
other liable parties at our current and former facilities, has been considered,
where appropriate, in our determination of our estimated liability.
We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund site, or as a liable party at our
current or former facilities, will not be material to our results of operations
or consolidated financial position.
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. 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
47
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. 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
are making additional contributions to the Employee Stock Ownership Plans. We
recorded expense for these matching contributions of approximately $3 million
for the three months ended March 31, 2007 as compared to $2 million for the
three months ended March 31, 2006. All contributions vest immediately.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to interest rate risk, see the
caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations," which is
incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. As of
December 31, 2006 we reported a material weakness in our internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)
based upon our evaluation pursuant to Section 404 of the Sarbanes-Oxley Act of
2002. Due to the nature of the material weakness, remediation will not be
completed until the annual tax processes are performed during the 2007 year end
close. Based upon the March 31, 2007 evaluation, we have concluded that our
disclosure controls and procedures were not effective for the reasons more fully
described below related to the unremediated material weakness. To address this
control weakness, we performed additional analysis and performed other
procedures in order to prepare the unaudited quarterly consolidated financial
statements in accordance with generally accepted accounting principles in the
United States of America. Accordingly, we believe that the consolidated
financial statements included in this Quarterly Report on Form 10-Q fairly
present, in all material respects, our financial condition, results of
operations and cash flows for the periods presented.
INTERNAL CONTROLS SURROUNDING THE ACCOUNTING FOR INCOME TAXES
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management identified a material weakness in our internal control
over financial reporting as of December 31, 2006, related to our accounting for
income taxes including income taxes payable, deferred income tax assets and
liabilities and the related income tax provision. Specifically, we did not
maintain effective controls over the accuracy and completeness of the components
of the income tax provision calculation and related deferred income taxes and
income taxes payable, and over the monitoring of the differences between the
income tax basis
48
and the financial reporting basis of assets and liabilities to effectively
reconcile the differences to the reported deferred income tax balances. This
control deficiency resulted in adjustments to the tax accounts for our financial
statements as of December 31, 2006. While the errors identified largely offset
each other, our internal controls did not operate effectively to detect errors
that could have been, individually or in the aggregate, material.
REMEDIATION PLAN FOR MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
We took action to improve internal controls over our accounting for income
taxes during 2006. However, the actions taken have not yet been fully evidenced
and therefore we concluded that this weakness existed as of December 31, 2006.
To address the material weakness in the accounting for income taxes, we are
taking the following actions during 2007:
- With the assistance of an outside professional service provider, we are
implementing procedures to more effectively and accurately accumulate
detailed support for approximately 70 foreign tax basis balance sheets
and related processes to quantify deferred tax balances.
- We are re-engineering the tax provision reporting processes (including
U.S. federal and state tax provision processes) to improve visibility,
timeliness and accuracy, as well as technical support and documentation
standards.
- We will reorganize functional responsibilities in the tax department to
better control and manage the income tax data that is collected and
enhance our current process for completing the provision and performing
analysis.
- We are in the process of developing additional remediation plans which
will be implemented to address the material weakness in internal controls
in accounting for income taxes. Many of these newly designed controls and
procedures are only executed annually during the year-end closing
process. Our assessment of the remediation will remain open until that
time.
Due to the nature of the material weakness, remediation will not be
completed until the annual tax processes are performed during the 2007 year end
close.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except as described above, there have been no changes in our internal
control over financial reporting during the quarter ended March 31, 2007 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
49
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, 2006.
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 first quarter of 2007. All of these
purchases reflect shares withheld upon vesting of restricted stock to satisfy
tax withholding obligations.
TOTAL NUMBER OF AVERAGE
PERIOD SHARES PURCHASED PRICE PAID
------ ---------------- ----------
January 2007.............................................. 121,873 $26.45
February 2007............................................. 1,031 $25.54
March 2007................................................ 2,004 $24.56
-------
Total................................................... 124,908 $26.41
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.
50
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
Executive Vice President and Chief
Financial Officer
Dated: May 9, 2007
51
INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2007
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).
52
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).
4.1(d) -- Amendment No. 3 to Rights Agreement, dated November 13, 2006, by and
between the registrant and Wells Fargo Bank, N..A., as Rights Agent
(incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated November 13, 2006,
File No. 1-12387.).
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).
53
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.3 -- Specimen stock certificate for Tenneco Inc. common stock
(incorporated herein by reference from Exhibit 4.3 of the
registrant's Annual Report on Form 10-K for the quarter ended
December 31, 2006, File No. 1-12387).
4.4(a) -- Indenture dated October 14, 1999 by and between the registrant and
The Bank of New York, as trustee (incorporated herein by reference
from Exhibit 4.4(a) of the registrant's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1999, File No. 1-12387).
4.4(b) -- Supplemental Indenture dated November 4, 1999 among Tenneco
Automotive Operating Company Inc., Tenneco International Holding
Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite
Industries Inc. and TMC Texas Inc. in favor of The Bank of New York,
as trustee (incorporated herein by reference from Exhibit 4.4(b) of
the registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-12387).
