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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, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12387
TENNECO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0515284
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 NORTH FIELD DRIVE, LAKE FOREST, 60045
ILLINOIS
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, par value $.01 per share: 45,247,685 shares as of April 28,
2006.
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TABLE OF CONTENTS
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).............................. 5
Tenneco Inc. and Consolidated Subsidiaries--
Report of Independent Registered Public Accounting Firm.......... 5
Statements of Income............................................. 6
Balance Sheets................................................... 7
Statements of Cash Flows......................................... 8
Statements of Changes in Shareholders' Equity.................... 9
Statements of Comprehensive Income (Loss)........................ 10
Notes to Consolidated Financial Statements....................... 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 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.............................................. 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds... 49
Item 3. Defaults Upon Senior Securities............................... *
Item 4. Submission of Matters to a Vote of Security Holders........... *
Item 5. Other Information............................................. *
Item 6. Exhibits...................................................... 49
--------
* 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," "anticipate," "intends,"
"estimates," and similar expressions (and variations thereof), identify these
forward-looking statements. Although we believe that the expectations reflected
in these forward-looking statements are based on reasonable assumptions, these
expectations may not prove to be correct. Because these forward-looking
statements are also subject to risks and uncertainties, actual results may
differ materially from the expectations expressed in the forward-looking
statements. Important factors that could cause actual results to differ
materially from the expectations reflected in the forward-looking statements
include:
- changes in automotive manufacturers' production rates and their actual
and forecasted requirements for our products, including the overall
highly competitive nature of the automotive parts industry, and our
resultant inability to realize the sales represented by our awarded book
of business (which is based on anticipated pricing for the applicable
program over its life, and is subject to increases or decreases due to
changes in customer requirements, customer and consumer preferences, and
the number of vehicles actually produced by customers);
2
- the loss of any of our large original equipment manufacturer ("OEM")
customers (on whom we depend for a substantial portion of our revenues),
or the loss of market shares by these customers if we are unable to
achieve increased sales to other OEMs;
- increases in the costs of raw materials, including our ability to
successfully reduce the impact of any such cost increases through
materials substitutions, cost reduction initiatives and other methods;
- the cyclical nature of the global vehicular industry, including the
performance of the global aftermarket sector and the longer product lives
of automobile parts;
- changes in consumer demand, prices and our ability to have our products
included on top selling vehicles, any shift in consumer preferences to
smaller vehicles in light of higher fuel costs and other factors
impacting the cyclicality of automotive production and sales of
automobiles which include our products, and the potential negative impact
on our revenues and margins from such products;
- our continued success in cost reduction and cash management programs and
our ability to execute restructuring and other cost reduction plans and
to realize anticipated benefits from these plans;
- general economic, business and market conditions, 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 and weakness in demand;
- 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 potential negative impact of higher fuel prices on discretionary
purchases of aftermarket products by consumers;
- the cost and outcome of existing and any future legal proceedings;
- labor disruptions at our facilities or any labor or other economic
disruptions at any of our significant customers or suppliers or any of
our customers' other suppliers;
- economic, exchange rate and political conditions in the foreign countries
where we operate or sell our products;
- customer acceptance of new products;
- new technologies that reduce the demand for certain of our products or
otherwise render them obsolete;
- our ability to realize our business strategy of improving operating
performance;
- capital availability or costs, including changes in interest rates,
market perceptions of the industries in which we operate or ratings of
securities;
- our inability to successfully integrate any acquisitions that we pursue;
- changes by the Financial Accounting Standards Board or the Securities and
Exchange Commission of authoritative generally accepted accounting
principles or policies;
- potential legislation, regulatory changes and other governmental actions,
including the ability to receive regulatory approvals and the timing of
such approvals;
- 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 terrorism, including, but not limited to, the events
taking place in the Middle East, the current military action in Iraq and
the continuing war on terrorism, as well as actions taken or to be taken
by the
3
United States and other governments as a result of further acts or
threats of terrorism, and the impact of these acts on economic, financial
and social conditions in the countries where we operate; and
- the timing and occurrence (or non-occurrence) of other transactions,
events and circumstances which may be beyond our control.
The risks included here are not exhaustive. Refer to "Part I, Item 1A--Risk
Factors" in our annual report on Form 10-K for the year ended December 31, 2005,
for further discussion regarding our exposure to risks. Additionally, new risk
factors emerge from time to time and it is not possible for us to predict all
such risk factors, nor to assess the impact such risk factors might have on our
business or the extent to which any factor or combination of factors may cause
actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
4
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TENNECO INC.
We have reviewed the accompanying consolidated balance sheet of Tenneco
Inc. and consolidated subsidiaries as of March 31, 2006, and the related
consolidated statements of income, comprehensive income (loss), cash flows and
changes in shareholders' equity for the three-month periods ended March 31, 2006
and 2005. These interim financial statements are the responsibility of Tenneco
Inc.'s management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated interim financial statements for them to be
in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 2, the Company changed its accounting for stock-based
compensation expense effective January 1, 2006 upon adoption of Statement of
Financial Accounting Standard No. 123(R), "Share-Based Payment."
We previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Tenneco Inc. and consolidated subsidiaries as of December 31, 2005, and the
related consolidated statements of income, cash flows, changes in shareholders'
equity and comprehensive income (loss) for the year then ended (not presented
herein); and in our report dated March 14, 2006, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2005 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Chicago, Illinois
May 8, 2006
5
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2006 2005
----------- -----------
(MILLIONS EXCEPT SHARE
AND
PER SHARE AMOUNTS)
REVENUES
Net sales and operating revenues....................... $ 1,132 $ 1,101
----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation and
amortization shown below)........................... 921 888
Engineering, research, and development................. 22 24
Selling, general, and administrative................... 101 98
Depreciation and amortization of other intangibles..... 44 46
----------- -----------
1,088 1,056
----------- -----------
OTHER EXPENSE............................................ (2) (1)
----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND
MINORITY INTEREST...................................... 42 44
Interest expense (net of interest capitalized)......... 34 32
Income tax expense..................................... -- 4
Minority interest...................................... 1 1
----------- -----------
NET INCOME............................................... $ 7 $ 7
=========== ===========
EARNINGS PER SHARE
Average shares of common stock outstanding--
Basic.................................................. 43,921,691 42,674,558
Diluted................................................ 46,723,181 44,995,875
Basic earnings per share of common stock................. $ 0.15 $ 0.17
Diluted earnings per share of common stock............... $ 0.14 $ 0.16
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,
2006 2005
--------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 96 $ 141
Receivables--
Customer notes and accounts, net....................... 608 515
Other.................................................. 20 28
Inventories............................................... 392 360
Deferred income taxes..................................... 44 43
Prepayments and other..................................... 117 110
------- -------
1,277 1,197
------- -------
Other assets:
Long-term notes receivable, net........................... 24 23
Goodwill.................................................. 200 200
Intangibles, net.......................................... 32 30
Deferred income taxes..................................... 308 307
Other..................................................... 139 140
------- -------
703 700
------- -------
Plant, property, and equipment, at cost..................... 2,479 2,428
Less--Reserves for depreciation and amortization.......... (1,427) (1,385)
------- -------
1,052 1,043
------- -------
$ 3,032 $ 2,940
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term
debt).................................................. $ 32 $ 22
Trade payables............................................ 729 651
Accrued taxes............................................. 43 31
Accrued interest.......................................... 33 38
Accrued liabilities....................................... 188 208
Other..................................................... 24 29
------- -------
1,049 979
------- -------
Long-term debt.............................................. 1,352 1,356
------- -------
Deferred income taxes....................................... 81 86
------- -------
Postretirement benefits..................................... 289 285
------- -------
Deferred credits and other liabilities...................... 78 81
------- -------
Commitments and contingencies
Minority interest........................................... 26 24
------- -------
Shareholders' equity:
Common stock.............................................. -- --
Premium on common stock and other capital surplus......... 2,781 2,776
Accumulated other comprehensive loss...................... (265) (282)
Retained earnings (accumulated deficit)................... (2,119) (2,125)
------- -------
397 369
Less--Shares held as treasury stock, at cost.............. 240 240
------- -------
157 129
------- -------
$ 3,032 $ 2,940
======= =======
The accompanying notes to financial statements are an integral part of these
balance sheets.
7
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE
MONTHS
ENDED
MARCH 31,
-----------
2006 2005
---- -----
(MILLIONS)
OPERATING ACTIVITIES
Net income....................................................... $ 7 $ 7
Adjustments to reconcile net income to cash used by operating
activities--
Depreciation and amortization of other intangibles............. 44 46
Deferred income taxes.......................................... 5 (4)
Stock option expense........................................... 1 --
Loss on sale of assets, net.................................... 1 --
Changes in components of working capital (net of acquisition)--
(Increase) decrease in receivables.......................... (82) (78)
(Increase) decrease in inventories.......................... (27) (46)
(Increase) decrease in prepayments and other current
assets.................................................... (14) (23)
Increase (decrease) in payables............................. 67 21
Increase (decrease) in accrued taxes........................ (2) --
Increase (decrease) in accrued interest..................... (4) (3)
Increase (decrease) in other current liabilities............ (18) (8)
Other.......................................................... (1) (8)
---- -----
Net cash used by operating activities............................ (23) (96)
---- -----
INVESTING ACTIVITIES
Net proceeds from the sale of assets............................. -- 1
Expenditures for plant, property, and equipment.................. (38) (32)
Expenditures for software related intangible assets.............. (3) (3)
Acquisition of businesses (net of cash acquired)................. -- (11)
Investments and other............................................ -- 3
---- -----
Net cash used by investing activities............................ (41) (42)
---- -----
FINANCING ACTIVITIES
Issuance of common shares........................................ 8 2
Retirement of long-term debt..................................... (1) (41)
Net increase in short-term debt excluding current maturities of
long-term debt................................................. 9 33
Other............................................................ -- 1
---- -----
Net cash provided (used) by financing activities................. 16 (5)
---- -----
Effect of foreign exchange rate changes on cash and cash
equivalents.................................................... 3 (3)
---- -----
Decrease in cash and cash equivalents............................ (45) (146)
Cash and cash equivalents, January 1............................. 141 214
---- -----
Cash and cash equivalents, March 31 (Note)....................... $ 96 $ 68
==== =====
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest......................... $ 34 $ 31
Cash paid during the period for income taxes (net of refunds).... $-- $ 7
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,
----------------------------------------
2006 2005
------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- -------
(Millions Except Share Amounts)
COMMON STOCK
Balance January 1............................. 44,544,668 $ -- 44,275,594 $ --
Issued pursuant to benefit plans............ 1,022,599 -- 290,330 --
Stock options exercised..................... 803,472 -- 335,340 --
---------- ------- ---------- -------
Balance March 31.............................. 46,370,739 -- 44,901,264 --
========== ==========
PREMIUM ON COMMON STOCK AND OTHER CAPITAL
SURPLUS
Balance January 1............................. 2,776 2,764
Premium on common stock issued pursuant to
benefit plans............................... 5 4
------- -------
Balance March 31.............................. 2,781 2,768
------- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance January 1............................. (282) (185)
Other comprehensive income (loss)........... 17 (35)
------- -------
Balance March 31.............................. (265) (220)
------- -------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1............................. (2,125) (2,180)
Net income.................................. 7 7
Other....................................... (1) --
------- -------
Balance March 31.............................. (2,119) (2,173)
------- -------
LESS--COMMON STOCK HELD AS TREASURY STOCK, AT
COST
Balance January 1 and March 31................ 1,294,692 240 1,294,692 240
========== ------- ========== -------
Total.................................. $ 157 $ 135
======= =======
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,
----------------------------------------------------------
2006 2005
---------------------------- ----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
(LOSS) (LOSS) (LOSS) (LOSS)
------------- ------------- ------------- -------------
(MILLIONS)
NET INCOME........................... $ 7 $ 7
--- ----
ACCUMULATED OTHER COMPREHENSIVE LOSS
CUMULATIVE TRANSLATION ADJUSTMENT
Balance January 1.................... $(150) $ (63)
Translation of foreign currency
statements...................... 17 17 (35) (35)
----- -----
Balance March 31..................... (133) (98)
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance January 1 and March 31....... (132) (122)
----- -----
Balance March 31..................... $(265) $(220)
===== --- ===== ----
Other comprehensive income (loss).... 17 (35)
--- ----
COMPREHENSIVE INCOME (LOSS).......... $24 $(28)
=== ====
The accompanying notes to financial statements are an integral part
of these statements of comprehensive income (loss).
10
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) As you read the accompanying financial statements and Management's
Discussion and Analysis you should also read our Annual Report on Form 10-K for
the year ended December 31, 2005.
In our opinion, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly Tenneco Inc.'s financial position, results of operations, cash flows,
changes in shareholders' equity, and comprehensive income (loss) for the periods
indicated. We have prepared the unaudited interim consolidated financial
statements pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America ("GAAP") for annual financial statements.
Our consolidated financial statements include all majority-owned
subsidiaries. We carry investments in 20 percent to 50 percent owned companies
at cost plus equity in undistributed earnings and cumulative translation
adjustments from the date of acquisition since we have the ability to exert
significant influence over operating and financial policies.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation. Specifically, we have reclassified
expenditures for software-related intangible assets in the statements of cash
flows from operating activities to investing activities as we believe this
presentation is preferable. We do not believe this change in presentation is
material to the financial statements.
(2) Equity Plans--In December 1996, we adopted the 1996 Stock Ownership
Plan, which permitted the granting of a variety of awards, including common
stock, restricted stock, performance units, stock equivalent units, stock
appreciation rights ("SARs"), and stock options to our directors, officers, and
employees. The plan, which terminated as to new awards on December 31, 2001, was
renamed the "Stock Ownership Plan." In December 1999, we adopted the
Supplemental Stock Ownership Plan, which permitted the granting of a variety of
similar awards to our directors, officers and employees. We were authorized to
deliver up to about 1.1 million treasury shares of common stock under the
Supplemental Stock Ownership Plan, which also terminated as to new awards on
December 31, 2001. In March 2002, we adopted the 2002 Long-Term Incentive Plan
which permits the granting of a variety of similar awards to our officers,
directors and employees. Up to 4 million shares of our common stock have been
authorized for delivery under the 2002 Long-Term Incentive Plan. Our
nonqualified stock options have 7 to 20 year terms and vest equally over a three
year requisite service period from the date of the grant.
We have granted restricted common stock to our directors and certain key
employees. These awards generally require, among other things, that the award
holder remains in service to our company during the restriction period. We have
also granted stock equivalent units to certain key employees that are payable in
cash annually based on the attainment of specified performance goals. The grant
value is indexed to the stock price. Each employee granted stock equivalent
units receives a percentage of the total grants value. In addition, we have
granted SARs to certain key employees in our Asian operations that are payable
in cash after a three year requisite service period. The grant value is indexed
to the stock price.
Accounting Methods--Prior to January 1, 2006, we utilized the intrinsic
value method to account for our stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Therefore, no compensation cost was reflected in net income related
to stock options as all options granted under the plans had an exercise price
equal to the market price of the underlying common stock on the date of the
grant. Compensation cost was previously recognized for restricted stock, stock
equivalent units and SARs under this accounting principle.
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standard ("SFAS") No. 123(R), "Share-Based Payment," using the modified
prospective application method. Under this transition method, compensation cost
recognized for the quarter ended March 31, 2006, includes the applicable amounts
of: (1) compensation cost of all unvested stock-based awards granted prior to
January 1, 2006, based upon the grant
11
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
date fair value estimated in accordance with the original provisions of SFAS No.
123 and previously presented in pro forma footnote disclosures, and (2)
compensation cost for all stock-based awards granted on or after January 1,
2006, based upon the grant date fair value estimated in accordance with the new
provisions of SFAS No. 123(R). Results for prior periods have not been restated.
THREE MONTHS
ENDED
MARCH 31,
------------
2006 2005
----- -----
(MILLIONS
EXCEPT PER
SHARE
AMOUNTS)
Net income....................................................... $ 7 $ 7
Add: Stock-based employee compensation expense included in net
income, net of income tax (including actual SFAS No. 123(R)
total stock-based compensation expense recognized since January
1, 2006)....................................................... 3 1
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards, net of income
tax............................................................ (3) (2)
----- -----
Adjusted net income.............................................. $ 7 $ 6
===== =====
Earnings per share:
Basic--as reported............................................... $0.15 $0.17
Basic--as adjusted for stock-based compensation expense.......... $0.15 $0.16
Diluted--as reported............................................. $0.14 $0.16
Diluted--as adjusted for stock-based compensation expense........ $0.14 $0.15
Prior to adopting SFAS No. 123(R), we presented all tax benefits related to
the exercise of nonqualified stock options as operating cash flows. Under SFAS
No. 123(R), only excess tax benefits are recognized as an addition to paid in
capital. Cash retained as a result of the excess tax benefits (tax deductions
realized in excess of the compensation expense recognized for the exercised
stock options) are presented as financing cash flows. The write-off of deferred
tax assets related to unrealized tax benefits associated with the recognized
compensation cost is reported as income tax expense.
Effects of Adopting--Compensation expense for restricted stock, stock
equivalent units and SARs was, prior to the adoption of SFAS No. 123(R), and
continues to be recognized in net income. Compensation expense for these awards,
net of tax, was less than $3 million for the quarter ended March 31, 2006
compared to approximately $1 million for the quarter ended March 31, 2005, and
was recorded in selling, general, and administrative expense on the statement of
income at the corporate level.
The impact of recognizing compensation expense related to nonqualified
stock options is contained in the table below.
THREE MONTHS ENDED
MARCH 31, 2006
------------------
(MILLIONS)
Selling, general and administrative............................ $ 1
------
Loss before interest expense, income taxes and minority
interest..................................................... (1)
Income tax benefit............................................. --
------
Net loss....................................................... $ (1)
======
Decrease in basic earnings per share........................... $(0.01)
Decrease in diluted earnings per share......................... $(0.01)
For the quarter ended March 31, 2006, the results of adopting SFAS No.
