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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-12387
TENNECO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0515284
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 NORTH FIELD DRIVE 60045
LAKE FOREST, IL (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 482-5000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
7.45% Debentures due 2025; New York Stock Exchange
9.20% Debentures due 2012; New York Stock Exchange
10.20% Debentures due 2008 New York Stock Exchange
Common Stock, par value $.01 per share New York, Chicago, and
London Stock Exchanges
Preferred Share Purchase Rights New York, Chicago, and
London Stock Exchanges
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes ______ No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ______ No X
Note -- Checking the box above will not relieve any registrant required to
file reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X Accelerated filer ___ Non-accelerated filer ___ Smaller reporting company ___
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ______ No X
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter.
CLASS OF COMMON EQUITY AND NUMBER OF SHARES
HELD BY NON-AFFILIATES AT JUNE 30, 2007 MARKET VALUE HELD BY NON-AFFILIATES*
------------------------------------------- ------------------------------------
Common Stock, 44,925,882 shares $1,574,202,905
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* Based upon the closing sale price on the New York Stock Exchange Composite
Tape for the Common Stock on June 30, 2007.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, par
value $.01 per share, 46,584,982 shares outstanding as of February 22, 2008.
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF THE FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
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Portions of Tenneco Inc.'s Definitive Proxy Statement
for the Annual Meeting of Stockholders to be held May 6, 2008 Part III
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning, among other
things, the prospects and developments of the Company (as defined) and business
strategies for our operations, all of which are subject to risks and
uncertainties. These forward-looking statements are included in various sections
of this report, including the section entitled "Outlook" appearing in Item 7 of
this report. These statements are identified as "forward-looking statements" or
by their use of terms (and variations thereof) such as "will," "may," "can,"
"anticipate," "intend," "continue," "estimate," "expect," "plan," "should,"
"outlook," "believe," and "seek" and similar terms (and variations thereof) and
phrases.
When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, we caution that, while we
believe such assumptions or bases to be reasonable and make them in good faith,
assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, we or
our management expresses an expectation or belief as to future results, we
express that expectation or belief in good faith and believe it has a reasonable
basis, but we can give no assurance that the statement of expectation or belief
will result or be achieved or accomplished.
Our actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include the matters described in the section entitled "Risk Factors" appearing
in Item 1A of this report and the following:
- general economic, business and market conditions;
- potential legislation, regulatory changes and other governmental actions,
including the ability to receive regulatory approvals and the timing of
such approvals;
- new technologies that reduce the demand for certain of our products or
otherwise render them obsolete;
- changes in distribution channels or competitive conditions in the markets
and countries where we operate;
- capital availability or costs, including changes in interest rates, our
leverage, market perceptions of the industries in which we operate or
ratings of securities;
- increases in the cost of compliance with regulations, including
environmental regulations, and environmental liabilities in excess of the
amount reserved;
- changes by the Financial Accounting Standards Board or the Securities and
Exchange Commission of authoritative accounting principles generally
accepted in the United States of America;
- acts of war or terrorism, including, but not limited to, the events
taking place in the Middle East, the current military action in Iraq and
the continuing war on terrorism, as well as actions taken or to be taken
by the United States and other governments as a result of further acts or
threats of terrorism, and the impact of these acts on economic, financial
and social conditions in the countries where we operate; and
- the timing and occurrence (or non-occurrence) of transactions and events
which may be subject to circumstances beyond our control.
i
TABLE OF CONTENTS
PART I
Item 1. Business......................................................... 1
Tenneco Inc. .................................................... 1
Contributions of Major Businesses................................ 4
Description of Our Business...................................... 5
Item 1A. Risk Factors..................................................... 21
Item 1B. Unresolved Staff Comments........................................ 27
Item 2. Properties....................................................... 27
Item 3. Legal Proceedings................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders.............. 28
Item 4.1. Executive Officers of the Registrant............................. 29
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer
Repurchases of Equity Securities................................. 31
Item 6. Selected Financial Data.......................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 65
Item 8. Financial Statements and Supplementary Data...................... 66
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 129
Item 9A. Controls and Procedures.......................................... 129
Item 9B. Other Information................................................ 129
PART III
Item 10. Directors, Executive Officers and Corporate Governance........... 130
Item 11. Executive Compensation........................................... 130
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................. 130
Item 13. Certain Relationships and Related Transactions, and Director
Independence..................................................... 131
Item 14. Principal Accountant Fees and Services........................... 131
PART IV
Item 15. Exhibits and Financial Statement Schedules....................... 132
ii
PART I
ITEM 1. BUSINESS.
TENNECO INC.
GENERAL
Our company, Tenneco Inc., is one of the world's largest producers of
automotive emission control and ride control products and systems. Our company
serves both original equipment vehicle manufacturers ("OEMs") and the repair and
replacement markets, or aftermarket, worldwide. As used herein, the term
"Tenneco", "we", "us", "our", or the "Company" refers to Tenneco Inc. and its
consolidated subsidiaries.
Tenneco was incorporated in Delaware in 1996. In 2005, we changed our name
from Tenneco Automotive Inc. back to Tenneco Inc. The name Tenneco better
represents the expanding number of markets we serve through our commercial and
specialty vehicle businesses. Building a stronger presence in these markets
complements our core businesses of supplying ride control and emission control
products and systems for light vehicles to automotive original equipment and
aftermarket customers worldwide. Our common stock continues to trade on the New
York Stock Exchange under the symbol "TEN".
CORPORATE GOVERNANCE AND AVAILABLE INFORMATION
We have established a comprehensive corporate governance plan for the
purpose of defining responsibilities, setting high standards of professional and
personal conduct and assuring compliance with such responsibilities and
standards. As part of its annual review process, the Board of Directors monitors
developments in the area of corporate governance. Listed below are some of the
key elements of our corporate governance plan.
For more information about these matters, see our definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 6, 2008.
INDEPENDENCE OF DIRECTORS
- Eight of our nine directors are independent under the New York Stock
Exchange ("NYSE") listing standards.
- Independent directors are scheduled to meet separately in executive
session after every regularly scheduled Board of Directors meeting.
- We have a lead independent director, Mr. Paul T. Stecko.
AUDIT COMMITTEE
- All members meet the independence standards for audit committee
membership under the NYSE listing standards and applicable Securities and
Exchange Commission ("SEC") rules.
- One member of the Audit Committee, Mr. Charles Cramb, has been designated
by the Board as an "audit committee financial expert," as defined in the
SEC rules, and the remaining members of the Audit Committee satisfy the
NYSE's financial literacy requirements. Mr. Dennis Letham also meets the
requirements to be considered a financial expert under SEC rules.
- The Audit Committee operates under a written charter which governs its
duties and responsibilities, including its sole authority to appoint,
review, evaluate and replace our independent auditors.
- The Audit Committee has adopted policies and procedures governing the
pre-approval of all audit, audit-related, tax and other services provided
by our independent auditors.
1
COMPENSATION/NOMINATING/GOVERNANCE COMMITTEE
- All members meet the independence standards for compensation and
nominating committee membership under the NYSE listing standards.
- The Compensation/Nominating/Governance Committee operates under a written
charter that governs its duties and responsibilities, including the
responsibility for executive compensation.