4.4(c) -- Subsidiary Guarantee dated as of October 14, 1999 from Tenneco
Automotive Operating Company Inc., Tenneco International Holding
Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite
Industries Inc. and TMC Texas Inc. in favor of The Bank of New York,
as trustee (incorporated herein by reference to Exhibit 4.4(c) to
the registrant's Registration Statement on Form S-4, Reg. No. 333-
93757).
4.5(a) -- Second Amended and Restated Credit Agreement, dated as of March 16,
2007, among the registrant, JP Morgan Chase Bank, N.A., as
administrative agent, and the other lenders party thereto
(incorporated herein by reference to Exhibit 99.1 to the
registrant's Current Report on Form 8-K dated March 16, 2007, File
No. 1-12387).
4.5(b) -- Guarantee and Collateral Agreement, dated as of March 16, 2007
(amending and restating the Guarantee and Collateral Agreement dated
as of November 4, 1999, as previously amended and amended and
restated), among the registrant various of its subsidiaries and
JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated
herein by reference from Exhibit 99.2 to the registrant's Current
Report on Form 8-K dated March 16, 2007, 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).
54
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.8(a) -- Indenture, dated as of November 19, 2004, among the registrant, the
subsidiary guarantors named therein and The Bank of New York Trust
Company (incorporated herein by reference from Exhibit 99.1 of the
registrant's Current Report on Form 8-K dated November 19, 2004,
File No. 1-12387).
4.8(b) -- Supplemental Indenture, dated as of March 28, 2005, among the
registrant, the guarantors party thereto and the Bank of New York
Trust Company, N.A., as trustee (incorporated herein by reference
from Exhibit 4.3 to the registrant's Registration Statement on Form
S-4, Reg No. 333-123752).
4.8(c) -- Registration Rights Agreement, dated as of November 19, 2004, among
the registrant, the guarantors party thereto and the initial
purchasers party thereto (incorporated herein by reference from
Exhibit 4.2 to the registrant's Registration Statement on Form S-4,
Reg No. 333-123752).
4.8(d) -- Second Supplemental Indenture, dated as of October 27, 2005, among
the registrant, the guarantors party thereto and the Bank of New
York Trust Company, N.A., as trustee (incorporated herein by
reference from Exhibit 4.8(d) to the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2005, File No. 1-
12387).
9 -- None.
10.1 -- Distribution Agreement, dated November 1, 1996, by and among El Paso
Tennessee Pipeline Co., the registrant, and Newport News
Shipbuilding Inc. (incorporated herein by reference from Exhibit 2
of the registrant's Form 10, File No. 1-12387).
10.2 -- Amendment No. 1 to Distribution Agreement, dated as of December 11,
1996, by and among El Paso Tennessee Pipeline Co., the registrant,
and Newport News Shipbuilding Inc. (incorporated herein by reference
from Exhibit 10.2 of the registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, File No. 1-12387).
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).
55
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.13 -- Supplemental Executive Retirement Plan (incorporated herein by
reference from Exhibit 10.13 to the registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387).
10.14 -- Human Resources Agreement by and between the registrant and Tenneco
Packaging Inc. dated November 4, 1999 (incorporated herein by
reference to Exhibit 99.1 to the registrant's Current Report on Form
8-K dated November 4, 1999, File No. 1-12387).
10.15 -- Tax Sharing Agreement by and between the registrant and Tenneco
Packaging Inc. dated November 3, 1999 (incorporated herein by
reference to Exhibit 99.2 to the registrant's Current Report on Form
8-K dated November 4, 1999, File No. 1-12387).
10.16 -- Amended and Restated Transition Services Agreement by and between
the registrant and Tenneco Packaging Inc. dated as of November 4,
1999 (incorporated herein by reference from Exhibit 10.21 of the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-12387).
10.17 -- Assumption Agreement among Tenneco Automotive Operating Company
Inc., Tenneco International Holding Corp., Tenneco Global Holdings
Inc., The Pullman Company, Clevite Industries Inc., TMC Texas Inc.,
Salomon Smith Barney Inc. and the other Initial Purchasers listed in
the Purchase Agreement dated as of November 4, 1999 (incorporated
herein by reference from Exhibit 10.24 of the registrant's
Registration Statement on Form S-4, Reg. No. 333-93757).
10.18 -- Amendment No. 1 to Change in Control Severance Benefits Plan for Key
Executives (incorporated herein by reference from Exhibit 10.23 to
the registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, File No. 1-12387).
10.19 -- Letter Agreement dated July 27, 2000 between the registrant and Mark
P. Frissora (incorporated herein by reference from Exhibit 10.24 to
the registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, File No. 1-12387).
10.20 -- Letter Agreement dated July 27, 2000 between the registrant and
Richard P. Schneider (incorporated herein by reference from Exhibit
10.26 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, File No. 1-12387).
10.21 -- Letter Agreement dated July 27, 2000 between the registrant and
Timothy R. Donovan (incorporated herein by reference from Exhibit
10.28 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 2000, File No. 1-12387).
10.22 -- Form of Indemnity Agreement entered into between the registrant and
the following directors of the registrant: Paul Stecko, M. Kathryn
Eickhoff and Dennis Severance (incorporated herein by reference from
Exhibit 10.29 to the registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000, File No. 1-12387).