123(R) on our results of operations including nonqualified stock options and
other stock-based compensation was additional expense of approximately
12
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
$1 million or $0.02 per diluted share. Adoption of this accounting standard also
increased the calculated number of diluted shares by approximately 0.6 million
primarily due to the elimination of excess tax benefits.
For stock options awarded to retiree eligible employees prior to the
adoption of SFAS No. 123(R) we continue to recognize compensation cost over the
explicit vesting period and immediately accelerate the recognition of any
outstanding compensation cost when employees retire before the end of the
explicit vesting period. This methodology has not had a material impact on our
recognized compensation cost.
As of March 31, 2006, there is approximately $4 million, net of tax, of
total unrecognized compensation costs related to these stock-based awards that
is expected to be recognized over a weighted average period of 1.7 years.
Cash received from option exercises for the three months ended March 31,
2006, was approximately $3 million. Stock option exercises during the first
quarter of 2006 generated an excess tax benefit of approximately $5 million.
Pursuant to footnote 82 of FASB 123(R), this benefit was not recorded as we have
federal and state net operating losses which are not currently being utilized.
As a result, the excess tax benefit had no impact on our financial position or
statement of cash flows.
Assumptions--We calculated the fair values of the awards using the Black-
Scholes option pricing model with the weighted average assumptions listed below.
Determining the fair value of share-based awards requires judgment in estimating
employee and market behavior. If actual results differ significantly from these
estimates, stock-based compensation expense and our results of operations could
be materially impacted.
THREE MONTHS
ENDED
MARCH 31,
------------
2006 2005
----- -----
Stock Options
Weighted average grant date fair value, per share................ $9.27 $8.22
Weighted average assumptions used:
Expected volatility............................................ 42.6% 43.0%
Expected lives................................................. 5.1 7.0
Risk-free interest rates....................................... 4.2% 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.
13
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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, 2006
---------------------------------------------------
WEIGHTED AVG.
SHARES WEIGHTED AVG. REMAINING AGGREGATE
UNDER EXERCISE LIFE IN INTRINSIC
OPTION PRICES YEARS VALUE
--------- ------------- ------------- ----------
(MILLIONS)
Outstanding Stock Options
Outstanding, January 1, 2006.............. 4,922,095 $ 9.08
Granted................................. 451,750 21.21
Canceled................................ (15,738) 20.08
Forfeited............................... (3,061) 7.35
Exercised............................... (803,472) 4.30 $14
---------
Outstanding, March 31, 2006............... 4,551,574 11.08 5.5 $49
=========
Exercisable, March 31, 2006............... 3,637,528 $ 9.55 5.6 $45
=========
Restricted Stock--The following table reflects the status for all nonvested
restricted shares for the period indicated:
THREE MONTHS ENDED
MARCH 31, 2006
-----------------------
SHARES WEIGHTED AVG.
UNDER GRANT DATE
OPTION FAIR VALUE
-------- -------------
Nonvested Restricted Shares
Nonvested balance at January 1, 2006....................... 533,714 $12.67
Granted.................................................. 249,477 21.23
Vested................................................... (222,687) 10.94
Forfeited................................................ -- --
--------
Nonvested balance at March 31, 2006........................ 560,504 17.17
========
The fair value of restricted stock grants is equal to the average market
price of the companies stock at the date of grant. As of March 31, 2006,
approximately $8 million of total unrecognized compensation costs related to
compensation for restricted stock awards is expected to be recognized over a
weighted-average period of approximately 2 year.
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, 2006, approximately $6 million of total unrecognized compensation costs is
expected to be recognized over a weighted-average period of approximately 1
year.
14
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(3) In April 2004, we entered into three separate fixed-to-floating
interest rate swaps with two separate financial institutions. These agreements
swapped an aggregate of $150 million of fixed interest rate debt at an annual
rate of 10 1/4 percent to floating interest rate debt at an annual rate of LIBOR
plus an average spread of 5.68 percent. Each agreement requires semi-annual
settlements through July 15, 2013. The LIBOR in effect for these swaps during
the course of 2005 resulted in lower interest expense of approximately $2
million for the year. Based upon the LIBOR rate as determined under these
agreements of 4.73 percent (which remains in effect until July 15, 2006) and the
rates in the market today these swaps are expected to increase our 2006 annual
interest expense by $1 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. As
of March 31, 2006, the fair value of the interest rate swaps was a liability of
approximately $9 million which has been recorded as a decrease to long-term debt
and an increase to other long-term liabilities.
In February 2005 we amended our senior credit facility to reduce by 75
basis points the interest rate on the term loan B facility and the tranche B-1
letter of credit/revolving loan facility. In connection with the amendment, we
voluntarily prepaid $40 million in principal on the term loan B, reducing the
term loan B facility from $396 million to $356 million.
Additional provisions of the February 2005 amendment to the senior credit
facility agreement were as follows: (i) amend the definition of EBITDA to
exclude all remaining cash charges and expenses related to restructuring
initiatives started on or before February 21, 2005, and to exclude up to an
additional $60 million in restructuring-related expenses announced and taken
after February 21, 2005, (ii) increase permitted investments to $50 million,
(iii) exclude expenses related to the issuance of stock options from the
definition of consolidated net income, (iv) permit us to redeem up to $125
million of senior secured notes after January 1, 2008 (subject to certain
conditions), (v) increase our ability to add commitments under the revolving
credit facility by $25 million, and (vi) make other minor modifications. We
incurred approximately $1 million in fees and expenses associated with this
amendment, which were capitalized and are being amortized over the remaining
term of the agreement. As a result of the amendment and the voluntary prepayment
of $40 million under the term loan B, our term loan B interest expense in 2005
was approximately $5 million lower than what it would otherwise have been.
Following the February 2005 voluntary prepayment of $40 million, the term
loan B facility is payable as follows: $74 million due March 31, 2010, and $94
million due each of June 30, September 30 and December 12, 2010. The revolving
credit facility requires that if any amounts are drawn, they be repaid by
December 2008. Prior to that date, funds may be borrowed, repaid and reborrowed
under the revolving credit facility without premium or penalty. Letters of
credit may be issued under the revolving credit facility.
The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by December 2010. We can borrow revolving loans from the $155 million
tranche B-1 letter of credit/revolving loan facility and use that facility to
support letters of credit. The tranche B-1 letter of credit/revolving loan
facility lenders have deposited $155 million with the administrative agent, who
has invested that amount in time deposits. We do not have an interest in any of
the funds on deposit. When we draw revolving loans under this facility, the
loans are funded from the $155 million on deposit with the administrative agent.
When we make repayments, the repayments are redeposited with the administrative
agent.
The tranche B-1 letter of credit/revolving loan facility will be reflected
as debt on our balance sheet only if we borrow money under this facility or if
we use the facility to make payments for letters of credit. We will not be
liable for any losses to or misappropriation of any (i) return due to the
administrative agent's failure to achieve the return described above or to pay
all or any portion of such return to any lender under such facility or (ii)
funds on deposit in such account by such lender (other than the obligation to
repay funds released from such accounts and provided to us as revolving loans
under such facility).
15
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
During 2005, we increased the amount of commitments under our revolving
credit facility from $220 million to $300 million and reduced the amount of
commitments under our tranche B-1 letter of credit/revolving loan facility from
$180 million to $155 million. This reduction of our tranche B-1 letter of
credit/revolving loan facility was required under the terms of the senior credit
facility, as we had increased the amount of our revolving credit facility
commitments by more than $55 million.
In October 2005, we further amended our senior credit facility increasing
the amount of commitments we may seek under the revolving credit portion of the
facility from $300 million to $350 million, along with other technical changes.
We will not be required to reduce the commitments under our tranche B-1 letter
of credit/revolving loan facility should we obtain additional revolving credit
commitments. We have not yet sought any such increased commitments, but may do
so when, in our judgment, market conditions are favorable.
(4) Over the past several years we have adopted plans to restructure
portions of our operations. These plans were approved by the Board of Directors
and were designed to reduce operational and administrative overhead costs
throughout the business. Prior to the change in accounting required for exit or
disposal activities, we recorded charges to income related to these plans for
costs that did not benefit future activities in the period in which the plans
were finalized and approved, while actions necessary to affect these
restructuring plans occurred over future periods in accordance with established
plans.
In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. Project Genesis involved closing eight facilities, improving the
process flow and efficiency through value mapping and plant arrangement at 20
facilities, relocating production among facilities, and centralizing some
functional areas. The total of all these restructuring and other costs recorded
in the fourth quarter of 2001 was $32 million before tax, $31 million after tax,
or $0.81 per diluted common share. We eliminated 974 positions in connection
with Project Genesis. Additionally, we executed this plan more efficiently than
originally anticipated and as a result in the fourth quarter of 2002 reduced our
reserves related to this restructuring activity by $6 million, which was
recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2
million of severance reserve to the asset impairment reserve. This
reclassification became necessary, as actual asset impairments along with the
sale of our closed facilities were different than the original estimates. We
completed the remaining restructuring activities under Project Genesis as of the
end of 2004. Since Project Genesis was announced, we have undertaken a number of
related projects designed to restructure our operations, described below.
In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. This charge was primarily recorded in cost
of sales.
In October of 2003, we announced the closing of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees were
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $3 million in costs related to
this action in 2004. This action is in addition to the plant closings announced
in Project Genesis in the fourth quarter of 2001.
In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of layoffs were at middle and senior management levels. As of March 31, 2006, we
have incurred $23 million in severance costs. Of this total, $7 million was
recorded in cost of sales and $16 million was recorded in selling, general and
administrative expense.
In February 2006, we decided to reduce the work force at certain of our
global locations as part of our ongoing effort to reduce our cost structure. We
recorded a pre-tax charge of $3 million during the first quarter of 2006 for
severance and other benefits related to these reductions in force, substantially
all of which have been paid in cash.
16
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will initiate actions that will
reduce our costs through implementing the most appropriate and efficient
logistics, distribution and manufacturing footprint for the future. We expect to
continue to undertake additional restructuring actions as deemed necessary,
however, there can be no assurances we will undertake such actions. Actions that
we take, if any, will require the approval of our Board of Directors, or its
authorized committee. We plan to conduct any workforce reductions that result in
compliance with all legal and contractual requirements including obligations to
consult with workers' councils, union representatives and others.
We incurred $6 million in restructuring and restructuring-related costs
during the first quarter of 2006. Including the costs incurred in 2002 through
2005 of $71 million, we have incurred a total of $77 million for activities
related to our restructuring initiatives.
Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we were allowed to exclude up to $60 million
of cash charges and expenses, before taxes, related to cost reduction
initiatives over the 2002 to 2006 time period from the calculation of the
financial covenant ratios we are required to maintain under our senior credit
agreement. In February of 2005, our senior credit facility was amended to
exclude all remaining cash charges and expenses related to restructuring
initiatives started on or before February 21, 2005. As of March 31, 2006, we
have excluded $62 million in allowable charges relating to restructuring
initiatives previously started.
Under our amended facility, we are allowed to exclude up to an additional
$60 million of cash charges and expenses, before taxes, related to restructuring
activities initiated after February 21, 2005 from the calculation of the
financial covenant ratios required under our senior credit facility. As of March
31, 2006, we have excluded $15 million in allowable charges relating to
restructuring initiatives against the $60 million available under the terms of
the February 2005 amendment to the senior credit facility.
(5) We are subject to a variety of environmental and pollution control laws
and regulations in all jurisdictions in which we operate. We expense or
capitalize, as appropriate, expenditures for ongoing compliance with
environmental regulations that relate to current operations. We expense costs
related to an existing condition caused by past operations and that do not
contribute to current or future revenue generation. We record liabilities when
environmental assessments indicate that remedial efforts are probable and the
costs can be reasonably estimated. Estimates of the liability are based upon
currently available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and other
societal and economic factors. We consider all available evidence including
prior experience in remediation of contaminated sites, other companies' cleanup
experiences and data released by the United States Environmental Protection
Agency or other organizations. These estimated liabilities are subject to
revision in future periods based on actual costs or new information. Where
future cash flows are fixed or reliably determinable, we have discounted the
liabilities. All other environmental liabilities are recorded at their
undiscounted amounts. We evaluate recoveries separately from the liability and,
when they are assured, recoveries are recorded and reported separately from the
associated liability in our financial statements.
As of March 31, 2006, we are designated as a potentially responsible party
in one Superfund site. Including the Superfund site, we may have the obligation
to remediate current or former facilities, and we estimate our share of
environmental remediation costs to be approximately $9 million. For the
Superfund site and the current and former facilities, we have established
reserves that we believe are adequate for these costs. Although we believe our
estimates of remediation costs are reasonable and are based on the latest
available information, the cleanup costs are estimates and are subject to
revision as more information becomes available about the extent of remediation
required. At some sites, we expect that other parties will contribute to the
remediation costs. In addition, at the Superfund site, the Comprehensive
Environmental Response, Compensation and Liability Act provides that our
liability could be joint and several, meaning that we could be required to pay
in excess of our share of remediation costs. Our understanding of the financial
strength of other potentially responsible parties at the Superfund site, and
17
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
of other liable parties at our current and former facilities, has been
considered, where appropriate, in our determination of our estimated liability.
We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund site, or as a liable party at our
current or former facilities, will not be material to our results of operations
or consolidated financial position.
We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, and other product liability related matters), taxes,
employment matters, and commercial or contractual disputes, sometimes related to
acquisitions or divestitures. For example, one of our Chinese joint ventures is
currently under investigation by Chinese government officials related to whether
the joint venture applied the proper tariff code to certain of its imports. We
vigorously defend ourselves against all of these claims. In future periods, we
could be subjected to cash costs or non-cash charges to earnings if any of these
matters is resolved on unfavorable terms. However, although the ultimate outcome
of any legal matter cannot be predicted with certainty, based on present
information, including our assessment of the merits of the particular claim, we
do not expect that these legal proceedings or claims will have any material
adverse impact on our future consolidated financial position or results of
operations. In addition, we are subject to a number of lawsuits initiated by a
significant number of claimants alleging health problems as a result of exposure
to asbestos. Many of these cases involve significant numbers of individual
claimants. However, only a small percentage of these claimants allege that they
were automobile mechanics who were allegedly exposed to our former muffler
products and a significant number appear to involve workers in other industries
or otherwise do not include sufficient information to determine whether there is
any basis for a claim against us. We believe, based on scientific and other
evidence, it is unlikely that mechanics were exposed to asbestos by our former
muffler products and that, in any event, they would not be at increased risk of
asbestos-related disease based on their work with these products. Further, many
of these cases involve numerous defendants, with the number of each in some
cases exceeding 200 defendants from a variety of industries. Additionally, the
plaintiffs either do not specify any, or specify the jurisdictional minimum,
dollar amount for damages. As major asbestos manufacturers continue to go out of
business or file for bankruptcy, we may experience an increased number of these
claims. We vigorously defend ourselves against these claims as part of our
ordinary course of business. In future periods, we could be subject to cash
costs or non-cash charges to earnings if any of these matters is resolved
unfavorably to us. To date, with respect to claims that have proceeded
sufficiently through the judicial process, we have regularly achieved favorable
resolution in the form of a dismissal of the claim or a judgment in our favor.
Accordingly, we presently believe that these asbestos-related claims will not
have a material adverse impact on our future financial condition or results of
operations.
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.
18
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Below is a table that shows the activity in the warranty accrual accounts:
THREE MONTHS
ENDED
MARCH 31,
--------------
2006 2005
---- ----
(MILLIONS)
Beginning Balance................................................. $22 $19
Accruals related to product warranties............................ 5 3
Reductions for payments made...................................... (4) (3)
--- ---
Ending Balance.................................................... $23 $19
=== ===
(6) In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. 46" (revised December
2003). The statement addresses whether a reporting enterprise should consider
whether it holds an implicit variable interest in a variable interest entity
("VIE") or potential VIE when specific conditions exist. The guidance should be
applied in the first reporting period beginning after March 3, 2005. The
adoption of FSP No. FIN 46(R)-5 did not have an impact on our consolidated
financial statements.
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations." This interpretation clarifies that the term
conditional asset retirement obligation as used in FASB No. 143, "Accounting for
Conditional Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. This interpretation was effective no later than the end
of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 did
not have a material impact on our financial position or results of operation.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Corrections," which supersedes APB No. 20, "Accounting Changes" and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements." This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 was effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 did not have a material impact on our financial
position or results of operation.
In June 2005, the FASB issued Staff Position ("FSP") No. 143-1, "Accounting
for Electronic Equipment Waste Obligations." This statement addresses the
accounting for obligations associated with Directive 2005/96/ EC on Waste
Electrical and Electronic Equipment adopted by the European Union. The Directive
distinguishes between "new" and "historical" waste. The guidance should be
applied the later of the first reporting period ending after June 8, 2005, or
the date of the adoption of the law by the applicable EU-member country. The
adoption of FSP No. 143-1 did not have a material impact on our financial
position or results of operations.
In November 2005, the FASB issued FSP FAS 123(R)-3, "Transition Election to
Accounting for the Tax Effects of Share-Based Payment Awards." This FSP requires
an entity to follow either the transition guidance for the additional paid-in-
capital pool as prescribed in SFAS No. 123(R), Share-Based Payment, or the
alternative transition method as described in the FSP. An entity that adopts
SFAS No. 123(R) using the modified prospective application may make a one-time
election to adopt the transition method described in this FSP. An entity may
take up to one year from the later of its initial adoption of SFAS No. 123(R) or
the effective date of this FSP to evaluate its available transition alternatives
and make its one-time election. This FSP became effective in November 2005. We
continue to evaluate the impact that the adoption of this FSP could have on our
financial statements.