- In December 2005, an Executive Compensation Subcommittee was formed which
has the responsibility to consider and approve equity based compensation
for our executive officers which is intended to qualify as "performance
based compensation" under Section 162(m) of the Internal Revenue Code of
1986, as amended.
CORPORATE GOVERNANCE PRINCIPLES
- We have adopted Corporate Governance Principles, including qualification
and independence standards for directors.
STOCK OWNERSHIP GUIDELINES
- We have adopted Stock Ownership Guidelines to align the interests of our
executives with the interests of stockholders and promote our commitment
to sound corporate governance.
- The Stock Ownership Guidelines apply to the independent directors, the
Chairman and Chief Executive Officer, all Executive Vice Presidents and
all Senior Vice Presidents.
COMMUNICATION WITH DIRECTORS
- The Audit Committee has established a process for confidential and
anonymous submission by our employees, as well as submissions by other
interested parties, regarding questionable accounting or auditing
matters.
- Additionally, the Board of Directors has established a process for
stockholders to communicate with the Board of Directors, as a whole, or
any independent director.
CODES OF BUSINESS CONDUCT AND ETHICS
- We have adopted a Code of Ethical Conduct for Financial Managers, which
applies to our Chief Executive Officer, Chief Financial Officer,
Controller and other key financial managers. This code is filed as
Exhibit 14 to this report.
- We also operate under a Statement of Business Principles that applies to
all directors, officers and employees and includes provisions ranging
from restrictions on gifts to conflicts of interests. All salaried
employees are required to affirm in writing their acceptance of these
principles.
RELATED PARTY TRANSACTIONS POLICY
- We have adopted a Policy and Procedure for Transactions With Related
Persons, under which our Audit Committee must generally pre-approve
transactions involving more than $120,000 with our directors, executive
officers, five percent or greater stockholders and their immediate family
members.
EQUITY AWARD POLICY
- We have adopted a written policy to be followed for all issuances by our
company of compensatory awards in the form of our common stock or any
derivative of the common stock.
2
PERSONAL LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
- We comply with and operate in a manner consistent with the legislation
outlawing extensions of credit in the form of a personal loan to or for
our directors or executive officers.
Our Internet address is www.tenneco.com. We make our proxy statements,
annual report to stockholders, annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports, as filed
with or furnished to the SEC, available free of charge on our Internet website
as soon as reasonably practicable after submission to the SEC. Securities
ownership reports on Forms 3, 4 and 5 are also available free of charge on our
website as soon as reasonably practicable after submission to the SEC. The
contents of our website are not, however, a part of this report.
Our Audit Committee, Compensation/Nominating/Governance Committee and
Executive Compensation Subcommittee Charters, Corporate Governance Principles,
Stock Ownership Guidelines, Audit Committee policy regarding accounting
complaints, Code of Ethical Conduct for Financial Managers, Statement of
Business Principles, Policy and Procedures for Transactions with Related
Persons, Equity Award Policy, policy for communicating with the Board of
Directors and Audit Committee policy regarding the pre-approval of audit, non-
audit, tax and other services are available free of charge on our website at
www.tenneco.com. In addition, we will make a copy of any of these documents
available to any person, without charge, upon written request to Tenneco Inc.,
500 North Field Drive, Lake Forest, Illinois 60045, Attn: General Counsel. We
intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and
applicable NYSE rules regarding amendments to or waivers of our Code of Ethical
Conduct for Financial Managers and Statement of Business Principles by posting
this information on our website at www.tenneco.com.
CEO AND CFO CERTIFICATIONS
In 2007 our chief executive officer provided to the NYSE and the Chicago
Stock Exchange the annual CEO certification regarding our compliance with the
corporate governance listing standards of those exchanges. In addition, our
chief executive officer and chief financial officer filed with the Securities
and Exchange Commission all required certifications regarding the quality of our
disclosures in our fiscal 2007 SEC reports. There were no qualifications to
these certifications.
3
CONTRIBUTIONS OF MAJOR BUSINESSES
For information concerning our operating segments, geographic areas and
major products or groups of products, see Note 11 to the consolidated financial
statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8. The
following tables summarize for each of our operating segments for the periods
indicated: (i) net sales and operating revenues; (ii) earnings before interest
expense, income taxes and minority interest ("EBIT"); and (iii) expenditures for
plant, property and equipment. You should also read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7
for information about certain costs and charges included in our results.
NET SALES AND OPERATING REVENUES:
2007 2006 2005
------------ ------------ ------------
(DOLLAR AMOUNTS IN MILLIONS)
North America............................... $2,910 47% $1,963 42% $2,033 46%
Europe, South America and India............. 3,135 51 2,387 51 2,110 48
Asia Pacific................................ 560 9 436 9 371 8
Intergroup sales............................ (421) (7) (104) (2) (74) (2)
------ --- ------ --- ------ ---
Total..................................... $6,184 100% $4,682 100% $4,440 100%
====== === ====== === ====== ===
EBIT:
2007 2006 2005
---------- ---------- ----------
(DOLLAR AMOUNTS IN MILLIONS)
North America................................... $120 48% $103 53% $148 69%
Europe, South America and India................. 99 39 81 41 53 24
Asia Pacific.................................... 33 13 12 6 16 7
---- --- ---- --- ---- ---
Total......................................... $252 100% $196 100% $217 100%
==== === ==== === ==== ===
EXPENDITURES FOR PLANT, PROPERTY AND EQUIPMENT:
2007 2006 2005
---------- ---------- ----------
(DOLLAR AMOUNTS IN MILLIONS)
North America................................... $106 54% $100 59% $ 74 51%
Europe, South America and India................. 74 37 51 30 54 38
Asia Pacific.................................... 18 9 19 11 16 11
---- --- ---- --- ---- ---
Total......................................... $198 100% $170 100% $144 100%
==== === ==== === ==== ===
Interest expense, income taxes, and minority interest that were not
allocated to our operating segments are:
2007 2006 2005
---- ---- ----
(MILLIONS)
Interest expense (net of interest capitalized)............... $164 $136 $133
Income tax expense........................................... 83 5 26
Minority interest............................................ 10 6 2
4
DESCRIPTION OF OUR BUSINESS
We design, manufacture and sell automotive emission control and ride
control systems and products, with 2007 revenues of $6.2 billion. We serve both
original equipment manufacturers and replacement markets worldwide through
leading brands, including Monroe(R), Rancho(R), Clevite(R) Elastomers, and Fric
Rot(TM) ride control products and Walker(R), Fonos(TM), and Gillet(TM) emission
control products.
As an automotive parts supplier, we produce individual component parts for
vehicles as well as groups of components that are combined as modules or systems
within vehicles. These parts, modules and systems are sold globally to most
leading OEMs and throughout all aftermarket distribution channels.
OVERVIEW OF AUTOMOTIVE PARTS INDUSTRY
The automotive parts industry is generally separated into two categories:
(1) "original equipment" or "OE" sales, in which parts are sold in large
quantities directly for use by OEMs; and (2) "aftermarket" sales, in which parts
are sold as replacement parts in varying quantities to a wide range of
wholesalers, retailers and installers. In the OE market, parts suppliers are
generally divided into tiers -- "Tier 1" suppliers, who provide their products
directly to OEMs, and "Tier 2" or "Tier 3" suppliers, who sell their products
principally to other suppliers for combination into the other suppliers' own
product offerings.