10.23 -- Mark P. Frissora Special Appendix under 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).
56
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.29 -- Form of Stock Option Agreement for employees under the 2002 Long-
Term Incentive Plan, as amended (providing for a ten year option
term) (incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated January 13, 2005, File
No. 1-12387).
10.30 -- Form of Stock Option Agreement for non-employee directors under the
2002 Long-Term Incentive Plan, as amended (providing for a ten year
option term) (incorporated herein by reference from Exhibit 99.3 of
the registrant's Current Report on Form 8-K dated January 13, 2005,
File No. 1-12387).
10.31 -- Form of Restricted Stock Award Agreement for employees under the
2002 Long-Term Incentive Plan, as amended (three year cliff vesting)
(incorporated herein by reference from Exhibit 99.4 of the
registrant's Current Report on Form 8-K dated January 13, 2005, File
No. 1-12387).
10.32 -- Form of Restricted Stock Award Agreement for non-employee directors
under the 2002 Long-Term Incentive Plan, as amended (incorporated
herein by reference from Exhibit 99.5 of the registrant's Current
Report on Form 8-K dated January 13, 2005, File No. 1-12387).
10.33 -- Form of Restricted Stock Award Agreement for employees under the
2002 Long-Term Incentive Plan, as amended (vesting 1/3 annually)
(incorporated herein by reference from Exhibit 99.1 of the
registrant's Current Report on Form 8-K dated January 17, 2005, File
No. 1-12387).
10.34 -- Form of Stock Option Agreement for employees under the 2002 Long-
Term Incentive Plan, as amended (providing for a seven year option
term) (incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated January 17, 2005, File
No. 1-12387).
10.35 -- Form of Stock Option Agreement for non-employee directors under the
2002 Long-Term Incentive Plan, as amended (providing for a seven
year option term) (incorporated herein by reference from Exhibit
99.3 of the registrant's Current Report on Form 8-K dated January
17, 2005, File No. 1-12387).
10.36 -- Form of Performance Share Agreement for non-employee directors under
the 2002 Long-Term Incentive Plan, as amended (incorporated herein
by reference from Exhibit 10.37 to the registrant's Annual Report on
Form 10-K for the year ended December 31, 2004, file No. 1-12387).
10.37 -- Summary of 2007 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, 2006,File No. 1-12387).
10.38 -- Summary of 2007 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, 2006, 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).
57
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
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 (incorporated herein by
reference from Exhibit 10.55 to the registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006, File No. 1-
12387).
10.56 -- Form of First Amendment to the Tenneco Inc. Supplemental Pension
Plan for Management (incorporated herein by reference to Exhibit
10.56 of the registrant's Annual Report on Form 10-K for the year
ended December 31, 2006, File No. 1-12387).
10.57 -- Form of First Amendment to the Tenneco Inc. Supplemental Retirement
Plan (incorporated herein by reference to Exhibit 10.57 of the
registrant's Annual Report on Form 10-K for the year ended December
31, 2006, File No. 1-12387).
10.58 -- Form of Stock Equivalent Unit Award Agreement, as amended, 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 as of December 6, 2006, File No. 1-12387).
10.59 -- Letter Agreement dated December 4, 2006 between the registrant and
Timothy R. Donovan (incorporated herein by reference to Exhibit
10.59 of the registrant's Annual Report on Form 10-K for the year
ended December 31, 2006, File No. 1-12387).
10.60 -- Letter Agreement dated January 5, 2007 between the registrant and
Hari N. Nair (incorporated herein by reference to Exhibit 10.60 of
the registrant's Annual Report on Form 10-K for the year ended
December 31, 2006, File No. 1-12387).
10.61 -- Letter Agreement between Tenneco Inc. and Gregg Sherrill
(incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated as of January 5, 2007,
File No. 1-12387).
10.62 -- Letter Agreement between Tenneco Inc. and Gregg Sherrill, dated as
of January 15, 2007 (incorporated herein by reference from Exhibit
99.1 of the registrant's Current Report on Form 8-K dated as of
January 15, 2007, File No. 1-12387).
58
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.63 -- Form of Restricted Stock Agreement between Tenneco Inc. and Gregg
Sherrill (incorporated herein by reference to Exhibit 10.63 of the
registrant's Annual Report on Form 10-K for the year ended December
31, 2006, File No. 1-12387).
11 -- None.
*12 -- Computation of Ratio of Earnings to Fixed Charges.
*15 -- Letter of Deloitte and Touche LLP regarding interim financial
information.
18 -- None.
19 -- None.
22 -- None.
23 -- None.
24 -- None.
*31.1 -- Certification of Gregg Sherrill under Section 302 of the Sarbanes-
Oxley Act of 2002.
*31.2 -- Certification of Kenneth R. Trammell under Section 302 of the
Sarbanes-Oxley Act of 2002.
*32.1 -- Certification of Gregg Sherrill and Kenneth R. Trammell under
Section 906 of the Sarbanes-Oxley Act of 2002
99 -- None.
100 -- None.
--------
* Filed herewith.
59