(7) We entered into an agreement to sell an interest in some of our U.S.
trade accounts receivable to a third party. Receivables become eligible for the
program on a daily basis, at which time the receivables are sold to the third
party, net of a factoring discount, through a wholly-owned subsidiary. Under
this agreement, as well as individual agreements with third parties in Europe,
we have sold accounts receivable of $147 million at both
19
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
March 31, 2006 and 2005, respectively. We recognized a loss of slightly greater
than $1 million for the quarter ended March 31, 2006, and less than $1 million
for the quarter ended March 31, 2005, on these sales of trade accounts,
representing the discount from book values at which these receivables were sold
to the third party. The discount rate varies based on funding cost incurred by
the third party, which has averaged approximately 6 percent during 2006. We
retained ownership of the remaining interest in the pool of receivables not sold
to the third party. The retained interest represents a credit enhancement for
the program. We value the retained interest based upon the amount we expect to
collect from our customers, which approximates book value.
(8) Earnings per share of common stock outstanding were computed as
follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2006 2005
----------- -----------
(MILLIONS EXCEPT SHARE
AND PER SHARE AMOUNTS)
Basic earnings per share--
Income................................................. $ 7 $ 7
=========== ===========
Average shares of common stock outstanding............. 43,921,691 42,674,558
=========== ===========
Earnings per average share of common stock............. $ 0.15 $ 0.17
=========== ===========
Diluted earnings per share--
Income................................................. $ 7 $ 7
=========== ===========
Average shares of common stock outstanding............. 43,921,691 42,674,558
Effect of dilutive securities:
Restricted stock.................................... 456,601 313,372
Stock options....................................... 2,344,889 2,007,945
----------- -----------
Average shares of common stock outstanding including
dilutive securities................................. 46,723,181 44,995,875
=========== ===========
Earnings per average share of common stock............. $ 0.14 $ 0.16
=========== ===========
Options to purchase 630,992 and 1,249,391 shares of common stock were
outstanding at March 31, 2006 and 2005, respectively, but were not included in
the computation of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares for the quarters ended March
31, 2006 and 2005, respectively.
(9) Net periodic pension costs (income) and postretirement benefit costs
(income) consist of the following components:
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
2006 2005
2006 2005 ---- ----
------------ ------------- POSTRETIRE-
PENSION MENT
--------------------------- -----------
US FOREIGN US FOREIGN US US
--- ------- ---- ------- ---- ----
(MILLIONS)
Service cost--benefits earned during the year.. $ 4 $ 2 $ 5 $ 2 $ 1 $ 1
Interest cost.................................. 5 4 4 4 2 2
Expected return on plan assets................. (5) (4) (4) (4) -- --
Net amortization:
Actuarial loss............................... 1 1 1 1 2 2
Prior service cost........................... 1 -- -- -- (2) (2)
--- ---- ---- ---- ---- ----
Net pension and postretirement costs........... $ 6 $ 3 $ 6 $ 3 $ 3 $ 3
=== ==== ==== ==== ==== ====
For the three months ended March 31, 2006, we made pension contributions of
approximately $4 million for our domestic pension plans and $2 million for our
foreign pension plans. Based on current actuarial estimates, we believe we will
be required to make approximately $31 million in contributions for the remainder
of 2006.
20
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
We made postretirement contributions of approximately $2 million during the
first three months of 2006. Based on current actuarial estimates, we believe we
will be required to make approximately $7 million in contributions for the
remainder of 2006.
(10) We occasionally provide guarantees that could require us to make
future payments in the event that the third party primary obligor does not make
its required payments. We have not recorded a liability for any of these
guarantees. The only third party guarantee we have made is the performance of
lease obligations by a former affiliate. Our maximum liability under this
guarantee was approximately $1 million at both March 31, 2006 and 2005,
respectively. We have no recourse in the event of default by the former
affiliate. However, we have not been required to make any payments under this
guarantee.
Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our existing and future material
domestic wholly-owned subsidiaries fully and unconditionally guarantee our
senior credit facility, our senior secured notes and our senior subordinated
notes on a joint and several basis. The arrangement for the senior credit
facility is also secured by first-priority liens on substantially all our
domestic assets and pledges of 66 percent of the stock of certain first-tier
foreign subsidiaries. The arrangement for the $475 million senior secured notes
is also secured by second-priority liens on substantially all our domestic
assets, excluding some of the stock of our domestic subsidiaries. No assets or
capital stock of our direct or indirect foreign subsidiaries secure these notes.
You should also read Note 12 where we present the Supplemental Guarantor
Condensed Consolidating Financial Statements.
We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities and cash management requirements for some of
our subsidiaries totaling $15 million. We have also issued $20 million in
letters of credit to support some of our subsidiaries' insurance arrangements.
In addition, we have issued $3 million in guarantees through letters of credit
to guarantee other obligations of subsidiaries primarily related to
environmental remediation activities.
Interest Rate Swaps--In April 2004, we hedged our exposure to fixed
interest rates by entering into fixed-to-floating interest rate swaps covering
$150 million of our fixed interest rate debt. These swaps qualify as fair value
hedges in accordance with SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended and as such are recorded on the balance
sheet at fair value as a long-term asset or liability with an offset to the
underlying hedged item, which is long-term debt. The cost of replacing these
contracts in the event of non-performance by the counterparties was not
material. These hedges are effective, so we have not recognized in earnings any
amounts related to the ineffectiveness of the interest rate swaps. No amounts
were excluded from the assessment of hedge effectiveness.
Negotiable Financial Instruments--One of our European subsidiaries receives
payment from one of its OE customers whereby the account receivables are
satisfied through the delivery of negotiable financial instruments. These
financial instruments are then sold at a discount to a European bank. The sales
of these financial instruments are not included in the account receivables sold
in 2005. Any of these financial instruments which were not sold as of March 31,
2006 and 2005 are classified as other current assets and are excluded from our
definition of cash equivalents. We had sold approximately $26 million of these
instruments at March 31, 2006 and $31 million at March 31, 2005.
In certain instances several of our Chinese subsidiaries receive payment
from OE customers and satisfy vendor payments through the receipt and delivery
of negotiable financial instruments. Financial instruments used to satisfy
vendor payables and not redeemed totaled $4 million at March 31, 2006 and are
classified as notes payable. Financial instruments received from OE customers
and not redeemed totaled $8 million at March 31, 2006 and are classified as
other current assets. One of our Chinese subsidiaries is required to maintain a
cash balance at a financial institution issuing the financial instruments which
are used to satisfy vendor payments. The balance totaled approximately $1
million at March 31, 2006 and is classified as cash and cash equivalents.
21
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(11) In October 2004 and July 2005, we announced changes in the structure
of our organization which changed the components of our reportable segments. The
European segment now includes the South American and Indian operations. The Asia
Pacific segment includes our other Asian and Australian operations. While this
had no impact on our consolidated results, it changed our segment results. You
should note that we have reclassified prior year's segment data where
appropriate to conform to the 2006 presentations.
We are a global manufacturer with three geographic reportable segments: (1)
North America, (2) Europe, South America and India ("Europe"), and (3) Asia
Pacific. Each segment manufactures and distributes ride control and emission
control products primarily for the automotive industry. We have not aggregated
individual operating segments within these reportable segments. We evaluate
segment performance based primarily on income before interest expense, income
taxes, and minority interest. Products are transferred between segments and
geographic areas on a basis intended to reflect as nearly as possible the
"market value" of the products.
The following table summarizes certain Tenneco segment information:
SEGMENT
-------------------------------------------------
NORTH ASIA RECLASS &
AMERICA EUROPE PACIFIC ELIMS CONSOLIDATED
------- ------ ------- --------- ------------
(MILLIONS)
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
AT MARCH 31, 2005, AND FOR THE THREE
MONTHS THEN ENDED
Revenues from external customers.......... $ 505 $ 514 $ 82 $-- $1,101
Intersegment revenues..................... 1 15 3 (19) --
Income before interest expense, income
taxes, and minority interest............ 37 5 2 -- 44
Total assets, as adjusted................. 1,282 1,418 252 109 3,061
(12) Supplemental guarantor condensed financial statements are presented
below:
Basis of Presentation
Subject to limited exceptions, all of our existing and future material
domestic wholly owned subsidiaries (which are referred to as the Guarantor
Subsidiaries) fully and unconditionally guarantee our senior subordinated notes
due 2014 and our senior secured notes due 2013 on a joint and several basis. We
have not presented separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries because management has determined
that such information is not material to the holders of the notes. Therefore,
the Guarantor Subsidiaries are combined in the presentation below.
These condensed consolidating financial statements are presented on the
equity method. Under this method, our investments are recorded at cost and
adjusted for our ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
You should read the condensed consolidating financial statements of the
Guarantor Subsidiaries in connection with our consolidated financial statements
and related notes of which this note is an integral part.
Distributions
There are no significant restrictions on the ability of the Guarantor
Subsidiaries to make distributions to us.
22
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)............. 2 (4) -- -- (2)
---- ---- ---- ----- ------
INCOME (LOSS) 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
==== ==== ==== ===== ======
23
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2005
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues--
External...................... $521 $580 $-- $ -- $1,101
Affiliated companies.......... 17 130 -- (147) --
---- ---- ---- ----- ------
538 710 -- (147) 1,101
---- ---- ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)..... 427 608 -- (147) 888
Engineering, research, and
development................... 14 10 -- -- 24
Selling, general, and
administrative................ 40 58 -- -- 98
Depreciation and amortization of
other intangibles............. 18 28 -- -- 46
---- ---- ---- ----- ------
499 704 -- (147) 1,056
---- ---- ---- ----- ------
OTHER INCOME (EXPENSE)............. 2 (3) -- -- (1)
---- ---- ---- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES........................ 41 3 -- -- 44
Interest expense--
External (net of interest
capitalized)................ -- 1 31 -- 32
Affiliated companies (net of
interest income)............ 27 (2) (25) -- --
Income tax expense (benefit)..... 13 1 (3) (7) 4
Minority interest................ -- 1 -- -- 1
---- ---- ---- ----- ------
1 2 (3) 7 7
Equity in net income (loss) from
affiliated companies.......... 8 -- 10 (18) --
---- ---- ---- ----- ------
NET INCOME (LOSS).................. $ 9 $ 2 $ 7 $ (11) $ 7
==== ==== ==== ===== ======
24
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
BALANCE SHEET
MARCH 31, 2006
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ 96 $ -- $ -- $ 96
Receivables, net................. 213 743 66 (394) 628
Inventories...................... 118 274 -- -- 392
Deferred income taxes............ 37 7 2 (2) 44
Prepayments and other............ 15 102 -- -- 117
------ ------ ------ -------- ------
383 1,222 68 (396) 1,277
------ ------ ------ -------- ------
Other assets:
Investment in affiliated
companies..................... 443 -- 1,055 (1,498) --
Notes and advances receivable
from affiliates............... 3,311 193 4,827 (8,331) --
Long-term notes receivable, net.. 2 22 -- -- 24
Goodwill......................... 135 65 -- -- 200
Intangibles, net................. 13 19 -- -- 32
Deferred income taxes............ 252 57 197 (198) 308
Other............................ 36 70 31 2 139
------ ------ ------ -------- ------
4,192 426 6,110 (10,025) 703
------ ------ ------ -------- ------
Plant, property, and equipment, at
cost............................. 939 1,540 -- -- 2,479
Less--Reserves for depreciation
and amortization.............. 605 822 -- -- 1,427
------ ------ ------ -------- ------
334 718 -- -- 1,052
------ ------ ------ -------- ------
$4,909 $2,366 $6,178 $(10,421) $3,032
====== ====== ====== ======== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including
current maturities of long-
term debt)
Short-term debt--non-
affiliated.................... $ -- $ 20 $ 12 $ -- $ 32
Short-term debt--affiliated... 1 255 10 (266) --
Trade payables................... 237 570 -- (78) 729
Accrued taxes.................... 74 18 -- (49) 43
Other............................ 160 101 33 (49) 245
------ ------ ------ -------- ------
472 964 55 (442) 1,049
Long-term debt--non-affiliated..... -- 11 1,340 1 1,352
Long-term debt--affiliated......... 3,642 71 4,618 (8,331) --
Deferred income taxes.............. 158 82 -- (159) 81
Postretirement benefits and other
liabilities...................... 264 89 8 6 367
Commitments and contingencies
Minority interest.................. -- 26 -- -- 26
Shareholders' equity............... 373 1,123 157 (1,496) 157
------ ------ ------ -------- ------
$4,909 $2,366 $6,178 $(10,421) $3,032
====== ====== ====== ======== ======
25
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
BALANCE SHEET
MARCH 31, 2005
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ 68 $ -- $ -- $ 68
Receivables, net................. 154 579 25 (202) 556
Inventories...................... 134 301 -- -- 435
Deferred income taxes............ 59 10 36 (35) 70
Prepayments and other............ 22 121 -- -- 143
------ ------ ------ ------- ------
369 1,079 61 (237) 1,272
------ ------ ------ ------- ------
Other assets:
Investment in affiliated
companies..................... 428 -- 958 (1,386) --
Notes and advances receivable
from affiliates............... 3,096 14 4,680 (7,790) --
Long-term notes receivable, net.. 2 19 -- -- 21
Goodwill......................... 136 60 -- -- 196
Intangibles, net................. 13 10 -- -- 23
Deferred income taxes............ 257 52 178 (178) 309
Other............................ 35 75 35 -- 145
------ ------ ------ ------- ------
3,967 230 5,851 (9,354) 694
------ ------ ------ ------- ------
Plant, property, and equipment, at
cost............................. 897 1,521 -- -- 2,418
Less--Reserves for depreciation
and amortization.............. 562 761 -- -- 1,323
------ ------ ------ ------- ------
335 760 -- -- 1,095
------ ------ ------ ------- ------
$4,671 $2,069 $5,912 $(9,591) $3,061
====== ====== ====== ======= ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including
current maturities of long-
term debt)
Short-term debt--non-
affiliated.................... $ -- $ 18 $ 30 $ -- $ 48
Short-term debt--affiliated... 20 95 10 (125) --
Trade payables................... 233 547 -- (73) 707
Accrued taxes.................... 32 14 -- (21) 25
Other............................ 128 126 31 (3) 282
------ ------ ------ ------- ------
413 800 71 (222) 1,062
Long-term debt-non-affiliated...... -- 14 1,346 -- 1,360
Long-term debt-affiliated.......... 3,434 -- 4,356 (7,790) --
Deferred income taxes.............. 257 66 -- (198) 125
Postretirement benefits and other
liabilities...................... 260 84 4 6 354
Commitments and contingencies
Minority interest.................. -- 25 -- -- 25
Shareholders' equity............... 307 1,080 135 (1,387) 135
------ ------ ------ ------- ------
$4,671 $2,069 $5,912 $(9,591) $3,061
====== ====== ====== ======= ======
26
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 $ 12 $(68) $-- $(23)
---- ---- ---- ---- ----
INVESTING ACTIVITIES
Net proceeds from the sale of
assets............................ -- -- -- -- --
Expenditures for plant, property,
and equipment..................... (21) (17) -- -- (38)
Expenditures for software related
intangible assets................. (1) (2) -- -- (3)
Acquisition of businesses........... -- -- -- -- --
Investments and other............... -- -- -- -- --
---- ---- ---- ---- ----
Net cash used by investing
activities........................ (22) (19) -- -- (41)
---- ---- ---- ---- ----
FINANCING ACTIVITIES
Issuance of common shares........... -- -- 8 -- 8
Retirement of long-term debt........ -- (1) -- -- (1)
Net increase (decrease) in 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.
27
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005
-----------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS &
SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED
------------ ------------ ------------ --------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities............ $ (52) $ 11 $(55) $-- $ (96)
----- ---- ---- ---- -----
INVESTING ACTIVITIES
Net proceeds from the sale of
assets.......................... -- 1 -- -- 1
Expenditures for plant, property,
and equipment................... (10) (22) -- -- (32)
Expenditures for software related
intangible assets............... -- (3) -- -- (3)
Acquisition of businesses......... -- (11) -- -- (11)
Investments and other............. 1 2 -- -- 3
----- ---- ---- ---- -----
Net cash used by investing
activities...................... (9) (33) -- -- (42)
----- ---- ---- ---- -----
FINANCING ACTIVITIES
Issuance of common shares......... -- -- 2 -- 2
Retirement of long-term debt...... -- (1) (40) -- (41)
Net increase (decrease) in short-
term debt excluding current
maturities of long-term debt.... -- 4 29 -- 33
Intercompany dividends and net
increase (decrease) in
intercompany obligations........ (79) 15 64 -- --
Other............................. -- 1 -- -- 1
----- ---- ---- ---- -----
Net cash provided (used) by
financing activities............ (79) 19 55 -- (5)
----- ---- ---- ---- -----
Effect of foreign exchange rate
changes on cash and cash
equivalents..................... -- (3) -- -- (3)
----- ---- ---- ---- -----
Decrease in cash and cash
equivalents..................... (140) (6) -- -- (146)
Cash and cash equivalents, January
1............................... 140 74 -- -- 214
----- ---- ---- ---- -----
Cash and cash equivalents, March
31 (Note)....................... $ -- $ 68 $-- $-- $ 68
===== ==== ==== ==== =====
NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
(The preceding notes are an integral part of the foregoing financial
statements.)
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 manufacturers and the repair and replacement markets, or
aftermarket, globally through leading brands, including Monroe(R), Rancho(R),
Clevite(R) Elastomers and Fric Rot(TM) ride control products and Walker(R),
Fonos(TM), and Gillet(TM) emission control products. Worldwide we serve more
than 30 different original equipment manufacturers, and our products or systems
are included on nine of the top 10 passenger car models produced for sale in
Western Europe and all of the top 10 light truck models produced for sale in
North America for 2005. Our aftermarket customers were comprised of full-line
and specialty warehouse distributors, retailers, jobbers, installer chains and
car dealers. We operate more than 70 manufacturing facilities worldwide and
employ approximately 19,000 people to service our customers' demands.