Demand for automotive parts in the OE market is generally a function of the
number of new vehicles produced, which in turn is a function of prevailing
economic conditions and consumer preferences. In 2007, the number of light
vehicles (i.e. passenger cars and light trucks) produced was 15.0 million in
North America, 29.4 million in Europe, South America and India and 26.3 million
in Asia Pacific. Worldwide new light vehicle production is forecasted to
increase to 73.4 million units in 2008 from approximately 70.7 million units in
2007. Although OE demand is tied to planned vehicle production, parts suppliers
also have the opportunity to grow through increasing their product content per
vehicle, by further penetrating business with existing customers and by gaining
new customers and markets. Companies with global presence and advanced
technology, engineering, manufacturing and support capabilities, such as our
company, are, we believe, well positioned to take advantage of these
opportunities.
Demand for aftermarket products is driven by the quality of OE parts, the
number of vehicles in operation, the age of the vehicle fleet, vehicle usage and
the average useful life of vehicle parts. Although more vehicles are on the road
than ever before, the aftermarket has experienced longer replacement cycles due
to improved quality of OE parts and increases in average useful lives of
automotive parts as a result of technological innovation. Suppliers are
increasingly being required to deliver innovative aftermarket products that
upgrade the performance or safety of a vehicle's original components to drive
aftermarket demand.
INDUSTRY TRENDS
Currently, we believe several significant existing and emerging trends are
dramatically impacting the automotive industry. As the dynamics of the
automotive industry change, so do the roles, responsibilities and relationships
of its participants. Key trends that we believe are affecting automotive parts
suppliers include:
INCREASING ENVIRONMENTAL STANDARDS
Automotive parts suppliers and OE manufacturers are designing products and
developing materials to respond to increasingly stringent environmental
requirements, a growing diesel market and the demand for better fuel economy.
Government regulations adopted over the past decade require substantial
reductions in automobile tailpipe emissions, longer warranties on parts of an
automobile's pollution control equipment and additional equipment to control
fuel vapor emissions. Some of these regulations also mandate more frequent
emission inspections for the existing fleet of vehicles. Manufacturers have
responded by focusing their efforts towards technological development to
minimize pollution. As a leading supplier of emission control systems with
strong technical capabilities, we believe we are well positioned to benefit from
more rigorous environmental standards. For example, we developed the diesel
particulate filter to meet stricter air quality regulations in Europe. Diesel
particulate filters are produced in both Europe on the Mercedes Benz Sprinter
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and E-class and North America on the GM Duramax, Ford Super Duty, Dodge Ram and
ITEC Medium duty. Our particulate filter and De-NOx converter can reduce
particulate emissions by up to 90 percent and nitrogen oxide emissions by up to
85 percent. We also have numerous development contracts with North American,
European and Asian light and medium-duty truck manufacturers for our selective
catalytic reduction (SCR) systems. In addition, we are actively working on
development of a non-road emission aftertreatment system for multiple
manufacturers, in order to meet Tier 4 environmental regulations. In China, we
have development contracts for complete turnkey SCR systems, including the Elim-
NOx urea dosing technology which we acquired in 2007. Several customers have
also purchased prototypes of our hydrocarbon injector, acquired with the ELIM-
NOx technology, for the purpose of actively regenerating diesel particulate
filters and Lean NOx Traps through hydrocarbon injection directly into the
exhaust system.
INCREASING TECHNOLOGICALLY SOPHISTICATED CONTENT
As consumers continue to demand competitively priced vehicles with
increased performance and functionality, the number of sophisticated components
utilized in vehicles is increasing. By replacing mechanical functions with
electronics and by integrating mechanical and electronic functions within a
vehicle, OE manufacturers are achieving improved emission control, improved
safety and more sophisticated features at lower costs.
Automotive parts customers are increasingly demanding technological
innovation from suppliers to address more stringent emission and other
regulatory standards and to improve vehicle performance. To develop innovative
products, systems and modules, we have invested $114 million for 2007, $88
million for 2006 and $83 million for 2005, net of customer reimbursements, into
engineering, research and development and we continuously seek to take advantage
of our technology investments and brand strength by extending our products into
new markets and categories. For example, we were the first supplier to develop
and commercialize a diesel particulate filter that can virtually eliminate
carbon and hydrocarbon emissions with minimal impact on engine performance.
We have expanded our competence in diesel particulate filters in Europe and
are winning business in North America on these same applications. In addition,
we supply Volvo, Audi, Ford and Mercedes Benz with a computerized electronic
suspension system that we co-developed with Ohlins Racing AB. As other examples,
we are sponsoring funded University Research for advanced technologies for both
emission control and ride control, and we are participating in the HyTRAN
consortium in Europe for the development of practical fuel cell reformers and
auxiliary power units.
Our customers reimburse us for engineering, research, and development costs
on some platforms when we prepare prototypes and incur costs before platform
awards. Our engineering, research and development expense for 2007, 2006, and
2005 has been reduced by $72 million, $61 million, and $51 million,
respectively, for these reimbursements.
ENHANCED VEHICLE SAFETY
Vehicle safety continues to gain increased industry attention and play a
critical role in consumer purchasing decisions. As such, OEMs are seeking out
suppliers with new technologies, capabilities and products that have the ability
to advance vehicle safety. Continued research and development by select
automotive suppliers in roll-over protection systems, smart airbag systems,
braking electronics and safer, more durable materials has dramatically advanced
the market for safety products and its evolving functional demands. Those
suppliers who are able to enhance vehicle safety through innovative products and
technologies have a distinct competitive advantage with the consumer, and thus
their OEM customers. In the Aftermarket, Tenneco has promoted the "Safety
Triangle" of Steering-Stopping-Stability to educate consumers of the detrimental
effect of worn shock absorbers on vehicle steering and stopping distances. We
further strengthened this message with the introduction of Monroe(R) branded
brakes as an Aftermarket product offering during 2007. Also during 2007, the new
Federal Motor Vehicle Safety Standard (FMVSS) 126 was introduced for electronic
stability control (ECS) systems, making those systems mandatory by 2012. We
believe that this
6
legislation will encourage more vehicle manufacturers to specify products like
CES and Kinetic, and we are sponsoring University Research to establish the
synergistic impact of our technologies to ECS systems.
OUTSOURCING AND DEMAND FOR SYSTEMS AND MODULES
OE manufacturers have been steadily moving towards outsourcing automotive
parts and systems to simplify the vehicle assembly process, lower costs and
reduce vehicle development time. Outsourcing allows OE manufacturers to take
advantage of the lower cost structure of the automotive parts suppliers and to
benefit from multiple suppliers engaging in simultaneous development efforts.
Furthermore, development of advanced electronics has enabled formerly
independent vehicle components to become "interactive," leading to a shift in
demand from individual parts to fully integrated systems. As a result,
automotive parts suppliers offer OE manufacturers component products
individually, as well as in a variety of integrated forms such as modules and
systems:
- "Modules" are groups of component parts arranged in close physical
proximity to each other within a vehicle. Modules are often assembled by
the supplier and shipped to the OEM for installation in a vehicle as a
unit. Integrated shock and spring units, seats, instrument panels, axles
and door panels are examples.
- "Systems" are groups of component parts located throughout a vehicle
which operate together to provide a specific vehicle function. Emission
control systems, anti-lock braking systems, safety restraint systems,
roll control systems and powertrain systems are examples.
This shift in demand towards fully integrated systems has created the role
of the Tier 1 systems integrator. These systems integrators increasingly have
the responsibility to execute a number of activities, such as design, product
development, engineering, testing of component systems and purchasing from Tier
2 suppliers. We are an established Tier 1 supplier with more than ten years of
product integration experience. We have modules or systems for various vehicle
platforms in production worldwide and modules or systems for additional
platforms under development. For example, we supply ride control modules for the
GM Chevy Silverado, GM Sierra and the VW Transporter and the emission control
system for the Ford Super Duty, Toyota Tundra, Chrysler Dodge Ram, Ford Focus,
and the GM Acadia, Enclave and Outlook.
GLOBAL REACH OF OE CUSTOMERS
OEMs are increasingly requesting suppliers to provide parts on a global
basis to support global vehicle platforms. Also, as the customer base of OEMs
has consolidated and emerging markets have become more important to achieving
growth, suppliers must be prepared to provide products any place in the world.
- Growing Importance of Emerging Markets: Because the North American and
Western European automotive markets are relatively mature, OE
manufacturers are increasingly focusing on emerging markets for growth
opportunities, particularly the so-called BRIC economies, including
Brazil, Russia, India, China and Eastern Europe. This increased OE focus
has, in turn, increased the growth opportunities in the aftermarkets in
these regions.
- Governmental Tariffs and Local Parts Requirements: Many governments
around the world require that vehicles sold within their country contain
specified percentages of locally produced parts. Additionally, some
governments place high tariffs on imported parts.
- Location of Production Closer to End Markets: OE manufacturers and parts
suppliers have relocated production globally on an "onsite" basis that is
closer to end markets. This international expansion allows suppliers to
pursue sales in developing markets and take advantage of relatively lower
labor costs.
With facilities around the world, including the key regions of North
America, South America, Europe and Asia, we can supply our customers on a global
basis.
7
GLOBAL RATIONALIZATION OF OE VEHICLE PLATFORMS
OE manufacturers are increasingly designing "global platforms." A global
platform is a basic mechanical structure of a vehicle that can accommodate
different features and is in production and/or development in more than one
region. Thus, OE manufacturers can design one platform for a number of similar
vehicle models. This allows manufacturers to realize significant economies of
scale through limiting variations across items such as steering columns, brake
systems, transmissions, axles, exhaust systems, support structures and power
window and door lock mechanisms. We believe that this shift towards
standardization will have a large impact on automotive parts suppliers, who
should experience a reduction in production costs as OE manufacturers reduce
variations in components. We also expect parts suppliers to experience higher
production volumes per platform and greater economies of scale, as well as
reduced total investment costs for molds, dies and prototype development. Light
vehicle platforms of over one million units are expected to grow from 34 percent
to 45 percent of global OE production from 2007 to 2012.
EXTENDED PRODUCT LIFE OF AUTOMOTIVE PARTS
The average useful life of automotive parts -- both OE and
replacement -- has been steadily increasing in recent years due to innovations
in products and technologies. The longer product lives allow vehicle owners to
replace parts of their vehicles less often. As a result, although more vehicles
are on the road than ever before, the global aftermarket has not grown as fast
as the number of vehicles on the road. Accordingly, a supplier's future
viability in the aftermarket will depend, in part, on its ability to reduce
costs and leverage its advanced technology and recognized brand names to
maintain or achieve additional sales. As a Tier 1 OE supplier, we believe we are
well positioned to leverage our products and technology into the aftermarket.
CHANGING AFTERMARKET DISTRIBUTION CHANNELS
From 1997 to 2007, the number of retail automotive parts stores increased
significantly while the number of jobber stores declined more than 16 percent in
North America. Major automotive aftermarket retailers, such as AutoZone and
Advance Auto Parts, are attempting to increase their commercial sales by selling
directly to automotive parts installers in addition to individual consumers.
These installers have historically purchased from their local warehouse
distributors and jobbers, who are our more traditional customers. This enables
the retailers to offer the option of a premium brand, which is often preferred
by their commercial customers, or a standard product, which is often preferred
by their retail customers. We believe we are well positioned to respond to this
trend in the aftermarket because of our focus on cost reduction and high-
quality, premium brands.
CONTRACTING SUPPLIER BASE
Over the past few years, automotive suppliers have been consolidating in an
effort to become more global, have a broad integrated product and service
offering, and gain economies of scale in order to remain competitive amidst
growing pricing pressures and increased outsourcing opportunities from the OEMs.
One industry consultant projects that the number of automotive supplier
companies will decrease from 5,600 in 2000 to 2,800 by 2015. A supplier's
viability in this market will depend, in part, on its ability to maintain and
increase operating efficiencies and provide value-added services.
8
ANALYSIS OF REVENUES
The table below provides, for each of the years 2007 through 2005,
information relating to our net sales and operating revenues, by primary product
lines and customer categories. You should read Note 4 to the consolidated
financial statements of Tenneco Inc. and Consolidated Subsidiaries included in
Item 8 for a discussion of the changes in our results due to the restatement
described therein.
NET SALES
YEAR ENDED DECEMBER 31,
------------------------
2007 2006 2005
------ ------ ------
(MILLIONS)
EMISSION CONTROL SYSTEMS & PRODUCTS
Aftermarket............................................. $ 370 $ 384 $ 368
Original Equipment market
OE Value-add......................................... 2,288 1,665 1,709
OE Substrate(1)...................................... 1,673 927 681
------ ------ ------
3,961 2,592 2,390
------ ------ ------
4,331 2,976 2,758
------ ------ ------
RIDE CONTROL SYSTEMS & PRODUCTS
Aftermarket............................................. 734 690 653
Original Equipment market............................... 1,119 1,016 1,029
------ ------ ------
1,853 1,706 1,682
------ ------ ------
Total Revenues....................................... $6,184 $4,682 $4,440
====== ====== ======
--------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7 for a discussion of substrate
sales.
BRANDS
In each of our operating segments, we manufacture and market leading brand
names. Monroe(R) ride control products and Walker(R) exhaust products are two of
the most recognized brand names in the automotive parts industry. We emphasize
product value differentiation with these and other key brands such as Monroe
Sensa-Trac(R) and Reflex(R) (shock absorbers and struts), Quiet-Flow(R)
(mufflers), DynoMax(R) (performance exhaust products), Rancho(R) (ride control
products for the high performance light truck market) and Clevite(R) Elastomers
(elastomeric vibration control components), and Lukey (performance exhaust and
filters). In Europe, our Gillet(TM) brand is recognized as a leader in
developing highly engineered exhaust systems for OE customers.
CUSTOMERS
We have developed long-standing business relationships with our customers
around the world. In each of our operating segments, we work together with our
customers in all stages of production, including design, development, component
sourcing, quality assurance, manufacturing and delivery. With a balanced mix of
OE and aftermarket products and facilities in major markets worldwide, we
believe we are well-positioned to meet customer needs. We believe we have a
strong, established reputation with customers for providing high-quality
products at competitive prices, as well as for timely delivery and customer
service.