Factors that are critical to our success include winning new business
awards, managing our overall global manufacturing footprint to ensure proper
placement and workforce levels in line with business needs, maintaining
competitive wages and benefits, maximizing efficiencies in manufacturing
processes, fixing or eliminating unprofitable businesses and reducing overall
costs. In addition, our ability to adapt to key industry trends, such as the
consolidation of OE customers, increasing technologically sophisticated content,
changing aftermarket distribution channels, increasing environmental standards
and extended product life of automotive parts, also plays a critical role in our
success. Other factors that are critical to our success include adjusting to
environmental and economic challenges such as increases in the cost of raw
materials and our ability to successfully reduce the impact of any such cost
increases through material substitutions, cost reduction initiatives and other
methods.
We have a substantial amount of indebtedness. 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 2006 were $1.1 billion, a three
percent increase over 2005. Higher aftermarket sales in North America and OE
volumes in Europe, South America and Asia primarily drove this increase. Gross
margin for the first quarter of 2006 was 18.6 percent, down 0.7 percent from
19.3 percent in 2005. This was primarily driven by higher substrate sales, which
on average carry a lower margin, and by higher restructuring charges that more
than offset savings and improved efficiencies from Lean manufacturing and Six
Sigma efforts. We reported selling, general, administrative and engineering
expenses for the first three months of 2006 of 10.9 percent of revenues, as
compared to 11.1 percent of revenues for 2005. This improvement in selling,
general, administrative and engineering expense was driven by discretionary
spending controls and savings from previously announced restructuring efforts.
Earnings before interest and taxes ("EBIT") was $42 million for the first
quarter of 2006, down $2 million from the $44 million reported in 2005.
Restructuring and restructuring related expenses in the first quarter of 2006
were $6 million compared to $3 million in the same period last year. Included in
2006 first quarter EBIT was expense of $1 million for adopting the new
accounting standard for stocked-based compensation. The company's revenues and
earnings were also negatively impacted by currency and the retiring of several
OE emission control vehicle platforms.
In October 2004 and July 2005, we announced changes in the structure of our
organization which changed the components of our reportable segments. The
European segment now includes our South American and Indian operations. The Asia
Pacific segment includes our other Asian and Australian operations. While this
had no impact on our consolidated results, it changed our segment results. These
changes in segment reporting have been reflected in this Management's Discussion
and Analysis, and the accompanying consolidated financial statements, for all
periods presented.
In February 2005, we acquired substantially all the exhaust assets, and
assumed certain related liabilities of, Gabilan Manufacturing, Inc., a privately
held company that had developed and manufactured motorcycle exhaust systems for
Harley-Davidson motorcycles since 1978. The company also produced aftermarket
muffler kits for Harley-Davidson. We purchased Gabilan's assets, including
working capital adjustments, for $11 million in cash. We recorded revenue of
approximately $11 million related to this business in the first quarter of 2006,
up from
29
$6 million in the first quarter of 2005 due to both higher 2006 volumes and the
additional month of ownership in 2006.
In December 2005, we completed the acquisition of the minority interest of
the joint venture partner for our Indian ride control operations. We purchased
the minority owned interest for approximately $5 million in cash and property.
RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
NET SALES AND OPERATING REVENUES
The following tables reflect our revenues for the first quarter of 2006 and
2005. We present these reconciliations of revenues in order to reflect the trend
in our sales in various product lines and geographic regions separately from the
effects of doing business in currencies other than the U.S. dollar.
Additionally, "substrate" catalytic converter sales include precious metals
pricing, which may be volatile. These "substrate" catalytic converter sales
occur when, at the direction of our OE customers, we purchase catalytic
converters or components from suppliers, use them in our manufacturing process,
and sell them as part of the completed system. While, generally, our original
equipment customers assume the risk of this volatility, it impacts our reported
revenues. Excluding "substrate" catalytic converter sales removes this impact.
We have not reflected any currency impact in the 2005 table since this is the
base period for measuring the effects of currency during 2006 on our operations.
We use this information to analyze the trend in our revenues before these
factors. We believe investors find this information useful in understanding
period-to-period comparisons in our revenues.
THREE MONTHS ENDED 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 3 240 66 174
------ ---- ------ ---- ----
Total North America Original
Equipment........................ 374 3 371 66 305
North America Aftermarket
Ride Control.......................... 101 -- 101 -- 101
Emission Control...................... 40 40 40
------ ---- ------ ---- ----
Total North America Aftermarket.... 141 141 141
Total North America.............. 515 3 512 66 446
Europe Original Equipment
Ride Control.......................... 95 (6) 101 -- 101
Emission Control...................... 292 (19) 311 111 200
------ ---- ------ ---- ----
Total Europe Original Equipment.... 387 (25) 412 111 301
Europe Aftermarket
Ride Control.......................... 36 (2) 38 -- 38
Emission Control...................... 39 (4) 43 43
------ ---- ------ ---- ----
Total Europe Aftermarket........... 75 (6) 81 81
South America & India................... 65 6 59 7 52
Total Europe, South America &
India......................... 527 (25) 552 118 434
Asia.................................... 50 -- 50 17 33
Australia............................... 40 (2) 42 4 38
------ ---- ------ ---- ----
Total Asia Pacific............... 90 (2) 92 21 71
------ ---- ------ ---- ----
Total Tenneco........................... $1,132 $(24) $1,156 $205 $951
====== ==== ====== ==== ====
30
THREE MONTHS ENDED MARCH 31, 2005
------------------------------------------------------
SUBSTRATE REVENUES
SALES EXCLUDING
REVENUES EXCLUDING CURRENCY AND
CURRENCY EXCLUDING CURRENCY SUBSTRATE
REVENUES IMPACT CURRENCY IMPACT SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control.......................... $ 127 $-- $ 127 $-- $127
Emission Control...................... 248 -- 248 67 181
------ ---- ------ ---- ----
Total North America Original
Equipment........................ 375 -- 375 67 308
North America Aftermarket
Ride Control.......................... 91 -- 91 -- 91
Emission Control...................... 39 -- 39 -- 39
------ ---- ------ ---- ----
Total North America Aftermarket.... 130 130 -- 130
Total North America.............. 505 505 67 438
Europe Original Equipment
Ride Control.......................... 109 -- 109 -- 109
Emission Control...................... 272 -- 272 79 193
------ ---- ------ ---- ----
Total Europe Original Equipment.... 381 381 79 302
Europe Aftermarket
Ride Control.......................... 37 -- 37 -- 37
Emission Control...................... 45 -- 45 -- 45
------ ---- ------ ---- ----
Total Europe Aftermarket........... 82 -- 82 -- 82
South America & India................... 51 -- 51 4 47
Total Europe, South America &
India......................... 514 -- 514 83 431
Asia.................................... 35 -- 35 13 22
Australia............................... 47 -- 47 4 43
------ ---- ------ ---- ----
Total Asia Pacific............... 82 82 17 65
------ ---- ------ ---- ----
Total Tenneco........................... $1,101 $-- $1,101 $167 $934
====== ==== ====== ==== ====
Revenues from our North American operations increased $10 million in the
first quarter of 2006 compared to the same period last year. Higher sales from
the aftermarket business were partially offset by lower total North American OE
revenues which were slightly lower in the first quarter of 2006, as compared to
the first quarter of 2005. OE emission control revenues decreased two percent to
$243 million in the first quarter of 2006, primarily due to the impact from
retiring emission-control platforms. Adjusted for substrate sales and currency,
OE emission control sales were down three percent compared to last year. OE ride
control revenues for the first quarter of 2006 increased four percent from the
prior year, driven by an increase in heavy-duty volumes. Total North American OE
revenues, excluding substrate sales and currency, decreased one percent in the
first quarter of 2006, while North American light vehicle production increased
approximately three percent from one year ago. Favorable platform mix and strong
heavy-duty ride control volumes were more than offset by production declines on
key vehicle platforms. Aftermarket revenues for North America were $141 million
in the first quarter of 2006, representing an increase of eight percent compared
to the prior year. New business, stronger ride control unit sales and higher
pricing in both product lines drove this increase. Aftermarket ride control
revenues grew to $101 million in the first quarter of 2006, up 11 percent from
the same period last year. Aftermarket emission control revenues increased two
percent in the first quarter of 2006 to $40 million, as compared to $39 million
in 2005, as a result of higher pricing.
Our European, South American and Indian segment's revenues increased $13
million, or three percent, in the first quarter of 2006 compared to last year.
Total Europe OE revenues were $387 million in the first quarter of 2006, up two
percent from the same period last year. OE emission control revenues increased
eight percent to $292 million in the first quarter of 2006, as compared to $272
million in the first quarter of 2005. Excluding a $32 million increase in
substrate sales and a $19 million decrease due to weakening currency, OE
emission control revenues increased four percent over 2005, in line with
European light vehicle production levels. Our increase of four percent
31
was a result of higher sales from the launch and ramp up of successful platforms
with BMW, Volkswagen, Nissan, Volvo and Porsche. OE ride control revenues
decreased to $95 million in the first quarter of 2006, down 13 percent from $109
million a year ago despite our position on top selling platforms with
Volkswagen, Fiat, Nissan and Suzuki, and increased sales of our conventional and
electronic controlled shock for the Audi A6. This was due to $6 million of
unfavorable currency and an accounting adjustment. We changed our reporting in
the second quarter of 2005 for an "assembly-only" contract with a European OE
ride control customer and began accounting for those revenues net of the related
cost of sales. If we had reported our first quarter 2005 revenues in the same
manner, they would have been lower by $15 million. European aftermarket sales
were $75 million in the first quarter of 2006 compared to $82 million in the
prior year. Excluding $6 million of unfavorable currency, European aftermarket
revenues declined one percent in the first quarter of 2006 compared to last
year. Ride control aftermarket revenues, excluding the impact of currency, were
up two percent compared to the prior year driven by higher volumes. Aftermarket
emission control revenues excluding unfavorable currency of $4 million, were
lower by four percent. South American and Indian revenues were $65 million
during the first quarter of 2006, compared with $51 million in the prior year.
Higher OE volumes primarily drove this 25 percent increase. Currency
appreciation in Brazil and Argentina also added $6 million to South America's
revenues.
Revenues from our Asia Pacific segment, which includes Australia and Asia,
increased $8 million to $90 million in the first quarter of 2006 compared to the
same period last year. First quarter revenues for Australia fell 14 percent to
$40 million. Currency had an unfavorable impact of $2 million on Australian
revenue, but lower production volumes had the most significant impact on
Australia's revenue decline. Asia revenues for the first quarter of 2006 were
$50 million, up 45 percent from last year. This increase was primarily due to
stronger sales in China driven by the ramp up of fourth quarter 2005 platform
launches and higher volumes with key customers.
EBIT
THREE
MONTHS
ENDED
MARCH 31,
----------
2006 2005 CHANGE
---- ---- ------
(MILLIONS)
North America................................................ $ 34 $37 $(3)
Europe, South America & India................................ 8 5 3
Asia Pacific................................................. -- 2 (2)
---- --- ---
$ 42 $44 $(2)
==== === ===
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,
----------
2006 2005
---- ----
(MILLIONS)
North America
Restructuring-related expenses................................... $3 $ 2
Stock-based compensation accounting change....................... 1 --
Europe, South America & India
Restructuring-related expenses................................... 1 1
Asia Pacific
Restructuring-related expenses................................... 2 --
EBIT for North American operations decreased to $34 million in the first
quarter of 2006, from $37 million one year ago. Lower volumes on key OE exhaust
platforms impacted EBIT by $2 million while unfavorable currency and incremental
start-up costs for new platforms each had a $1 million impact. Higher OE price
concessions also negatively impacted EBIT. These decreases were partially offset
by lower selling, general, administrative and engineering costs and higher North
American OE ride control and aftermarket revenues. Included in North America's
first quarter 2006 EBIT were $3 million in restructuring and restructuring-
related expenses and
32
$1 million for adopting the new accounting standard for stock-based
compensation. Included in North America's first quarter 2005 EBIT were $2
million in restructuring and restructuring-related expenses.
Our European, South American and Indian segment's EBIT was $8 million for
the first quarter of 2006 compared to $5 million during the same period last
year. Higher European OE volumes from both emission and ride control product
lines contributed $4 million to EBIT. Improved OE manufacturing performance
added $8 million to EBIT. These increases were partially offset by price
concessions and higher selling, general, administrative and engineering costs of
$3 million and unfavorable currency of $1 million. Higher aftermarket ride
control volumes increased EBIT by $1 million. Higher aftermarket manufacturing
and selling, general, administrative and engineering expenses decreased EBIT by
$5 million. South America and India benefited from higher volumes and lower
manufacturing costs compared to the same period last year. Included in 2006's
first quarter EBIT was $1 million in restructuring related expenses. Included in
2005's first quarter EBIT were $1 million in restructuring related expenses.
EBIT for our Asia Pacific segment was breakeven in the first quarter of
2006 compared to $2 million in the first quarter of 2005. Lower volumes and
higher manufacturing costs in Australia primarily related to restructuring
activities reduced EBIT by $1 million and $3 million dollars respectively. These
decreases were partially offset by higher revenue and lower selling, general,
administrative and engineering costs in Asia. Included in the first quarter of
2006's EBIT was $2 million in restructuring-related expenses.
EBIT AS A PERCENTAGE OF REVENUE
THREE
MONTHS
ENDED
MARCH 31,
----------
2006 2005
---- ----
North America...................................................... 7% 7%
Europe, South America & India...................................... 2% 1%
Asia Pacific....................................................... 0% 2%
Total Tenneco.................................................... 4% 4%
In North America, EBIT as a percentage of revenue for the first quarter of
2006 was even with last year. Higher aftermarket revenues and lower selling,
general, administrative and engineering expenses, were offset by lower volumes
on OE exhaust platforms and unfavorable currency. In addition, during the first
quarter of 2006, North American results included higher restructuring and other
charges. In Europe, South America and India, EBIT margin for the first quarter
of 2005 was one percent higher compared to the prior year. Higher revenues and
improved manufacturing performance more than offset the impact of higher
selling, general, administrative and engineering expenses. EBIT as a percentage
of revenue for our Asia Pacific segment decreased two percent in the first
quarter of 2005 versus the prior year. Lower revenue in Australia and higher
restructuring and other charges drove this decrease in EBIT margin.
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $34 million in the first quarter of 2006
compared to $32 million in the prior year. This increase is primarily due to the
impact of higher LIBOR rates on the variable portion of our debt.
In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at an annual rate of
10 1/4 percent to floating interest rate debt at an annual rate of LIBOR plus an
average spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2005 resulted in lower interest expense of approximately $2 million for the
year. Based upon the LIBOR rate as determined under these agreements of 4.73
percent (which remains in effect until July 15, 2006) and the rates in the
market today these swaps are expected to increase our 2006 annual interest
expense by $1 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. As
of March 31, 2006, the fair value of the interest rate swaps was
33
a liability of approximately $9 million, which has been recorded as a decrease
to long-term debt and an increase to other long-term liabilities.
INCOME TAXES
We had no income tax expense after recording a $3 million tax benefit
primarily related to the resolution of certain tax issues with former affiliates
in the first quarter of 2006. Income tax expense was $4 million in the first
quarter of 2005. Excluding the $3 million net tax benefit, the effective tax
rate for the first quarter of 2006 was 35 percent. The effective tax rate for
the first quarter of 2005 was 35 percent.
EARNINGS PER SHARE
We reported net income of $7 million or $0.14 per diluted common share for
the first quarter of 2006, as compared to net income of $7 million or $0.16 per
diluted common share for the first quarter of 2005. 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. Also included in the first three months of 2006, were
charges related to the adoption of a stock-based compensation accounting
standard which negatively impacted earnings per share by $0.02. Adoption of this
accounting standard also increased the calculated number of diluted shares by
approximately 0.6 million primarily due to the elimination of some excess tax
benefits impacting earnings per share by $0.01. Included in the results for the
first quarter of 2005 were negative impacts from expenses related to our
restructuring activities. The net impact of these items decreased earnings per
diluted share by $0.04. Please read the Notes to the consolidated financial
statements for more detailed information on earnings per share.
RESTRUCTURING AND OTHER CHARGES
Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by the Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. Prior to the change in accounting required for exit or disposal
activities, we recorded charges to income related to these plans for costs that
did not benefit future activities in the period in which the plans were
finalized and approved, while actions necessary to affect these restructuring
plans occurred over future periods in accordance with established plans.
In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. Project Genesis involved closing eight facilities, improving the
process flow and efficiency through value mapping and plant arrangement at 20
facilities, relocating production among facilities, and centralizing some
functional areas. The total of all these restructuring and other costs recorded
in the fourth quarter of 2001 was $32 million before tax, $31 million after tax,
or $0.81 per diluted common share. We eliminated 974 positions in connection
with Project Genesis. Additionally, we executed this plan more efficiently than
originally anticipated and as a result in the fourth quarter of 2002 reduced our
reserves related to this restructuring activity by $6 million, which was
recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2
million of severance reserve to the asset impairment reserve. This
reclassification became necessary, as actual asset impairments along with the
sale of our closed facilities were different than the original estimates. We
completed the remaining restructuring activities under Project Genesis as of the
end of 2004. Since Project Genesis was announced, we have undertaken a number of
related projects designed to restructure our operations, described below.
In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. This charge was primarily recorded in cost
of sales.
In October of 2003, we announced the closing of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees were
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $3 million in costs related to
this action in 2004. This action is in addition to the plant closings announced
in Project Genesis in the fourth quarter of 2001.