9
Worldwide we serve more than 39 different OE manufacturers, and our
products or systems are included on 8 of the top 10 passenger car models
produced for sale in Europe and 9 of the top 10 SUV and light truck models
produced for sale in North America for 2007. During 2007, our OE customers
included:
NORTH AMERICA EUROPE ASIA
AM General BMW BMW
CAMI Automotive Daimler Brilliance JinBei Automotive
Caterpillar Fiat Co.
Chrysler Ford Chang'an Automobile
Club Car General Motors Chery Automobile
E-Z Go Golf Car Nissan Daimler
Ford Paccar First Auto Works
General Motors Porsche Ford
Harley-Davidson PSA Peugeot Citroen General Motors
Honda Renault Great Wall Motor Co.
John Deere Scania Isuzu
Motor Coach Industries Suzuki Jiangling Motors
Navistar (International) Toyota Mazda
Nissan Volkswagen Mitsubishi
Paccar Volvo Truck Nissan
Toyota PSA Peugeot Citroen
Volkswagen Group SOUTH AMERICA Shanghai Automotive (SAIC)
Volvo Truck Daimler Toyota
Fiat Volkswagen Group
AUSTRALIA Ford
Club Car General Motors INDIA
Ford PSA Peugeot Citroen Club Car
General Motors Renault E-Z Go Golf Car
Mazda Scania General Motors
Mitsubishi Toyota Mahindra & Mahindra
Toyota Volkswagen Group Suzuki
TATA Motors
TVS Motors
The following customers accounted for 10 percent or more of our net sales
in any of the last three years.
CUSTOMER 2007 2006 2005
-------- ---- ---- ----
General Motors........................................... 20% 14% 17%
Ford..................................................... 14% 11% 12%
Volkswagen Group......................................... 9% 11% 9%
DaimlerChrysler(1)....................................... -- 11% 9%
--------
(1) In 2007, DaimlerChrysler sold approximately 80% of its interest in its
U.S. unit, Chrysler Group, to Cerberus Capital Management L.P. Daimler
AG accounted for approximately 8 percent of our 2007 net sales. The
Chrysler Group accounted for approximately 2 percent of our 2007 net
sales.
During 2007, our aftermarket customers were comprised of full-line and
specialty warehouse distributors, retailers, jobbers, installer chains and car
dealers. These customers included such wholesalers and retailers such as
National Auto Parts Association (NAPA), Advance Auto Parts, Uni-Select and
O'Reilly Automotive in North America and Temot, Group Auto Union, Mekonoman
Grossist and Auto Distribution International in Europe. We believe we have a
balanced mix of aftermarket customers, with our top 10 aftermarket customers
accounting for 38 percent of our total net aftermarket sales and only 7 percent
of our total net sales for 2007.
COMPETITION
We operate in highly competitive markets. Customer loyalty is a key element
of competition in these markets and is developed through long-standing
relationships, customer service, high quality value-added products and timely
delivery. Product pricing and services provided are other important competitive
factors.
10
In both the OE market and aftermarket, we compete with the vehicle
manufacturers, some of which are also customers of ours, and numerous
independent suppliers. In the OE market, we believe that we are among the top
two suppliers in the world for both emission control and ride control products
and systems for light vehicles. In the aftermarket, we believe that we are the
market share leader in the supply of both emission control and ride control
products for light vehicles in the markets we serve throughout the world.
SEASONALITY
Our business is somewhat seasonal. OE manufacturers' production
requirements have historically been higher in the first two quarters of the year
as compared to the last two quarters. Production requirements tend to decrease
in the third quarter due to plant shutdowns for model changeovers. In addition,
we believe this seasonality is due, in part, to consumer demand for new vehicles
softening during the holiday season and as a result of the winter months in
North America and Europe. Also, the major North American OE manufacturers
generally close their production facilities for the last two weeks of the year.
Our aftermarket business also experiences seasonality. Demand for aftermarket
products increases during the spring as drivers prepare for the summer driving
season. Although seasonality does impact our business, actual results may vary
from the above trends due to timing of platform launches and other production
related events.
EMISSION CONTROL SYSTEMS
Vehicle emission control products and systems play a critical role in
safely conveying noxious exhaust gases away from the passenger compartment and
reducing the level of pollutants and engine exhaust noise to an acceptable
level. Precise engineering of the exhaust system -- from the manifold that
connects an engine's exhaust ports to an exhaust pipe, to the catalytic
converter that eliminates pollutants from the exhaust, to the muffler -- leads
to a pleasant, tuned engine sound, reduced pollutants and optimized engine
performance.
We design, manufacture and distribute a variety of products and systems
designed to reduce pollution and optimize engine performance, acoustic tuning
and weight, including the following:
- Catalytic converters and diesel oxidation catalysts -- Devices consisting
of a substrate coated with precious metals enclosed in a steel casing
used to reduce harmful gaseous emissions, such as carbon monoxide, below
the EPA regulated limits for emissions;
- Diesel Particulate Filters -- Devices to eliminate particulate matter
emitted from diesel engines;
- Selective Catalytic Reduction (SCR) systems -- Devices which reduce
Nitrogen Oxide (NOx) emissions from diesel powertrains;
- Mufflers and resonators -- Devices to provide noise elimination and
acoustic tuning;
- Exhaust manifolds -- Components that collect gases from individual
cylinders of a vehicle's engine and direct them into a single exhaust
pipe;
- Pipes -- Utilized to connect various parts of both the hot and cold ends
of an exhaust system;
- Hydroformed assemblies -- Forms into various geometric shapes, such as Y-
pipes or T-pipes, which provides optimization in both design and
installation as compared to conventional pipes; and
- Hangers and isolators -- Used for system installation and noise and
vibration elimination;
We entered the emission control product line in 1967 with the acquisition
of Walker Manufacturing Company, which was founded in 1888. With the acquisition
of Heinrich Gillet GmbH & Co. in 1994, we also became one of Europe's leading OE
emission control systems suppliers. When the term "Walker" is used in this
document, it refers to our subsidiaries and affiliates that produce emission
control products and systems.
We supply our emission control offerings to over 38 vehicle-makers for use
on over 160 vehicle models, including 6 of the top 10 passenger cars produced
for sale in Europe and 7 of the top 10 SUVs and light trucks produced for sale
in North America in 2007. We also supply OE EC products to heavy duty and
11
specialty vehicle manufacturers including Harley-Davidson, BMW Motorcycle,
Daimler Trucks, and International Truck and Engine (Navistar).
With respect to catalytic converters, we buy the substrate coated with
precious metals, or sometimes the completed catalytic converter, from third
parties, use them in our manufacturing process and sell them as part of the
completed system. This often occurs at the direction of the OE customers. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for more information on our sales of these products.
In the aftermarket, we manufacture, market and distribute replacement
mufflers for virtually all North American, European, and Asian makes of light
vehicles under brand names including Quiet-Flow(R), TruFit(R) and Aluminox
Pro(TM), in addition to offering a variety of other related products such as
pipes and catalytic converters (Walker Perfection(R)). We also serve the
specialty exhaust aftermarket, where our key offerings include Mega-Flow(TM)
exhaust products for heavy-duty vehicle applications and DynoMax(R) high
performance exhaust products. We continue to emphasize product value
differentiation with other aftermarket brands such as Thrush(R) and Fonos(TM).