34
In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of layoffs were at middle and senior management levels. As of March 31, 2006, we
have incurred $23 million in severance costs. Of this total, $7 million was
recorded in cost of sales and $16 million was recorded in selling, general and
administrative expense. We expect to generate savings of approximately $20
million annually from this initiative.
In February 2006, we decided to reduce the work force at certain of our
global locations as part of our ongoing effort to reduce our cost structure. We
recorded a pre-tax charge of $3 million during the first quarter of 2006 for
severance and other benefits related to these reductions in force, substantially
all of which have been paid in cash.
In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will initiate actions that will
reduce our costs through implementing the most appropriate and efficient
logistics, distribution and manufacturing footprint for the future. We expect to
continue to undertake additional restructuring actions as deemed necessary,
however, there can be no assurances we will undertake such actions. Actions that
we take, if any, will require the approval of our Board of Directors, or its
authorized committee. We plan to conduct any workforce reductions that result in
compliance with all legal and contractual requirements including obligations to
consult with workers' councils, union representatives and others.
We incurred $6 million in restructuring and restructuring-related costs
during the first quarter of 2006. Including the costs incurred in 2002 through
2005 of $71 million, we have incurred a total of $77 million for activities
related to our restructuring initiatives.
We have generated about $31 million of annual savings from Project Genesis.
Approximately $7 million of savings was related to closing the eight facilities,
approximately $16 million of savings was related to value mapping and plant
arrangement and approximately $8 million of savings was related to relocating
production among facilities and centralizing some functional areas. There have
been no significant deviations from planned savings. All actions for Project
Genesis have been completed.
Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we were allowed to exclude up to $60 million
of cash charges and expenses, before taxes, related to cost reduction
initiatives over the 2002 to 2006 time period from the calculation of the
financial covenant ratios we are required to maintain under our senior credit
agreement. In February of 2005, our senior credit facility was amended to
exclude all remaining cash charges and expenses related to restructuring
initiatives started on or before February 21, 2005. As of March 31, 2006, we
have excluded $62 million in allowable charges relating to restructuring
initiatives previously started.
Under our amended facility, we are allowed to exclude up to an additional
$60 million of cash charges and expenses, before taxes, related to restructuring
activities initiated after February 21, 2005 from the calculation of the
financial covenant ratios required under our senior credit facility. As of March
31, 2006, we have excluded $15 million in allowable charges relating to
restructuring initiatives against the $60 million available under the terms of
the February 2005 amendment to the senior credit facility.
CRITICAL ACCOUNTING POLICES
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing our
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required.
Revenue Recognition
We recognize revenue for sales to our original equipment and aftermarket
customers when title and risk of loss passes to the customers under the terms of
our arrangements with those customers, which is usually at the time of shipment
from our plants or distribution centers. In connection with the sale of exhaust
systems to certain original equipment manufacturers, we purchase catalytic
converters or components thereof ("substrates") on behalf of our
35
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 $205 million and $167 million for the first quarter of 2006 and 2005,
respectively. For our aftermarket customers, we provide for promotional
incentives and returns at the time of sale. Estimates are based upon the terms
of the incentives and historical experience with returns.
Warranty Reserves
Where we have offered product warranty, we also provide for warranty costs.
Those estimates are based upon historical experience and upon specific warranty
issues as they arise. While we have not experienced any material differences
between these estimates and our actual costs, it is reasonably possible that
future warranty issues could arise that could have a significant impact on our
financial statements.
Long-Term Receivables
We expense pre-production design and development costs incurred for our
original equipment customers unless we have a contractual guarantee for
reimbursement of those costs from the customer. At March 31, 2006, we had $18
million recorded as a long-term receivable from original equipment customers for
guaranteed pre-production design and development arrangements. While we believe
that the vehicle programs behind these arrangements will enter production, these
arrangements allow us to recover our pre-production design and development costs
in the event that the programs are cancelled or do not reach expected production
levels. We have not experienced any material losses on arrangements where we
have a contractual guarantee of reimbursement from our customers.
Income Taxes
We have a U.S. Federal tax net operating loss ("NOL") carryforward at March
31, 2006, of $570 million, which will expire in varying amounts from 2018 to
2025. The federal tax effect of that NOL is $200 million, and is recorded as a
deferred tax asset on our balance sheet at March 31, 2006. We also have state
NOL carryforwards at March 31, 2006 of $724 million, which will expire in
varying amounts from 2006 to 2025. The tax effect of the state NOL, net of a
valuation allowance, is $27 million and is recorded as a deferred tax asset on
our balance sheet at March 31, 2006. We estimate, based on available evidence
both positive and negative, that it is more likely than not that we will utilize
these NOLs within the prescribed carryforward period. That estimate is based
upon our expectations regarding future taxable income of our U.S. operations and
the implementation of available tax planning strategies that accelerate usage of
the NOL. Circumstances that could change that estimate include future U.S.
earnings at lower than expected levels or a majority ownership change as defined
in the rules of the U.S. tax law. If that estimate changed, we would be required
to cease recognizing an income tax benefit for any new NOL and could be required
to record a reserve for some or all of the asset currently recorded on our
balance sheet.
Stock-Based Compensation
Prior to January 1, 2006, we utilized the intrinsic value method to account
for our stock-based compensation plans in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Using
the modified prospective application method, effective January 1, 2006, we
account for our stock-based compensation plans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment" which
requires a fair value method of accounting for compensation costs related to our
stock-based compensation plans. Under the fair value method recognition
provision of the statement, a share-based payment is measured at the grant date
based upon the value of the award and is recognized as expense over the vesting
period. Determining the fair value of share-based awards requires judgment in
estimating employee and market behavior. If actual results differ significantly
from these estimates, stock-based compensation expense and our results of
operations could be materially impacted. Under APB No. 25, for the quarter ended
March 31, 2005, we estimated that the pro forma net income impact under SFAS No.
123(R) would have been less than $1 million or $.01 per diluted share. For the
quarter ended March 31, 2006, the results of adopting SFAS No. 123(R) on our
results of operations including nonqualified stock options and other stock-based
compensation was
36
additional expense of approximately $1 million or $.02 per diluted share. As of
March 31, 2006, there is approximately $4 million of total unrecognized
compensation costs related to these stock-based awards that is expected to be
recognized over a weighted average period of 1.7 years.
Goodwill and Other Intangible Assets
We utilize an impairment-only approach to value our purchased goodwill in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year
in the fourth quarter, we perform an impairment analysis on the balance of
goodwill. Inherent in this calculation is the use of estimates as the fair value
of our designated reporting units is based upon the present value of our
expected future cash flows. In addition, our calculation includes our best
estimate of our weighted average cost of capital and growth rate. If the
calculation results in a fair value of goodwill which is less than the book
value of goodwill, an impairment charge would be recorded in the operating
results of the impaired reporting unit.
Pension and Other Postretirement Benefits
We have various defined benefit pension plans that cover substantially all
of our employees. We also have postretirement health care and life insurance
plans that cover a majority of our domestic employees. Our pension and
postretirement health care and life insurance expenses and valuations are
dependent on assumptions used by our actuaries in calculating those amounts.
These assumptions include discount rates, health care cost trend rates, long-
term return on plan assets, retirement rates, mortality rates and other factors.
Health care cost trend rate assumptions are developed based on historical cost
data and an assessment of likely long-term trends. Retirement rates are based
primarily on actual plan experience while mortality rates are based upon the
general population experience which is not expected to differ materially from
our experience.
Our approach to establishing the discount rate assumption for both our
domestic and foreign plans starts with high-quality investment-grade bonds
adjusted for an incremental yield based on actual historical performance. This
incremental yield adjustment is the result of selecting securities whose yields
are higher than the "normal" bonds that comprise the index. Based on this
approach, for 2005 we lowered the weighted average discount rate for all of our
pension plans to 5.4 percent, from 6.0 percent. The discount rate for
postretirement benefits was lowered from approximately 6.3 percent for 2004 to
approximately 5.8 percent for 2005.
Our approach to determining expected return on plan asset assumptions
evaluates both historical returns as well as estimates of future returns, and is
adjusted for any expected changes in the long-term outlook for the equity and
fixed income markets. As a result, our estimate of the weighted average long-
term rate of return on plan assets for all of our pension plans was lowered from
8.4 percent for 2004 to 8.2 percent for 2005.
Except in the U.K., generally, our pension plans do not require employee
contributions. Our policy is to fund our pension plans in accordance with
applicable U.S. and foreign government regulations and to make additional
payments as funds are available to achieve full funding of the accumulated
benefit obligation. At March 31, 2006, all legal funding requirements had been
met. Other postretirement benefit obligations, such as retiree medical, and
certain foreign pension plans are not funded.
CHANGES IN ACCOUNTING PRONOUNCEMENTS
In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. 46" (revised December
2003). The statement addresses whether a reporting enterprise should consider
whether it holds an implicit variable interest in a variable interest entity
("VIE") or potential VIE when specific conditions exist. The guidance should be
applied in the first reporting period beginning after March 3, 2005. The
adoption of FSP No. FIN 46(R)-5 did not have an impact on our consolidated
financial statements.
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations." This interpretation clarifies that the term
conditional asset retirement obligation as used in FASB No. 143, "Accounting for
Conditional Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. This interpretation was effective no later than the end
of fiscal years
37
ending after December 15, 2005. The adoption of FIN No. 47 did not have a
material impact on our financial position or results of operation.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Corrections," which supersedes APB No. 20, "Accounting Changes" and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements." This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 was effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 did not have a material impact on our financial
position or results of operation.
In June 2005, the FASB issued Staff Position No. ("FSP") No. 143-1,
"Accounting for Electronic Equipment Waste Obligations." This statement
addresses the accounting for obligations associated with Directive 2005/96/ EC
on Waste Electrical and Electronic Equipment adopted by the European Union. The
Directive distinguishes between "new" and "historical" waste. The guidance
should be applied the later of the first reporting period ending after June 8,
2005, or the date of the adoption of the law by the applicable EU-member
country. The adoption of FSP No. 143-1 did not have a material impact on our
financial position or results of operations.
In November 2005, the FASB issued FSP FAS 123(R)-3, "Transition Election to
Accounting for the Tax Effects of Share-Based Payment Awards." This FSP requires
an entity to follow either the transition guidance for the additional paid-in-
capital pool as prescribed in SFAS No. 123(R), Share-Based Payment, or the
alternative transition method as described in the FSP. An entity that adopts
SFAS No. 123(R) using the modified prospective application may make a one-time
election to adopt the transition method described in this FSP. An entity may
take up to one year from the later of its initial adoption of SFAS No. 123(R) or
the effective date of this FSP to evaluate its available transition alternatives
and make its one-time election. This FSP became effective in November 2005. We
continue to evaluate the impact that the adoption of this FSP could have on our
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
CAPITALIZATION
MARCH 31, DECEMBER 31,
2006 2005 % CHANGE
--------- ------------ --------
(MILLIONS)
Short-term debt and current maturities.............. $ 32 $ 22 46%
Long-term debt...................................... 1,352 1,356 --
------ ------
Total debt.......................................... 1,384 1,378 --
------ ------
Total minority interest............................. 26 24 8
Shareholders' equity................................ 157 129 22
------ ------
Total capitalization................................ $1,567 $1,531 2
====== ======
General. Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries, as well as any outstanding
borrowings on our revolving credit facilities, increased by approximately $10
million. Borrowings under our revolving credit facilities increased $12 million
during the first quarter of 2006 and was offset by $2 million decrease in
foreign subsidiaries' obligations. Borrowings under our revolving credit
facilities were $12 million and zero, respectively, as of March 31, 2006 and
December 31, 2005.
The year-to-date increase in shareholders' equity primarily results from
$17 million related to the translation of foreign balances into U.S. dollars. In
addition our net income, premium on common stock issued pursuant to benefit
plans and other transactions which contributed $11 million to shareholders'
equity. While our book equity balance was small at March 31, 2006, it had no
effect on our business operations. We have no debt covenants that are based upon
our book equity, and there are no other agreements that are adversely impacted
by our relatively low book equity.
Overview and Recent Transactions. Our financing arrangements are primarily
provided by a committed senior secured financing arrangement with a syndicate of
banks and other financial institutions. The arrangement is secured by
substantially all our domestic assets and pledges of 66 percent of the stock of
certain first-tier foreign
38
subsidiaries, as well as guarantees by our material domestic subsidiaries. We
originally entered into this facility in 1999 and since that time have
periodically requested and received amendments to the facility for various
purposes. In December of 2003, we engaged in a series of transactions that
resulted in the full refinancing of the facility, through an amendment and
restatement. In February 2005, we amended the facility, which resulted in
reduced interest rates on the term loan B and tranche B-1 letter of
credit/revolving loan portions of the facility. We also made a voluntary
prepayment of $40 million on the term loan B facility, reducing borrowings to
$356 million. During 2005, we increased the amount of commitments under our
revolving credit facility from $220 million to $300 million and reduced the
amount of commitments under our tranche B-1 letter of credit/revolving loan
facility from $180 million to $155 million. As of March 31, 2006, the senior
credit facility consisted of a seven-year, $356 million term loan B facility
maturing in December 2010; a five-year, $300 million revolving credit facility
maturing in December 2008; and a seven-year, $155 million tranche B-1 letter of
credit/revolving loan facility maturing in December 2010.
In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at an annual rate of
10 1/4 percent to floating interest rate debt at an annual rate of LIBOR plus an
average spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2005 resulted in lower interest expense of approximately $2 million for the
year. Based upon the LIBOR rate as determined under these agreements of 4.73
percent (which remains in effect until July 15, 2006) and the rates in the
market today these swaps are expected to increase our 2006 annual interest
expense by $1 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. As
of March 31, 2006, the fair value of the interest rate swaps was a liability of
approximately $9 million which has been recorded as a decrease to long-term debt
and an increase to other long-term liabilities. On March 31, 2006, we had $996
million in long-term debt obligations that have fixed interest rates. Of that
amount, $475 million is fixed through July 2013 and $500 million through
November 2014, while the remainder is fixed over periods of 2007 through 2025.
Included in the $475 million is $150 million of long-term debt obligations
subject to variable interest rates as a result of our swap agreements. We also
have $356 million in long-term debt obligations that have variable interest
rates based on a current market rate of interest.
In November 2004, we refinanced our $500 million of 11 5/8 percent senior
subordinated notes maturing in October of 2009 with new senior subordinated
notes. The new notes have an interest rate of 8 5/8 percent, a maturity date of
November 15, 2014 and contain substantially similar terms as the notes
refinanced. Premium payments and other fees in connection with the refinancing
of these notes totaled approximately $40 million, including a $29 million or
5.813% price premium over par on the redeemed notes. The new notes accrued
interest from November 19, 2004 with an initial interest payment date of May 15,
2005. These notes are described in more detail below under "Senior Secured and
Subordinated Notes."
In connection with the refinancing of the $500 million in senior
subordinated notes we amended the senior credit facility effective November 17,
2004. This amendment allowed us to use up to $50 million in cash on hand to pay
redemption premiums and/or other fees and costs in connection with the
redemption and refinancing of the senior subordinated notes. In exchange for the
amendment, we agreed to pay a small fee to the consenting lenders. We also
incurred approximately $13 million in legal, advisory and other costs related to
the amendment and the issuance of the new senior subordinated notes. These
amounts were capitalized and are being amortized over the remaining terms of the
senior subordinated notes and senior credit facility.
Our interest expense increased in 2004 by $42 million due to the fees and
expenses associated with the refinancing of our senior subordinated notes, which
includes an expense of $8 million for existing deferred debt issuance costs
associated with the 11 5/8 percent senior subordinated notes.
In February 2005 we amended our senior credit facility to reduce by 75
basis points the interest rate on the term loan B facility and the tranche B-1
letter of credit/revolving loan facility. In connection with the amendment, we
voluntarily prepaid $40 million in principal on the term loan B, reducing the
term loan B facility from $396 million to $356 million.
39
Additional provisions of the February 2005 amendment to the senior credit
facility agreement were as follows: (i) amend the definition of EBITDA to
exclude all remaining cash charges and expenses related to restructuring
initiatives started on or before February 21, 2005, and to exclude up to an
additional $60 million in restructuring-related expenses announced and taken
after February 21, 2005, (ii) increase permitted investments to $50 million,
(iii) exclude expenses related to the issuance of stock options from the
definition of consolidated net income, (iv) permit us to redeem up to $125
million of senior secured notes after January 1, 2008 (subject to certain
conditions), (v) increase our ability to add commitments under the revolving
credit facility by $25 million, and (vi) make other minor modifications. We
incurred approximately $1 million in fees and expenses associated with this
amendment, which were capitalized and are being amortized over the remaining
term of the agreement. As a result of the amendment and the voluntary prepayment
of $40 million under the term loan B, our term loan B interest expense in 2005
was approximately $5 million lower than what it would otherwise have been.
During 2005, we increased the amount of commitments under our revolving
credit facility from $220 million to $300 million and reduced the amount of
commitments under our tranche B-1 letter of credit/revolving loan facility from
$180 million to $155 million. This reduction of our tranche B-1 letter of
credit/revolving loan facility was required under the terms of the senior credit
facility, as we had increased the amount of our revolving credit facility
commitments by more than $55 million.
In October 2005, we further amended our senior credit facility increasing
the amount of commitments we may seek under the revolving credit portion of the
facility from $300 million to $350 million, along with other technical changes.
We will not be required to reduce the commitments under our tranche B-1 letter
of credit/revolving loan facility should we obtain additional revolving credit
commitments. We have not yet sought any such increased commitments, but may do
so when, in our judgment, market conditions are favorable.
Senior Credit Facility--Forms of Credit Provided. Following the February
2005 voluntary prepayment of $40 million, the term loan B facility is payable as
follows: $74 million due March 31, 2010, and $94 million due each of June 30,
September 30 and December 12, 2010. The revolving credit facility requires that
if any amounts are drawn, they be repaid by December 2008. Prior to that date,
funds may be borrowed, repaid and reborrowed under the revolving credit facility
without premium or penalty. Letters of credit may be issued under the revolving
credit facility.