The following table provides, for each of the years 2007 through 2005,
information relating to our sales of emission control products and systems for
certain geographic areas:
PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
-----------------------
2007 2006 2005
---- ---- ----
UNITED STATES
Aftermarket.......................................... 10% 19% 18%
OE market............................................ 90 81 82
--- --- ---
100% 100% 100%
=== === ===
FOREIGN SALES
Aftermarket.......................................... 8% 10% 11%
OE market............................................ 92 90 89
--- --- ---
100% 100% 100%
=== === ===
TOTAL SALES BY GEOGRAPHIC AREA
United States........................................ 34% 29% 33%
Foreign.............................................. 66 71 67
--- --- ---
100% 100% 100%
=== === ===
RIDE CONTROL SYSTEMS
Superior ride control is governed by a vehicle's suspension system,
including its shock absorbers and struts. Shock absorbers and struts help
maintain vertical loads placed on a vehicle's tires to help keep the tires in
contact with the road. A vehicle's ability to steer, brake and accelerate
depends on the contact between the vehicle's tires and the road. Worn shocks and
struts can allow excess weight transfer from side to side, which is called
"roll," from front to rear, which is called "pitch," and up and down, which is
called "bounce." Variations in tire-to-road contact can affect a vehicle's
handling and braking performance and the safe operation of a vehicle. Shock
absorbers are designed to control vertical loads placed on tires by providing
resistance to vehicle roll, pitch and bounce. Thus, by maintaining the tire to
road contact, ride control products are designed to function as safety
components of a vehicle, in addition to providing a comfortable ride.
We design, manufacture and distribute a variety of ride control products
and systems. Our ride control offerings include:
- Shock absorbers -- A broad range of mechanical shock absorbers and
related components for light- and heavy-duty vehicles. We supply both
twin-tube and monotube shock absorbers to vehicle manufacturers and the
aftermarket;
12
- Struts -- A complete line of struts and strut assemblies for light
vehicles;
- Vibration control components (Clevite(R) Elastomers) -- Generally rubber-
to-metal bushings and mountings to reduce vibration between metal parts
of a vehicle. Our offerings include a broad range of suspension arms,
rods and links for light- and heavy-duty vehicles;
- Kinetic(R) Suspension Technology -- A suite of roll control, near equal
wheel loading systems ranging from simple mechanical systems to complex
hydraulic systems featuring proprietary and patented technology. The
Kinetic(R) Suspension Technology was incorporated on the Citroen World
Rally Car that was featured in the World Rally Championship 2003, 2004
and 2005. Additionally, the Kinetic(R) Suspension Technology was
incorporated on the Lexus GX 470 sport utility vehicle which resulted in
our winning the PACE Award;
- Advanced suspension systems -- Electronically adjustable shock absorbers
and suspension systems that change performance based on vehicle inputs
such as steering and braking; and
- Other -- We also offer other ride control products such as load assist
products, springs, steering stabilizers, adjustable suspension systems,
suspension kits and modular assemblies.
We supply our ride control offerings to over 37 vehicle-makers for use on
over 155 vehicle models, including 8 of the top 10 SUV and light truck models
produced for sale in North America for 2007. We also supply OE ride control
products and systems to a range of heavy-duty and specialty vehicle
manufacturers including Volvo Truck, Scania, International Truck and Engine
(Navistar), and PACCAR.
In the ride control aftermarket, we manufacture, market and distribute
replacement shock absorbers for virtually all North American, European and Asian
makes of light vehicles under several brand names including Gas Matic(R), Sensa-
Trac(R), Monroe Reflex(R) and Monroe Adventure(R), as well as Clevite(R)
Elastomers for elastomeric vibration control components. We also sell ride
control offerings for the heavy duty, off-road and specialty aftermarket, such
as our Gas-Magnum(R) shock absorbers for the North American heavy-duty category.
We entered the ride control product line in 1977 with the acquisition of
Monroe Auto Equipment Company, which was founded in 1916 and introduced the
world's first modern tubular shock absorber in 1930. When the term "Monroe" is
used in this document it refers to our subsidiaries and affiliates that produce
ride control products and systems.
The following table provides, for each of the years 2007 through 2005,
information relating to our sales of ride control equipment for certain
geographic areas:
PERCENTAGE OF NET SALES
YEAR ENDED
DECEMBER 31,
-----------------------
2007 2006 2005
---- ---- ----
UNITED STATES
Aftermarket.......................................... 58% 53% 46%
OE market............................................ 42 47 54
--- --- ---
100% 100% 100%
=== === ===
FOREIGN SALES
Aftermarket.......................................... 31% 33% 33%
OE market............................................ 69 67 67
--- --- ---
100% 100% 100%
=== === ===
TOTAL SALES BY GEOGRAPHIC AREA
United States........................................ 32% 38% 42%
Foreign.............................................. 68 62 58
--- --- ---
100% 100% 100%
=== === ===
13
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Refer to Note 11 of the consolidated financial statements of Tenneco Inc.
and Consolidated Subsidiaries included in Item 8 of this report for financial
information about geographic areas.
SALES, MARKETING AND DISTRIBUTION
We have separate and distinct sales and marketing efforts for our OE and
aftermarket businesses.
For OE sales, our sales and marketing team is an integrated group of
professionals, including skilled engineers and program managers that are
organized by customer and product type (e.g., ride control and emission
control). Our sales and marketing team provides the appropriate mix of
operational and technical expertise needed to interface successfully with the
OEMs. Our new business "capture process" involves working closely with the OEM
platform engineering and purchasing team. Bidding on OE automotive platforms
typically encompasses many months of engineering and business development
activity. Throughout the process, our sales team, program managers and product
engineers assist the OE customer in defining the project's technical and
business requirements. A normal part of the process includes our engineering and
sales personnel working on customers' integrated product teams, and assisting
with the development of component/system specifications and test procedures.
Given that the OE business involves long-term production contracts awarded on a
platform-by-platform basis, our strategy is to leverage our engineering
expertise and strong customer relationships to obtain platform awards and
increase operating margins.
For aftermarket sales and marketing, our sales force is generally organized
by customer and region and covers multiple product lines. We sell aftermarket
products through four primary channels of distribution: (1) the traditional
three-step distribution system: full line warehouse distributors, jobbers and
installers; (2) the specialty two-step distribution system: specialty warehouse
distributors that carry only specified automotive product groups and installers;
(3) direct sales to retailers; and (4) direct sales to installer chains. Our
aftermarket sales and marketing representatives cover all levels of the
distribution channel, stimulating interest in our products and helping our
products move through the distribution system. Also, to generate demand for our
products from end-users, we run print and television advertisements and offer
pricing promotions. We were one of the first parts manufacturers to offer
business-to-business services to customers with TA-Direct, an on-line order
entry and customer service tool. In addition, we maintain detailed web sites for
each of the Walker(R), Monroe(R), Rancho(R) and DynoMax(R) brands and our heavy
duty products.
MANUFACTURING AND ENGINEERING
We focus on achieving superior product quality at the lowest operating
costs possible and generally use state-of-the-art manufacturing processes to
achieve that goal. Our manufacturing strategy centers on a lean production
system designed to reduce overall costs ,while maintaining quality standards and
reducing manufacturing cycle time. In addition, we have implemented Six Sigma in
our processes to minimize product defects and improve operational efficiencies.