The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by December 2010. We can borrow revolving loans from the $155 million
tranche B-1 letter of credit/revolving loan facility and use that facility to
support letters of credit. The tranche B-1 letter of credit/revolving loan
facility lenders have deposited $155 million with the administrative agent, who
has invested that amount in time deposits. We do not have an interest in any of
the funds on deposit. When we draw revolving loans under this facility, the
loans are funded from the $155 million on deposit with the administrative agent.
When we make repayments, the repayments are redeposited with the administrative
agent.
The tranche B-1 letter of credit/revolving loan facility will be reflected
as debt on our balance sheet only if we borrow money under this facility or if
we use the facility to make payments for letters of credit. We will not be
liable for any losses to or misappropriation of any (i) return due to the
administrative agent's failure to achieve the return described above or to pay
all or any portion of such return to any lender under such facility or (ii)
funds on deposit in such account by such lender (other than the obligation to
repay funds released from such accounts and provided to us as revolving loans
under such facility).
Senior Credit Facility--Interest Rates and Fees. Borrowings under the term
loan B facility and the tranche B-1 letter of credit/revolving loan facility
bore interest at an annual rate equal to, at our option, either (i) the London
Interbank Offering Rate plus a margin of 225 basis points (reduced from 300
basis points in February 2005); or (ii) a rate consisting of the greater of the
JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus
a margin of 125 basis points (reduced from 200 basis points in February 2005).
There is no cost to us for issuing letters of credit under the tranche B-1
letter of credit/revolving loan facility, however outstanding letters of credit
reduce our availability to borrow revolving loans under this portion of the
facility. If a letter of credit issued under this facility is subsequently paid
and we do not reimburse the amount paid in full, then a ratable portion of each
lender's deposit would be used to fund the letter of credit. We pay the tranche
B-1 lenders a fee which is equal to LIBOR plus 225 basis points (reduced from
300 basis points in February 2005). This fee is offset by the
40
return on the funds deposited with the administrative agent which earn interest
at a per annum rate approximately equal to LIBOR. Outstanding revolving loans
reduce the funds on deposit with the administrative agent which in turn reduce
the earnings of those deposits and effectively increases our interest expense at
a per annum rate equal to LIBOR. The interest margins for borrowings under the
term loan B facility and tranche B-1 letter of credit/revolving loan facility
were further reduced by 25 basis points as of April 3, 2006, based on an
improved credit rating of BB- by Standard and Poor's.
Borrowings under the revolving credit facility bore interest at an annual
rate equal to, at our option, either (i) the London Interbank Offering Rate plus
a margin of 275 basis points (reduced from 325 basis points in March 2005 and
further reduced from 300 basis points in August 2005); or (ii) a rate consisting
of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus
37.5 basis points (reduced from 50 basis points to 37.5 basis points in August
2005), plus a margin of 175 basis points (reduced from 225 basis points in March
2005 and further reduced from 200 basis points in August 2005). Letters of
credit issued under the revolving credit facility accrue a letter of credit fee
at a per annum rate of 275 basis points (reduced from 325 basis points in March
2005 and further reduced from 300 basis points in August 2005) for the pro rata
account of the lenders under such facility and a fronting fee for the ratable
account of the issuers thereof at a per annum rate in an amount to be agreed
upon payable quarterly in arrears. The interest margins for borrowings and
letters of credit issued under the revolving credit facility are subject to
adjustment based on the consolidated leverage ratio (consolidated indebtedness
divided by consolidated EBITDA as defined in the senior credit facility
agreement) measured at the end of each quarter. The margin we pay on the
revolving credit facility is reduced by 25 basis points following each fiscal
quarter for which the consolidated leverage ratio is less than 4.0 beginning in
March 2005. Since our consolidated leverage ratio was 3.52 as of March 31, 2005,
and 3.42 as of June 30, 2005, the margin we pay on the revolving credit facility
was reduced by 25 basis points in the second quarter of 2005 and was further
reduced by 25 basis points in the third quarter of 2005. We also pay a
commitment fee of 50 basis points on the unused portion of the revolving credit
facility. This commitment fee was reduced by 12.5 basis points during the third
quarter of 2005 to 37.5 basis points as our consolidated leverage ratio was less
than 3.5.
Senior Credit Facility--Other Terms and Conditions. As described above, we
are highly leveraged. Our amended and restated senior credit facility requires
that we maintain financial ratios equal to or better than the following
consolidated leverage ratio (consolidated indebtedness divided by consolidated
EBITDA, as calculated under the facility), consolidated interest coverage ratio
(consolidated EBITDA divided by consolidated cash interest paid, as calculated
under the facility), and fixed charge coverage ratio (consolidated EBITDA less
consolidated capital expenditures, divided by consolidated cash interest paid,
as calculated under the facility) at the end of each period indicated. The
financial ratios required under the amended senior credit facility and, the
actual ratios we achieved for the four quarters of 2006, are shown in the
following tables:
QUARTER ENDED
-------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2006 2006 2006 2006
---------- -------- ------------- ------------
REQ. ACT. REQ. REQ. REQ.
---- ---- -------- ------------- ------------
Leverage Ratio (maximum)................... 4.25 3.37 4.25 4.25 4.25
Interest Coverage Ratio (minimum).......... 2.10 3.27 2.10 2.10 2.10
Fixed Charge Coverage Ratio (minimum)...... 1.15 2.07 1.15 1.15 1.15
QUARTERS ENDING
------------------------------------------------------
MARCH 31- MARCH 31- MARCH 31- MARCH 31-
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 12,
2007 2008 2009 2010
------------ ------------ ------------ ------------
REQ. REQ. REQ. REQ.
------------ ------------ ------------ ------------
Leverage Ratio (maximum)................. 3.75 3.50 3.50 3.50
Interest Coverage Ratio (minimum)........ 2.20 2.35 2.50 2.75
Fixed Charge Coverage Ratio (minimum).... 1.25 1.35 1.50 1.75
The senior credit facility agreement provides: (i) the ability to refinance
our senior subordinated notes and/or our senior secured notes using the net cash
proceeds from the issuance of similarly structured debt; (ii) the ability to
41
repurchase our senior subordinated notes and/or our senior secured notes using
the net cash proceeds from issuing shares of our common stock; and (iii) the
prepayment of the term loans by an amount equal to 50 percent of our excess cash
flow as defined by the agreement.
The senior credit facility agreement also contains restrictions on our
operations that are customary for similar facilities, including limitations on:
(i) incurring additional liens; (ii) sale and leaseback transactions (except for
the permitted transactions as described in the amended agreement); (iii)
liquidations and dissolutions; (iv) incurring additional indebtedness or
guarantees; (v) capital expenditures; (vi) dividends (limited to no more than
$15 million per year); (vii) mergers and consolidations; and (viii) prepayments
and modifications of subordinated and other debt instruments. Compliance with
these requirements and restrictions is a condition for any incremental
borrowings under the senior credit facility agreement and failure to meet these
requirements enables the lenders to require repayment of any outstanding loans.
As of March 31, 2006, we were in compliance with all the financial covenants (as
indicated above) and operational restrictions of the facility.
Our senior credit facility does not contain any terms that could accelerate
the payment of the facility as a result of a credit rating agency downgrade.
Senior Secured and Subordinated Notes. Our outstanding debt also includes
$475 million of 10 1/4 percent senior secured notes due July 15, 2013, in
addition to the $500 million of 8 5/8 percent senior subordinated notes due
November 15, 2014 described above. We can redeem some or all of the notes at any
time after July 15, 2008, in the case of the senior secured notes, and November
15, 2009, in the case of the senior subordinated notes. If we sell certain of
our assets or experience specified kinds of changes in control, we must offer to
repurchase the notes. We are permitted to redeem up to 35 percent of the senior
secured notes with the proceeds of certain equity offerings completed before
July 15, 2006 and up to 35 percent of the senior subordinated notes with the
proceeds of certain equity offerings completed before November 15, 2007.
Our senior secured and subordinated notes require that, as a condition
precedent to incurring certain types of indebtedness not otherwise permitted,
our consolidated fixed charge coverage ratio, as calculated on a proforma basis,
to be greater than 2.25 and 2.00, respectively. We have not incurred any of the
types of indebtedness not otherwise permitted by the indentures. The indentures
also contain restrictions on our operations, including limitations on: (i)
incurring additional indebtedness or liens; (ii) dividends; (iii) distributions
and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and
consolidations. Subject to limited exceptions, all of our existing and future
material domestic wholly owned subsidiaries fully and unconditionally guarantee
these notes on a joint and several basis. In addition, the senior secured notes
and related guarantees are secured by second priority liens, subject to
specified exceptions, on all of our and our subsidiary guarantors' assets that
secure obligations under our senior credit facility, except that only a portion
of the capital stock of our and our subsidiary guarantor's domestic subsidiaries
is provided as collateral and no assets or capital stock of our direct or
indirect foreign subsidiaries secure the notes or guarantees. There are no
significant restrictions on the ability of the subsidiaries that have guaranteed
these notes to make distributions to us. The senior subordinated notes rank
junior in right of payment to our senior credit facility and any future senior
debt incurred. As of March 31, 2006, we were in compliance with the covenants
and restrictions of these indentures.
Accounts Receivable Securitization. In addition to our senior credit
facility, senior secured notes and senior subordinated notes, we also sell some
of our accounts receivable on a nonrecourse basis in North America and Europe.
In North America, we have an accounts receivable securitization program with two
commercial banks. We sell original equipment and aftermarket receivables on a
daily basis under this program. We sold accounts receivable under this program
of $95 million and $88 million at March 31, 2006 and 2005, respectively. This
program is subject to cancellation prior to its maturity date if we were to (i)
fail to pay interest or principal payments on an amount of indebtedness
exceeding $50 million, (ii) default on the financial covenant ratios under the
senior credit facility, or (iii) fail to maintain certain financial ratios in
connection with the accounts receivable securitization program. In January 2006,
this program was renewed for 364 days to January 29, 2007 at a facility size of
$100 million. We also sell some receivables in our European operations to
regional banks in Europe. At March 31, 2006, we sold $52 million of accounts
receivable in Europe down from $59 million at March 31, 2005. The arrangements
to sell receivables in Europe are not committed and can be cancelled at any
time. If we were not able to sell receivables under either the North American or
European securitization programs, our borrowings under our
42
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.
CONTRACTUAL OBLIGATIONS
Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments as of March 31, 2006, are
shown in the following table:
PAYMENTS DUE IN:
--------------------------------------------
BEYOND
2006 2007 2008 2009 2010 2010 TOTAL
---- ---- ---- ---- ---- ------ ------
(MILLIONS)
Obligations:
Revolver borrowings................. $ 12 $-- $-- $-- $-- $ -- $ 12
Senior long-term debt............... -- -- -- -- 356 -- 356
Long-term notes..................... -- 1 2 -- -- 468 471
Capital leases...................... 2 3 2 2 3 -- 12
Subordinated long-term debt......... -- -- -- -- -- 500 500
Other subsidiary debt............... 1 -- -- -- -- 2 3
Short-term debt..................... 16 -- -- -- -- -- 16
---- ---- ---- ---- ---- ------ ------
Debt and capital lease obligations.... 31 4 4 2 359 970 1,370
Operating leases...................... 12 14 10 8 6 7 57
Interest payments..................... 95 128 128 128 126 293 898
Capital commitments................... 26 -- -- -- -- -- 26
---- ---- ---- ---- ---- ------ ------
Total Payments........................ $164 $146 $142 $138 $491 $1,270 $2,351
==== ==== ==== ==== ==== ====== ======
We principally use our revolving credit facilities to finance our short-
term capital requirements. As a result, we classify any outstanding balances of
the revolving credit facilities within our short-term debt even though the
revolving credit facility has a termination date of December 13, 2008 and the
tranche B-1 letter of credit facility/revolving loan facility has a termination
date of December 13, 2010.
If we do not maintain compliance with the terms of our senior credit
facility, senior secured notes indenture and senior subordinated debt indenture
described above, all amounts under those arrangements could, automatically or at
the option of the lenders or other debt holders, become due. Additionally, each
of those facilities contains provisions that certain events of default under one
facility will constitute a default under the other facility, allowing the
acceleration of all amounts due. We currently expect to maintain compliance with
terms of all of our various credit agreements for the foreseeable future.
Included in our contractual obligations is the amount of interest to be
paid on our long-term debt. As our debt structure contains both fixed and
variable rate interest debt, we have made assumptions in calculating the amount
of the future interest payments. Interest on our senior secured notes and senior
subordinated notes is calculated using
43
the fixed rates of 10 1/4 percent and 8 5/8 percent, respectively. Interest on
our variable rate debt is calculated as 225 basis points plus LIBOR of 4.8
percent which was the rate at March 31, 2006. We have assumed that LIBOR will
remain unchanged for the outlying years. See "--Capitalization." In addition we
have included the impact of our interest rate swaps entered into in April 2004.
See "Interest Rate Risk" below.
We have also included an estimate of expenditures required after March 31,
2006 to complete the facilities and projects authorized at December 31, 2005, in
which we have made substantial commitments in connections with facilities.
We have not included purchase obligations as part of our contractual
obligations as we generally do not enter into long-term agreements with our
suppliers. In addition, the agreements we currently have do not specify the
volumes we are required to purchase. If any commitment is provided, in many
cases the agreements state only the minimum percentage of our purchase
requirements we must buy from the supplier. As a result, these purchase
obligations fluctuate from year to year and we are not able to quantify the
amount of our future obligation.
We have not included material cash requirements for taxes as we are a
taxpayer in certain foreign jurisdictions but not in domestic locations.
Additionally, it is difficult to estimate taxes to be paid as changes in where
we generate income can have a significant impact on future tax payments. We have
also not included cash requirements for funding pension and postretirement
benefit costs. Based upon current estimates we believe we will be required to
make contributions of approximately $46 million to those plans in 2006, of which
approximately $8 million has been contributed as of March 31, 2006. Pension and
postretirement contributions beyond 2006 will be required but those amounts will
vary based upon many factors, including the performance of our pension fund
investments during 2006. In addition, we have not included cash requirements for
environmental remediation. Based upon current estimates we believe we will be
required to spend approximately $9 million over the next 20 to 30 years.
However, due to possible modifications in remediation processes and other
factors, it is difficult to determine the actual timing of the payments. See
"--Environmental and Other Matters".
We occasionally provide guarantees that could require us to make future
payments in the event that the third party primary obligor does not make its
required payments. We have not recorded a liability for any of these guarantees.
The only third party guarantee we have made is the performance of lease
obligations by a former affiliate. Our maximum liability under this guarantee
was approximately $1 million at both March 31, 2006 and 2005, 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 then existing and future
material domestic wholly-owned subsidiaries fully and unconditionally guarantee
our senior credit facility, our senior secured notes and our senior subordinated
notes on a joint and several basis. The arrangement for the senior credit
facility is also secured by first-priority liens on substantially all our
domestic assets and pledges of 66 percent of the stock of certain first-tier
foreign subsidiaries. The arrangement for the $475 million senior secured notes
is also secured by second-priority liens on substantially all our domestic
assets, excluding some of the stock of our domestic subsidiaries. No assets or
capital stock of our direct or indirect foreign subsidiaries secure these notes.
You should also read Note 12 where we present the Supplemental Guarantor
Condensed Consolidating Financial Statements.
We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities and cash management requirements for some of
our subsidiaries totaling $20 million. We have also issued $15 million in
letters of credit to support some of our subsidiaries' insurance arrangements.
In addition, we have issued $3 million in guarantees through letters of credit
to guarantee other obligations of subsidiaries primarily related to
environmental remediation activities.
44
CASH FLOWS
THREE
MONTHS
ENDED
MARCH 31,
----------
2006 2005
---- ----
(MILLIONS)
Cash provided (used) by:
Operating activities............................................ $(23) $(96)
Investing activities............................................ (41) (42)
Financing activities............................................ 16 (5)
Operating Activities
For the three months ended March 31, 2006, operating activities used $23
million in cash compared to a use of $96 million in cash during the same period
last year. For the first three months of 2006, cash used for working capital was
$80 million versus $137 million for the first three months of 2005. Higher sales
levels during the first quarter of 2006 versus the first quarter of 2005 were
the primary reason for higher year over year receivables balances that resulted
in a cash outflow of $82 million, a $4 million increase from last year.
Inventory represented a cash outflow of $27 million during the first quarter of
2006, a decrease of $19 million over the prior year. This decrease primarily
resulted from our continued focus on inventories. Accounts payable provided cash
of $67 million, up significantly from last year's cash inflow of $21 million.
Our day's payable outstanding for the three months ended March 31, 2006 was back
in line with our three-year historical average. Other current liabilities
resulted in a use of $18 million in cash for the first quarter of 2006, versus a
use of $8 million in cash during the same period last year. This change of $10
million was related to severance payments and an increase in pension
contributions during the first quarter of 2006, as well as last year's increase
in accruals for a new aftermarket customer. No net cash taxes were paid in the
latest three months ending March 31, 2006 primarily due to the cash collected
from former affiliates that offset other taxes paid during the quarter. Cash
taxes paid in the first quarter of 2005 were $7 million.
One of our European subsidiaries receives payment from one of its OE
customers whereby the accounts receivable are satisfied through the delivery of
negotiable financial instruments. We may collect these financial instruments
before their maturity date by either selling them at a discount or using them to
satisfy accounts receivable that have previously been sold to a European bank.
The reported sales of these financial instruments were no longer included in the
account receivables sold beginning in the fourth quarter of 2004. Any of these
financial instruments which were not sold are classified as other current assets
as they do not meet our definition of cash equivalents. The amount of these
financial instruments that were collected before their maturity date totaled $26
million at March 31, 2005, compared with $31 million at March 31, 2005.
In certain instances several of our Chinese subsidiaries receive payment
from OE customers and satisfy vendor payments through the receipt and delivery
of negotiable financial instruments. Financial instruments used to satisfy
vendor payables and not redeemed totaled $4 million at March 31, 2006 and are
classified as notes payable. Financial instruments received from OE customers
and not redeemed totaled $8 million at March 31, 2006 and are classified as
other current assets. One of our Chinese subsidiaries is required to maintain a
cash balance at a financial institution issuing the financial instruments which
are used to satisfy vendor payments. The balance totaled $1 million at March 31,
2006 and is classified as cash and cash equivalents.
Investing Activities
Cash used for investing activities was $41 million in the first three
months of 2006 compared to $42 million in the same period one year ago. During
the first quarter of 2005, we used $11 million in cash to acquire the exhaust
operations of Gabilan Manufacturing, partially offset by net proceeds from the
sale of assets of $1 million. Expenditures for plant, property and equipment
were $38 million in the first three months of 2006 compared to $32 million a
year ago. This increase of $6 million in capital expenditures was primarily due
to the timing of future OE customer platform launches. First quarter
expenditures for software-related intangible assets were $3 million in both 2006
and 2005.
45
Financing Activities
Cash flow from financing activities was a $16 million inflow in the first
three months of 2006 compared to a $5 million outflow in the same period of
2005. The difference is primarily attributable to an $8 million issuance of
common shares and an increase in short-term debt of $9 million during the first
quarter of 2006, compared to financing activities in the first quarter of 2005
that included using $40 million in cash to reduce our long-term debt, partially
offset by increased borrowings from our revolving credit facility.
INTEREST RATE RISK
Our financial instruments that are sensitive to market risk for changes in
interest rates are primarily our debt securities. We primarily use our revolving
credit facilities to finance our short-term capital requirements. We pay a
current market rate of interest on these borrowings. We have financed our long-
term capital requirements with long-term debt with original maturity dates
ranging from five to ten years.
In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at an annual rate of
10 1/4 percent to floating interest rate debt at an annual rate of LIBOR plus an
average spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2005 resulted in lower interest expense of approximately $2 million for the
year. Based upon the LIBOR rate as determined under these agreements of 4.73
percent (which remains in effect until July 15, 2006) and the rates in the
market today these swaps are expected to increase our 2006 annual interest
expense by $1 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. As
of March 31, 2006, the fair value of the interest rate swaps was a liability of
approximately $9 million which has been recorded as a decrease to long-term debt
and an increase to other long-term liabilities. On March 31, 2006, we had $996
million in long-term debt obligations that have fixed interest rates. Of that
amount, $475 million is fixed through July 2013 and $500 million through
November 2014, while the remainder is fixed over periods of 2007 through 2025.
Included in the $475 million is $150 million of long-term debt obligations
subject to variable interest rates as a result of our swap agreements. We also
have $356 million in long-term debt obligations that have variable interest
rates based on a current market rate of interest.
We estimate that the fair value of our long-term debt at March 31, 2006 was
about 105 percent of its book value. A one percentage point increase or decrease
in interest rates would increase or decrease the annual interest expense we
recognize in the income statement and the cash we pay for interest expense by
about $2 million after tax, excluding the effect of the interest rate swaps we
completed in April 2004. A one percentage point increase or decrease in interest
rates on the swaps we completed in April 2004 would increase or decrease the
annual interest expense we recognize in the income statement and the cash we pay
for interest expense by approximately $1 million after tax.
OUTLOOK
Volatile oil prices and rising interest rates make this an uncertain and
challenging environment for automotive suppliers. Current estimates for 2006 are
that North American OE light vehicle production levels will remain flat with
2005. We remain cautious about the outlook for North American production rates
due to the overall financial condition of original equipment manufacturers,
especially Ford and General Motors who have announced job cuts, plant closings,
and other restructuring activities. We are also uncertain about the willingness
of the original equipment manufacturers to continue to support consumer vehicle
sales through incentives. We believe that new product launches, increasing
market positions with Japanese OE customers, and a strong new product and
technology pipeline will help us to offset pressures from North American
production rates. European light vehicle production is expected to increase one
percent in 2006 compared to 2005. Heavy-duty truck production rates for 2006 are
expected to remain at the same levels as 2005, primarily due to the pull forward
of production ahead of the introduction of stricter emission regulations in
2007. In China, light vehicle production is projected to grow to 6.2 million
units in 2006, significantly up from 5.2 million units in 2005. In the Europe
aftermarket, heightened competition and longer product replacement cycles are
expected to continue to negatively impact volumes. We saw signs of sales
stabilization in the North America aftermarket exhaust business unit during 2005
and are cautiously optimistic that these conditions will continue in 2006. We
also plan to continue our efforts to increase new and
46
existing sales in the North American aftermarket ride control business unit. In
addition, we are pursuing other aftermarket opportunities with the introduction
of air filters in Europe and brakes in both Europe and North America.
Raw material prices, and in particular steel prices, continue to be a
concern with price pressures expected to continue into the foreseeable future.
Where appropriate, we have sought to mitigate short-term volatility in steel
prices through supply commitments with firm pricing. These commitments generally
extend for one to two years. We worked hard in 2005 and continue to work hard to
address this issue by evaluating alternative materials and processes, reviewing
material substitution opportunities, increasing component and assembly
outsourcing to low cost countries and aggressively pursuing recovery of higher
costs from our customers. In addition to these actions, we continue to pursue
productivity initiatives and review opportunities to reduce costs through Six
Sigma, Lean manufacturing and restructuring activities. We will continue to
focus on controlling costs and leveraging global supply chain spending.
ENVIRONMENTAL AND OTHER MATTERS
We are subject to a variety of environmental and pollution control laws and
regulations in all jurisdictions in which we operate. We expense or capitalize,
as appropriate, expenditures for ongoing compliance with environmental
regulations that relate to current operations. We expense 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, 2006, we are designated as a potentially responsible party
in one Superfund site. Including the Superfund site, we may have the obligation
to remediate current or former facilities, and we estimate our share of
environmental remediation costs to be approximately $9 million. For the
Superfund site and the current and former facilities, we have established
reserves that we believe are adequate for these costs. Although we believe our
estimates of remediation costs are reasonable and are based on the latest
available information, the cleanup costs are estimates and are subject to
revision as more information becomes available about the extent of remediation
required. At some sites, we expect that other parties will contribute to the
remediation costs. In addition, at the Superfund site, the Comprehensive
Environmental Response, Compensation and Liability Act provides that our
liability could be joint and several, meaning that we could be required to pay
in excess of our share of remediation costs. Our understanding of the financial
strength of other potentially responsible parties at the Superfund site, and of
other liable parties at our current and former facilities, has been considered,
where appropriate, in our determination of our estimated liability.
We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund site, or as a liable party at our
current or former facilities, will not be material to our results of operations
or consolidated financial position.
From time to time we are subject to product warranty claims whereby we are
required to bear costs of repair or replacement of certain of our products.
Warranty claims may range from individual customer claims to full recalls of all
products in the field. We believe that the warranty reserve is appropriate;
however, actual claims incurred could differ from the original estimates
requiring adjustments to the reserve. The reserve is included in current
liabilities on the balance sheet. See Note 5 to our consolidated financial
statements included under Item 1 for information regarding our warranty
reserves.
We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities
47
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, and other product liability related matters), taxes,
employment matters, and commercial or contractual disputes, sometimes related to
acquisitions or divestitures. For example, one of our Chinese joint ventures is
currently under investigation by Chinese government officials related to whether
the joint venture applied the proper tariff code to certain of its imports. We
vigorously defend ourselves against all of these claims. In future periods, we
could be subjected to cash costs or non-cash charges to earnings if any of these
matters is resolved on unfavorable terms. However, although the ultimate outcome
of any legal matter cannot be predicted with certainty, based on present
information, including our assessment of the merits of the particular claim, we
do not expect that these legal proceedings or claims will have any material
adverse impact on our future consolidated financial position or results of
operations. In addition, we are subject to a number of lawsuits initiated by a
significant number of claimants alleging health problems as a result of exposure
to asbestos. Many of these cases involve significant numbers of individual
claimants. However, only a small percentage of these claimants allege that they
were automobile mechanics who were allegedly exposed to our former muffler
products and a significant number appear to involve workers in other industries
or otherwise do not include sufficient information to determine whether there is
any basis for a claim against us. We believe, based on scientific and other
evidence, it is unlikely that mechanics were exposed to asbestos by our former
muffler products and that, in any event, they would not be at increased risk of
asbestos-related disease based on their work with these products. Further, many
of these cases involve numerous defendants, with the number of each in some
cases exceeding 200 defendants from a variety of industries. Additionally, the
plaintiffs either do not specify any, or specify the jurisdictional minimum,
dollar amount for damages. As major asbestos manufacturers continue to go out of
business or file for bankruptcy, we may experience an increased number of these
claims. We vigorously defend ourselves against these claims as part of our
ordinary course of business. In future periods, we could be subject to cash
costs or non-cash charges to earnings if any of these matters is resolved
unfavorably to us. To date, with respect to claims that have proceeded
sufficiently through the judicial process, we have regularly achieved favorable
resolution in the form of a dismissal of the claim or a judgment in our favor.
Accordingly, we presently believe that these asbestos-related claims will not
have a material adverse impact on our future financial condition or results of
operations.
EMPLOYEE STOCK OWNERSHIP PLANS
We have established Employee Stock Ownership Plans for the benefit of our
employees. Under the plans, subject to limitations in the Internal Revenue Code,
participants may elect to defer up to 75 percent of their salary through
contributions to the plan, which are invested in selected mutual funds or used
to buy our common stock. We currently match in cash 50 percent of each
employee's contribution up to eight percent of the employee's salary. We
recorded expense for these matching contributions of approximately $2 million
for each of the quarters ended March 31, 2006 and 2005, respectively. All
contributions vest immediately.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to interest rate risk, see the
caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations," which is
incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the quarter covered by this report. Based
on their evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that the company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by our company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms and such information is accumulated and
communicated to management as appropriate to allow timely decisions regarding
required disclosures.
48
PART II
ITEM 1A. RISK FACTORS
We are exposed to certain risks and uncertainties that could have a
material adverse impact on our business, financial condition and operating
results. There have been no material changes to the Risk Factors described in
Part I, Item 1A of our Annual Report on Form 10-K for the year ended December
31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) Not applicable.
(c) Purchase of equity securities by the issuer and affiliated
purchasers. The following table provides information relating to our purchase
of shares of our common stock in the first quarter of 2006. All of these
purchases reflect shares withheld upon vesting of restricted stock, to satisfy
statutory minimum tax withholding obligations.
TOTAL NUMBER OF AVERAGE
PERIOD SHARES PURCHASED PRICE PAID
------ ---------------- ----------
January 2006.............................................. 71,567 $20.71
February 2006............................................. -- --
March 2006................................................ -- --
------ ------
Total................................................... 71,567 $20.71
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.
49
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 10, 2006
50
INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2006
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2 -- None
3.1(a) -- Restated Certificate of Incorporation of the registrant dated
December 11, 1996 (incorporated herein by reference from Exhibit
3.1(a) of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1997, File No. 1-12387).
3.1(b) -- Certificate of Amendment, dated December 11, 1996 (incorporated
herein by reference from Exhibit 3.1(c) of the registrant's Annual
Report on Form 10-K for the year ended December 31, 1997, File No.
1-12387).
3.1(c) -- Certificate of Ownership and Merger, dated July 8, 1997
(incorporated herein by reference from Exhibit 3.1(d) of the
registrant's Annual Report on Form 10-K for the year ended December
31, 1997, File No. 1-12387).
3.1(d) -- Certificate of Designation of Series B Junior Participating
Preferred Stock dated September 9, 1998 (incorporated herein by
reference from Exhibit 3.1(d) of the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998, File No. 1-
12387).
3.1(e) -- Certificate of Elimination of the Series A Participating Junior
Preferred Stock of the registrant dated September 11, 1998
(incorporated herein by reference from Exhibit 3.1(e) of the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, File No. 1-12387).
3.1(f) -- Certificate of Amendment to Restated Certificate of Incorporation
of the registrant dated November 5, 1999 (incorporated herein by
reference from Exhibit 3.1(f) of the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999, File No. 1-
12387).
3.1(g) -- Certificate of Amendment to Restated Certificate of Incorporation
of the registrant dated November 5, 1999 (incorporated herein by
reference from Exhibit 3.1(g) of the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999, File No. 1-
12387).
3.1(h) -- Certificate of Ownership and Merger merging Tenneco Automotive
Merger Sub Inc. with and into the registrant, dated November 5,
1999 (incorporated herein by reference from Exhibit 3.1(h) of the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-12387).
3.1(i) -- Certificate of Amendment to Restated Certificate of Incorporation
of the registrant dated May 9, 2000 (incorporated herein by
reference from Exhibit 3.1(i) of the registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000, File No. 1-
12387).
3.1(j) -- Certificate of Ownership and Merger merging Tenneco Inc. with and
into the registrant, dated October 27, 2005 (incorporated herein by
reference from Exhibit 99.1 of the registrant's Current Report on
Form 8-K dated October 28, 2005, File No. 1-12387).
3.2 -- By-laws of the registrant, as amended October 27, 2005
(incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated October 28, 2005,
File No. 1-12387).
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).
51
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.8 -- Amended and Restated By-laws of TIHC (incorporated herein by
reference to Exhibit 3.8 to the registrant's Registration Statement
on Form S-4, Reg. No. 333-93757).
3.9 -- Certificate of Incorporation of Clevite Industries Inc.
("Clevite"), as amended (incorporated herein by reference to
Exhibit 3.9 to the registrant's Registration Statement on Form S-4,
Reg. No. 333-93757).
3.10 -- By-laws of Clevite (incorporated herein by reference to Exhibit
3.10 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
3.11 -- Amended and Restated Certificate of Incorporation of the Pullman
Company ("Pullman") (incorporated herein by reference to Exhibit
3.11 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
3.12 -- By-laws of Pullman (incorporated herein by reference to Exhibit
3.12 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
3.13 -- Certificate of Incorporation of Tenneco Automotive Operating
Company Inc. ("Operating") (incorporated herein by reference to
Exhibit 3.13 to the registrant's Registration Statement on Form S-
4, Reg. No. 333-93757).
3.14 -- By-laws of Operating (incorporated herein by reference to Exhibit
3.14 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
4.1(a) -- Rights Agreement dated as of September 8, 1998, by and between the
registrant and First Chicago Trust Company of New York, as Rights
Agent (incorporated herein by reference from Exhibit 4.1 of the
registrant's Current Report on Form 8-K dated September 24, 1998,
File No. 1-12387).
4.1(b) -- Amendment No. 1 to Rights Agreement, dated March 14, 2000, by and
between the registrant and First Chicago Trust Company of New York,
as Rights Agent (incorporated herein by reference from Exhibit
4.4(b) of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1999, File No. 1-12387).
4.1(c) -- Amendment No. 2 to Rights Agreement, dated February 5, 2001, by and
between the registrant and First Union National Bank, as Rights
Agent (incorporated herein by reference from Exhibit 4.4(b) of the
registrant's Post-Effective Amendment No. 3, dated February 26,
2001, to its Registration Statement on Form 8-A dated September 17,
1998).
4.2(a) -- Indenture, dated as of November 1, 1996, between the registrant and
The Chase Manhattan Bank, as Trustee (incorporated herein by
reference from Exhibit 4.1 of the registrant's Registration
Statement on Form S-4, Registration No. 333-14003).
4.2(b) -- First Supplemental Indenture dated as of December 11, 1996 to
Indenture dated as of November 1, 1996 between the registrant and
The Chase Manhattan Bank, as Trustee (incorporated herein by
reference from Exhibit 4.3(b) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
4.2(c) -- Third Supplemental Indenture dated as of December 11, 1996 to
Indenture dated as of November 1, 1996 between the registrant and
The Chase Manhattan Bank, as Trustee (incorporated herein by
reference from Exhibit 4.3(d) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
4.2(d) -- Fourth Supplemental Indenture dated as of December 11, 1996 to
Indenture dated as of November 1, 1996 between the registrant and
The Chase Manhattan Bank, as Trustee (incorporated herein by
reference from Exhibit 4.3(e) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
4.2(e) -- Eleventh Supplemental Indenture, dated October 21, 1999, to
Indenture dated November 1, 1996 between The Chase Manhattan Bank,
as Trustee, and the registrant (incorporated herein by reference
from Exhibit 4.2(l) of the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, File No. 1-12387).
4.3 -- Specimen stock certificate for Tenneco Inc. common stock
(incorporated herein by reference from Exhibit 4.3 of the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005, File No. 1-12387).
52
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.4(a) -- Indenture dated October 14, 1999 by and between the registrant and
The Bank of New York, as trustee (incorporated herein by reference
from Exhibit 4.4(a) of the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, File No. 1-12387).
4.4(b) -- Supplemental Indenture dated November 4, 1999 among Tenneco
Automotive Operating Company Inc., Tenneco International Holding
Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite
Industries Inc. and TMC Texas Inc. in favor of The Bank of New
York, as trustee (incorporated herein by reference from Exhibit
4.4(b) of the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-12387).
4.4(c) -- Subsidiary Guarantee dated as of October 14, 1999 from Tenneco
Automotive Operating Company Inc., Tenneco International Holding
Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite
Industries Inc. and TMC Texas Inc. in favor of The Bank of New
York, as trustee (incorporated herein by reference to Exhibit
4.4(c) to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
4.5(a) -- Amended and Restated Credit Agreement, dated as of December 12,
2003, among the registrant, the several banks and other financial
institutions or entities from time to time parties thereto, Bank of
America, N.A. and Citicorp North America, Inc., as co-documentation
agents, Deutsche Bank Securities Inc., as syndication agent, and JP
Morgan Chase Bank, as administrative agent (incorporated herein by
reference to Exhibit 4.5(a) to the registrant's Annual Report on
Form 10-K for the year ended December 31, 2003, File No. 1-12387).