We deploy new technology to differentiate our products from our competitors' or
to achieve higher quality and productivity. We continue to adapt our capacity to
customer demand, both expanding capabilities in growth areas as well as
reallocating capacity away from demand segments in decline.
EMISSION CONTROL
Our consolidated businesses operate 13 emission control manufacturing
facilities in the U.S. and 39 emission control manufacturing facilities outside
of the U.S. We operate 11 of these international manufacturing facilities
through joint ventures in which we own a controlling interest. We operate 5
emission control engineering and technical facilities worldwide and share two
other such facilities with our ride control operations. In addition, three joint
ventures in which we hold a noncontrolling interest operate a total of three
manufacturing facilities outside the U.S.
Within each of our emission control manufacturing facilities, operations
are organized by component (muffler, catalytic converter, pipe, resonator and
manifold). Our manufacturing systems incorporate cell-based
14
designs, allowing work-in-process to move through the operation with greater
speed and flexibility. We continue to invest in plant and equipment to stay
competitive in the industry. For instance, in our Smithville, Tennessee, OE
manufacturing facility, we have developed a muffler assembly cell that utilizes
laser welding. This allows for quicker change over times in the process as well
as less material used and less weight for the product. There is also a reduced
cycle time compared to traditional joining and increased manufacturing precision
for superior durability and performance. In 2007, we introduced the Measured and
Matched Converter technique in North America. This allows us to maintain the
optimum GBD (Gap Bulk Density) in our converter manufacturing operations with
Tenneco proprietary processing. This process, coupled with cold spinning of the
converter body versus traditional cone to can welding, allows for more effective
use of material through reduced welding, lower cost, and better performance of
the product.
In an effort to further improve our OE customer service and position
ourselves as a Tier-1 OE systems supplier, we have been developing some of our
emission control manufacturing operations into "just-in-time" or "JIT" systems.
In this system, a JIT facility located close to our OE customer's manufacturing
plant receives product components from both our manufacturing operations and
independent suppliers, assembles and then ships products to the OEMs on an as-
needed basis. To manage the JIT functions and material flow, we have advanced
computerized material requirements planning systems linked with our customers'
and supplier partners' resource management systems. We have 4 emission control
JIT assembly facilities in the United States and 20 in the rest of the world.
Our engineering capabilities include advanced predictive design tools,
advanced prototyping processes and state-of-the-art testing equipment. This
technological capability makes us a "full system" integrator, supplying complete
emission control systems from the manifold to the tailpipe, to provide full
emission and noise control. We have expanded our engineering capabilities with
the recent acquisition of Combustion Component Associates Elim-NOx(R) mobile
emission technology to include urea and hydrocarbon injection, and electronic
controls and software for selective catalytic reduction. We have also developed
advanced predictive engineering tools, including KBM&E (Knowledge Based
Manufacturing & Engineering). The innovation of our KBM&E (which we call TEN-
KBM&E) is a modular toolbox set of CAD embedded applications for manufacturing
and engineering compliant design. The encapsulated TEN-KBM&E content is driven
by an analytical method which continuously captures and updates the knowledge of
our main manufacturing and engineering processes.
RIDE CONTROL
Our consolidated businesses operate 7 ride control manufacturing facilities
in the U.S. and 21 ride control manufacturing facilities outside the U.S. We
operate 2 of these international facilities through joint ventures in which we
own a controlling interest. We operate 8 engineering and technical facilities
worldwide and share 2 other such facilities with our emission control
operations.
Within each of our ride control manufacturing facilities, operations are
organized by product (shocks, struts and vibration control products) and include
computer numerically controlled and conventional machine centers; tube milling
and drawn-over-mandrel manufacturing equipment; metal inert gas and resistance
welding; powdered metal pressing and sintering; chrome plating; stamping; and
assembly/test capabilities. Our manufacturing systems incorporate cell-based
designs, allowing work-in-process to move through the operation with greater
speed and flexibility.
As in the emission control business, in an effort to further improve our OE
customer service and position us as a Tier 1 OE module supplier, we have been
developing some of our manufacturing operations into JIT systems. We have 3 JIT
ride control facilities outside the U.S.
In designing our shock absorbers and struts, we use advanced engineering
and test capabilities to provide product reliability, endurance and performance.
Our engineering capabilities feature advanced computer aided
15
design equipment and testing facilities. Our dedication to innovative solutions
has led to such technological advances as:
- Adaptive damping systems -- adapt to the vehicle's motion to better
control undesirable vehicle motions;
- Electronically adjustable suspensions -- change suspension performance
based on a variety of inputs such as steering, braking, vehicle height,
and velocity; and
- Air leveling systems -- manually or automatically adjust the height of
the vehicle.
Conventional shock absorbers and struts generally compromise either ride
comfort or vehicle control. Our innovative grooved-tube, gas-charged shock
absorbers and struts provide both ride comfort and vehicle control, resulting in
improved handling, reduced vibration and a wider range of vehicle control. This
technology can be found in our premium quality Sensa-Trac(R) shock absorbers. We
further enhanced this technology by adding the SafeTech(TM) fluon banded piston,
which improves shock absorber performance and durability. We introduced the
Monroe Reflex(R) shock absorber, which incorporates our Impact Sensor(TM)
device. This technology permits the shock absorber to automatically switch in
milliseconds between firm and soft compression damping when the vehicle
encounters rough road conditions, thus maintaining better tire-to-road contact
and improving handling and safety. We have also developed an innovative
computerized electronic suspension system, which features dampers developed by
Tenneco and electronic valves designed by Ohlins Racing AB. The continuously
controlled electronic suspension ("CES") ride control system is featured on
Audi, Volvo, Ford and Mercedes Benz vehicles.
QUALITY CONTROL
Quality control is an important part of our production process. Our quality
engineers establish performance and reliability standards in the product's
design stage, and use prototypes to confirm the component/system can be
manufactured to specifications. Quality control is also integrated into the
manufacturing process, with shop operators being responsible for quality control
of their specific work product. In addition, our inspectors test work-in-
progress at various stages to ensure components are being fabricated to meet
customers' requirements.
We believe our commitment to quality control and sound management practices
and policies is demonstrated by our successful participation in the
International Standards Organization/Quality Management Systems certification
process ("ISO/TS"). ISO/TS certifications are semi-annual or annual audits that
certify that a company's facilities meet stringent quality and business systems
requirements. Without ISO or TS certification, we would not be able to supply
our products for the aftermarket or the OE market, respectively, either locally
or globally. Of those manufacturing facilities where we have determined that TS
certification is required to service our customers or would provide us with an
advantage in securing additional business, 95 percent have achieved TS
16949:2002 certification. We plan to complete the certification of the remaining
plants by year end 2008. Of those manufacturing facilities where we have
determined that ISO 9000 certification is required or would provide us with an
advantage in securing additional business, all have achieved ISO 9000
certification.
BUSINESS STRATEGY
Our objective is to enhance profitability by leveraging our global position
in the manufacture of emission control and ride control products and systems. We
intend to apply our competitive strengths and balanced mix of products, markets,
customers and distribution channels to capitalize on many of the significant
existing and emerging trends in the automotive and specialty industries. The key
components of our business strategy are described below.