4.5(b) -- Amended and Restated Guarantee And Collateral Agreement, dated as
of November 4, 1999, by Tenneco Inc. and the subsidiary guarantors
named therein, in favor of JPMorgan Chase Bank, as Administrative
Agent (incorporated herein by reference from Exhibit 4.5(f) to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003, File No. 1-12387).
4.5(c) -- First Amendment, dated as of April 30, 2004, to the Amended and
Restated Credit Agreement dated as of December 12, 2003, among the
registrant, JP Morgan Chase Bank as administrative agent and the
various lenders party thereto (incorporated herein by reference
from Exhibit 4.5(c) to the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2004, File No. 1-12387).
4.5(d) -- Second Amendment, dated November 19, 2004, to the Amended and
Restated Credit Agreement dated as of December 12, 2003, among the
registrant, JP Morgan Chase Bank as administrative agent and the
various lenders party thereto (incorporated herein by reference
from Exhibit 99.2 of the registrant's Current Report on Form 8-K
dated November 19, 2004, File No. 1-12387).
4.5(e) -- Third Amendment, dated February 17, 2005, to the Amended and
Restated Credit Agreement, dated as of December 12, 2003 among the
registrant, JP Morgan Chase Bank as administrative agent and the
various lenders party thereto (incorporated by reference to Exhibit
99.1 to the registrant's Current Report on Form 8-K dated February
17, 2005, File No. 1-12387).
4.5(f) -- New Lender Supplement, dated as of March 31, 2005, by and among
Wachovia Bank, National Association, the registrant and JPMorgan
Chase Bank, N.A.; New Lender Supplement, dated as of March 31,
2005, by and among Wells Fargo Foothill, LLC, the registrant and
JPMorgan Chase Bank, N.A.; New Lender Supplement, dated as of March
31, 2005, by and among Charter One Bank, NA, the registrant and
JPMorgan Chase Bank, N.A. (incorporated herein by reference from
Exhibit 4.5(f) to the registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2005, File No. 1-12387).
4.5(g) -- New Lender Supplement, dated as of April 29, 2005, by and among The
Bank of Nova Scotia, the registrant and JPMorgan Chase Bank, N.A.
(incorporated herein by reference from Exhibit 4.5(g) to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2005, File No. 1-12387).
4.5(h) -- Fourth Amendment, dated October 7, 2005, to the Amended and
Restated Credit Agreement, dated as of December 12, 2003, among the
registrant, JP Morgan Chase Bank as administrative agent and the
various lenders party thereto (incorporated herein by reference
from Exhibit 4.5(h) to the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2005, File No. 1-12387).
53
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.5(i) -- First Amendment, dated October 7, 2005, to the Amended and Restated
Guarantee and Collateral Agreement, dated as of November 4, 1999,
by the registrant and the subsidiary guarantors named therein, in
favor of JPMorgan Chase Bank, as Administrative Agent (incorporated
herein by reference from Exhibit 4.5(i) to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2005, File No. 1-12387).
4.6(a) -- Indenture, dated as of June 19, 2003, among the registrant, the
subsidiary guarantors named therein and Wachovia Bank, National
Association (incorporated herein by reference from Exhibit 4.6(a)
to the registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003, File No. 1-12387).
4.6(b) -- Collateral Agreement, dated as of June 19, 2003, by the registrant
and the subsidiary guarantors named therein in favor of Wachovia
Bank, National Association (incorporated herein by reference from
Exhibit 4.6(b) to the registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003, File No. 1-12387).
4.6(c) -- Registration Rights Agreement, dated as of June 19, 2003, among the
registrant, the subsidiary guarantors named therein, and the
initial purchasers named therein, for whom JPMorgan Securities Inc.
acted as representative (incorporated herein by reference from
Exhibit 4.6(c) to the registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003, File No. 1-12387).
4.6(d) -- Supplemental Indenture, dated as of December 12, 2003, among the
registrant, the subsidiary guarantors named therein and Wachovia
Bank, National Association (incorporated herein by reference to
Exhibit 4.6(d) to the registrant's Annual Report on Form 10-K for
the year ended December 31, 2003, File No. 1-12387).
4.6(e) -- Registration Rights Agreement, dated as of December 12, 2003, among
the registrant, the subsidiary guarantors named therein, and the
initial purchasers named therein, for whom Banc of America
Securities LLC acted as representative agent (incorporated herein
by reference to Exhibit 4.5(a) to the registrant's Annual Report on
Form 10-K for the year ended December 31, 2003, File No. 1-12387).
4.6(f) -- Second Supplemental Indenture, dated as of October 28, 2005, among
the registrant, the subsidiary guarantors named therein and
Wachovia Bank, National Association (incorporated herein by
reference from Exhibit 4.6(f) to the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2005, File No. 1-
12387).
4.7 -- Intercreditor Agreement, dated as of June 19, 2003, among JPMorgan
Chase Bank, as Credit Agent, Wachovia Bank, National Association,
as Trustee and Collateral Agent, and the registrant (incorporated
herein by reference from Exhibit 4.7 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003, File No.
1-12387).
4.8(a) -- Indenture, dated as of November 19, 2004, among the registrant, the
subsidiary guarantors named therein and The Bank of New York Trust
Company (incorporated herein by reference from Exhibit 99.1 of the
registrant's Current Report on Form 8-K dated November 19, 2004,
File No. 1-12387).
4.8(b) -- Supplemental Indenture, dated as of March 28, 2005, among the
registrant, the guarantors party thereto and the Bank of New York
Trust Company, N.A., as trustee (incorporated herein by reference
from Exhibit 4.3 to the registrant's Registration Statement on Form
S-4, Reg No. 333-123752).
4.8(c) -- Registration Rights Agreement, dated as of November 19, 2004, among
the registrant, the guarantors party thereto and the initial
purchasers party thereto (incorporated herein by reference from
Exhibit 4.2 to the registrant's Registration Statement on Form S-4,
Reg No. 333-123752).
4.8(d) -- Second Supplemental Indenture, dated as of October 27, 2005, among
the registrant, the guarantors party thereto and the Bank of New
York Trust Company, N.A., as trustee (incorporated herein by
reference from Exhibit 4.8(d) to the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2005, File No. 1-
12387).
9 -- None
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).
54
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.2 -- Amendment No. 1 to Distribution Agreement, dated as of December 11,
1996, by and among El Paso Tennessee Pipeline Co., the registrant,
and Newport News Shipbuilding Inc. (incorporated herein by
reference from Exhibit 10.2 of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
10.3 -- Debt and Cash Allocation Agreement, dated December 11, 1996, by and
among El Paso Tennessee Pipeline Co. , the registrant, and Newport
News Ship- building Inc. (incorporated herein by reference from
Exhibit 10.3 of the registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, File No. 1-12387).
10.4 -- Benefits Agreement, dated December 11, 1996, by and among El Paso
Tennessee Pipeline Co., the registrant, and Newport News
Shipbuilding Inc. (incorporated herein by reference from Exhibit
10.4 of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, File No. 1-12387).
10.5 -- Insurance Agreement, dated December 11, 1996, by and among El Paso
Tennessee Pipeline Co., the registrant, and Newport News
Shipbuilding Inc. (incorporated herein by reference from Exhibit
10.5 of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, File No. 1-12387).
10.6 -- Tax Sharing Agreement, dated December 11, 1996, by and among El
Paso Tennessee Pipeline Co., Newport News Shipbuilding Inc., the
registrant, and El Paso Natural Gas Company (incorporated herein by
reference from Exhibit 10.6 of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
10.7 -- First Amendment to Tax Sharing Agreement, dated as of December 11,
1996, among El Paso Tennessee Pipeline Co., the registrant, El Paso
Natural Gas Company and Newport News Shipbuilding Inc.
(incorporated herein by reference from Exhibit 10.7 of the
registrant's Annual Report on Form 10-K for the year ended December
31, 1996, File No. 1-12387).
10.8 -- Value Added 'TAVA' Incentive Compensation Plan, as in effect for
periods through December 31, 2005 (incorporated herein by reference
from Exhibit 10.8 of the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003, File No. 1-12387).
10.9 -- Change of Control Severance Benefits Plan for Key Executives
(incorporated herein by reference from Exhibit 10.13 of the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-12387).
10.10 -- Stock Ownership Plan (incorporated herein by reference from Exhibit
10.10 of the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
10.11 -- Key Executive Pension Plan (incorporated herein by reference from
Exhibit 10.11 to the registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, File No. 1-12387).
10.12 -- Deferred Compensation Plan (incorporated herein by reference from
Exhibit 10.12 to the registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, File No. 1-12387).
10.13 -- Supplemental Executive Retirement Plan (incorporated herein by
reference from Exhibit 10.13 to the registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000, File No. 1-
12387).
10.14 -- Human Resources Agreement by and between the registrant and Tenneco
Packaging Inc. dated November 4, 1999 (incorporated herein by
reference to Exhibit 99.1 to the registrant's Current Report on
Form 8-K dated November 4, 1999, File No. 1-12387).
10.15 -- Tax Sharing Agreement by and between the registrant and Tenneco
Packaging Inc. dated November 3, 1999 (incorporated herein by
reference to Exhibit 99.2 to the registrant's Current Report on
Form 8-K dated November 4, 1999, File No. 1-12387).
10.16 -- Amended and Restated Transition Services Agreement by and between
the registrant and Tenneco Packaging Inc. dated as of November 4,
1999 (incorporated herein by reference from Exhibit 10.21 of the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-12387).
55
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.17 -- Assumption Agreement among Tenneco Automotive Operating Company
Inc., Tenneco International Holding Corp., Tenneco Global Holdings
Inc., The Pullman Company, Clevite Industries Inc., TMC Texas Inc.,
Salomon Smith Barney Inc. and the other Initial Purchasers listed
in the Purchase Agreement dated as of November 4, 1999
(incorporated herein by reference from Exhibit 10.24 of the
registrant's Registration Statement on Form S-4, Reg. No. 333-
93757).
10.18 -- Amendment No. 1 to Change in Control Severance Benefits Plan for
Key Executives (incorporated herein by reference from Exhibit 10.23
to the registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, File No. 1-12387).
10.19 -- Letter Agreement dated July 27, 2000 between the registrant and
Mark P. Frissora (incorporated herein by reference from Exhibit
10.24 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, File No. 1-12387).
10.20 -- Letter Agreement dated July 27, 2000 between the registrant and
Richard P. Schneider (incorporated herein by reference from Exhibit
10.26 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, File No. 1-12387).
10.21 -- Letter Agreement dated July 27, 2000 between the registrant and
Timothy R. Donovan (incorporated herein by reference from Exhibit
10.28 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 2000, File No. 1-12387).
10.22 -- Form of Indemnity Agreement entered into between the registrant and
the following directors of the registrant: Paul Stecko, M. Kathryn
Eickhoff and Dennis Severance (incorporated herein by reference
from Exhibit 10.29 to the registrant's Quarterly Report on Form 10-
Q for the quarter ended September 30, 2000, File No. 1-12387).
10.23 -- Mark P. Frissora Special Appendix under Supplemental Executive
Retirement Plan (incorporated herein by reference from Exhibit
10.30 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 2000, File No. 1-12387).
10.24 -- Letter Agreement dated as of June 1, 2001 between the registrant
and Hari Nair (incorporated herein by reference from Exhibit 10.28
to the registrant's Annual Report on Form 10-K for the year ended
December 31, 2001. File No. 1-12387).
10.25 -- 2002 Long-Term Incentive Plan (As Amended and Restated Effective
March 11, 2003) (incorporated herein by reference from Exhibit
10.26 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003. File No. 1-12387).
10.26 -- Amendment No. 1 to Deferred Compensation Plan (incorporated herein
by reference from Exhibit 10.27 to the registrant's Annual Report
on Form 10-K for the year ended December 31, 2002, File No. 1-
12387).
10.27 -- Supplemental Stock Ownership Plan (incorporated herein by reference
from Exhibit 10.28 to the registrant's Annual Report on Form 10-K
for the year ended December 31, 2002, File No. 1-12387).
10.28 -- Form of Stock Equivalent Unit Award Agreement under the 2002 Long-
Term Incentive Plan, as amended (incorporated herein by reference
from Exhibit 99.1 of the registrant's Current Report on Form 8-K
dated January 13, 2005, File No. 1-12387).
10.29 -- Form of Stock Option Agreement for employees under the 2002 Long-
Term Incentive Plan, as amended (providing for a ten year option
term) (incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated January 13, 2005,
File No. 1-12387).
10.30 -- Form of Stock Option Agreement for non-employee directors under the
2002 Long-Term Incentive Plan, as amended (providing for a ten year
option term) (incorporated herein by reference from Exhibit 99.3 of
the registrant's Current Report on Form 8-K dated January 13, 2005,
File No. 1-12387).
10.31 -- Form of Restricted Stock Award Agreement for employees under the
2002 Long-Term Incentive Plan, as amended (three year cliff
vesting) (incorporated herein by reference from Exhibit 99.4 of the
registrant's Current Report on Form 8-K dated January 13, 2005,
File No. 1-12387).
10.32 -- Form of Restricted Stock Award Agreement for non-employee directors
under the 2002 Long-Term Incentive Plan, as amended (incorporated
herein by reference from Exhibit 99.5 of the registrant's Current
Report on Form 8-K dated January 13, 2005, File No. 1-12387).
56
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.33 -- Form of Restricted Stock Award Agreement for employees under the
2002 Long-Term Incentive Plan, as amended (vesting 1/3 annually)
(incorporated herein by reference from Exhibit 99.1 of the
registrant's Current Report on Form 8-K dated January 17, 2005,
File No. 1-12387).
10.34 -- Form of Stock Option Agreement for employees under the 2002 Long-
Term Incentive Plan, as amended (providing for a seven year option
term) (incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated January 17, 2005,
File No. 1-12387).
10.35 -- Form of Stock Option Agreement for non-employee directors under the
2002 Long-Term Incentive Plan, as amended (providing for a seven
year option term) (incorporated herein by reference from Exhibit
99.3 of the registrant's Current Report on Form 8-K dated January
17, 2005, File No. 1-12387).
10.36 -- Form of Performance Share Agreement for non-employee directors
under the 2002 Long-Term Incentive Plan, as amended (incorporated
herein by reference from Exhibit 10.37 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2004, file No.
1-12387).
10.37 -- Summary of 2006 Outside Directors' Compensation (incorporated
herein by reference from Exhibit 10.37 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2005, file No.
1-12387).
10.38 -- Summary of 2006 Named Executive Officer Compensation (incorporated
herein by reference from Exhibit 10.38 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2005, file No.
1-12387).
10.39 -- Amendment No. 1 to the Key Executive Pension Plan (incorporated
herein by reference from Exhibit 10.39 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005,
File No. 1-12387).
10.40 -- Amendment No. 1 to the Supplemental Executive Retirement Plan
(incorporated herein by reference from Exhibit 10.40 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005, File No. 1-12387).
10.41 -- Second Amendment to the Key Executive Pension Plan (incorporated
herein by reference from Exhibit 10.41 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005,
File No. 1-12387).
10.42 -- Amendment No. 2 to the Deferred Compensation Plan (incorporated
herein by reference from Exhibit 10.42 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005,
File No. 1-12387).
10.43 -- Supplemental Retirement Plan (incorporated herein by reference from
Exhibit 10.43 to the registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005, File No. 1-12387).
10.44 -- Mark P. Frissora Special Appendix under Supplemental Retirement
Plan (incorporated herein by reference from Exhibit 10.44 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005, File No. 1-12387).
10.45 -- Supplemental Pension Plan for Management (incorporated herein by
reference from Exhibit 10.45 to the registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2005, File No. 1-
12387).
10.46 -- Incentive Deferral Plan (incorporated herein by reference from
Exhibit 10.46 to the registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005, File No. 1-12387).
10.47 -- Amended and Restated Value Added ("TAVA") Incentive Compensation
Plan, effective January 1, 2006 (incorporated herein by reference
from Exhibit 10.47 to the registrant's Annual Report on Form 10-K
for the year ended December 31, 2005, file No. 1-12387).
10.48 -- Form of Restricted Stock Award Agreement for non-employee directors
under the 2002 Long-Term Incentive Plan, as amended (providing for
one year cliff vesting) (incorporated herein by reference from
Exhibit 10.48 to the registrant's Annual Report on Form 10-K for
the year ended December 31, 2005, file No. 1-12387).
*10.49 -- Form of Stock Equivalent Unit Award Agreement, as amended, under
the 2002 Long-Term Incentive Plan, as amended.
*10.50 -- Summary of Amendments to Deferred Compensation Plan and Incentive
Deferral Plan.
57
EXHIBIT
NUMBER DESCRIPTION
------- -----------
11 -- None.
*12 -- Computation of Ratio of Earnings to Fixed Charges.
*15 -- Letter of Deloitte & Touche LLP regarding interim financial
information
18 -- None.
19 -- None.
22 -- None.
23 -- None.
24 -- None.
*31.1 -- Certification of Mark P. Frissora under Section 302 of the
Sarbanes-Oxley Act of 2002.
*31.2 -- Certification of Kenneth R. Trammell under Section 302 of the
Sarbanes-Oxley Act of 2002.
*32.1 -- Certification of Mark P. Frissora and Kenneth R. Trammell under
Section 906 of the Sarbanes-Oxley Act of 2002.
99 -- None.
100 -- None.
--------
* Filed herewith.
58