LEVERAGE GLOBAL ENGINEERING AND ADVANCED SYSTEM CAPABILITIES
We continue to focus on the development of highly engineered systems and
complex assemblies and modules, which are designed to provide value-added
solutions to customers and generally increase vehicle
16
content and carry higher profit margins than individualized components. We have
developed integrated, electronically linked global engineering and manufacturing
facilities, which we believe help us to maintain our presence on top-selling
vehicles. We have more than 11 years of experience in integrating systems and
modules. In addition, our JIT and in-line sequencing manufacturing and
distribution capabilities have enabled us to better respond to our customers'
needs. We operate 27 JIT facilities worldwide.
"OWN" THE PRODUCT LIFE CYCLE
We seek to leverage our aftermarket expertise, which provides us with
valuable consumer demand information, to strengthen our competitive position
with OEMs. Our market knowledge, coupled with our leading aftermarket presence,
strengthens our ties with our OE customer base and drives OE acceptance of our
aftermarket products and technologies for use in original equipment vehicle
manufacturing.
COMMERCIALIZE INNOVATIVE, VALUE-ADDED PRODUCTS
To differentiate our offerings from those of our competitors, we focus on
commercializing innovative, value-added products, both on our own and through
strategic alliances, with emphasis on highly engineered systems and complex
assemblies and modules. We seek to continually identify and target new, fast-
growing niche markets and commercialize our new technologies for these markets,
as well as our existing markets. For example, our exclusive Kinetic(R) Dynamic
Suspension System, a version of the Kinetic(R) Reversible Function Stabilizer
Technology, is featured as an option on the Lexus GX470 sports utility vehicle
and LX470 Land Cruiser through a licensing arrangement between us and Toyota.
EXPAND OUR AFTERMARKET BUSINESS
We manufacture and market leading brand name products. Monroe(R) ride
control products and Walker(R) emission control products, which have been
offered to consumers for approximately 76 years, are two of the most recognized
brand name products in the automotive parts industry. We continue to emphasize
product value differentiation with these brands and our other primary brands,
including:
- The Monroe Reflex(R) shock absorber which features an Acceleration
Sensitive Damping Technology (ASD) to maintain better tire-to-road
contact and improve handling and safety for high center of gravity
vehicles (SUVs and light trucks) requiring more control;
- The Monroe Sensa-Trac(R) line of shock absorbers, that has been enhanced
by the PSD (Position Sensitive Damping) technology which offers both
comfort and control when you need it;
- Walker's Quiet-Flow(R) muffler, which features an open flow design that
increases exhaust flow, improves sound quality and significantly reduces
exhaust back pressure when compared to other replacement mufflers;
- Rancho(R) ride control products provide on and off road performance for
both stock or raised light truck vehicles;
- DynoMax(R), which offers a complete line of mufflers, cat-back
performance exhaust systems, headers and pipes engineered to increase the
efficiency, horsepower, torque and sound of virtually any car, truck, or
light vehicle;
- Walker Ultra(TM) catalytic converters, which offer a higher loading of
precious metals to help problematic vehicles pass emissions testing;
- Monroe(R) Dynamics and Ceramics brakes offer the Complete Solution,
combining wire wear sensors, hardware and lube allowing installers to do
the job right the first time; and
- In European markets, Walker(TM) and Aluminox Pro(TM) mufflers.
We are capitalizing on our brand strength by incorporating newly acquired
product lines within existing product families. We believe brand equity is a key
asset in a time of customer consolidation and merging channels of distribution.
17
Our plans to expand our aftermarket business are focused on four key
marketing initiatives: new product introductions; building customer and industry
awareness of the maintenance, performance and other benefits of ensuring that a
vehicle's ride control systems are in good working condition; adding coverage to
current brands; and extending our brands and aftermarket penetration to new
product segments. For example, in North America we introduced a ride control
line extension with the Quick Strut. This strut is a completed module that
incorporates the spring and upper mount, resulting in a much easier
installation. This allows installers quicker turn over of vehicles in their bay
and the opportunity for do it yourself consumers to perform a task that
previously required special tools and skills. In addition, Monroe(R) Dynamics
and Ceramic Disc brake pads were introduced in the United States in 2006. We
also created the Monroe(R) 50,000 mile replacement campaign to help increase
customer and industry awareness. The campaign is being advertised via radio and
outdoor billboards throughout the United States and Canada stating "Monroe(R)
Recommends Replacing Your Shocks and Struts at 50,000 Miles." We will continue
to carry that message to consumers and the trade in 2008, again utilizing
billboards, radio spots and ads in both trade and consumer magazines. We are
exploring a number of opportunities to extend our existing well-known brands,
such as Monroe(R), and our product line generally, to aftermarket product
segments not previously served. We believe that, when combined with our
expansive customer service network, these initiatives will yield incremental
aftermarket revenues.
ACHIEVE GREATER CONTENT PER VEHICLE
As a result of increasing emissions standards we believe that available
emission control content per light vehicle will rise over the next several
years. We believe that consumers' greater emphasis on automotive safety could
also allow available ride control content per light vehicle to rise. In
addition, advanced technologies and modular assemblies represent an opportunity
to increase vehicle content. For example, our innovative CES system, which we
supply on several Volvo, Audi, Ford and Mercedes Benz passenger cars, increases
our content revenues seven-fold compared to a standard shock offering. We plan
to take advantage of these trends by leveraging our existing position on many
top-selling vehicle platforms and by continuing to enhance our modular/systems
capabilities.
EXECUTE FOCUSED TRANSACTIONS
In the past, we have been successful in identifying and capitalizing on
strategic acquisitions and alliances to achieve growth. Through these
acquisitions and alliances, we have (1) expanded our product portfolio; (2)
realized incremental business with existing customers; (3) gained access to new
customers; and (4) achieved leadership positions in new geographic markets.
We have developed a strategic alliance with Futaba, a leading exhaust
manufacturer in Japan that also includes a joint venture operation in Burnley,
England. We also have an alliance with Hitachi (as successor to Tokico Ltd.
following its acquisition of Tokico), a leading Japanese ride control
manufacturer. These alliances help us grow our business with Japan-based OEMs by
leveraging the geographical presence of each partner to serve Japan-based global
platforms. We have established a presence in Thailand through a joint venture
that supplies exhaust components for GM Isuzu. Our joint venture operations in
Dalian and Shanghai, China have established us as one of the leading exhaust
suppliers in the rapidly growing Chinese automotive market. We also operate
joint ventures with Eberspacher International GmbH to supply emission control
products and systems for luxury cars produced by BMW and Audi in China, and with
Chengdu Lingchuan Mechanical Plant to supply emission control products and
systems for various Ford platforms produced in China.
We are expanding our operations in China with investment in both
manufacturing and engineering facilities. We opened our first wholly-owned
operation in China, an elastomer manufacturing facility in Suzhou. In addition,
we extended our joint venture with Shanghai Tractor and Engine Company, a
subsidiary of Shanghai Automotive Industry Corp., by establishing an engineering
center to develop automotive exhaust products. Finally, we increased our
ownership stake in the Beijing Monroe Shock Absorber Co. Ltd. (a joint venture
with Beijing Automotive Industry Corp.) from 51 percent to 65 percent in 2006.
In September 2007, we acquired the mobile emissions business of Combustion
Components Associates, Inc., a manufacturer of air pollution control
technologies. The acquisition enhances Tenneco's complete system
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integration capabilities for selective catalyst reduction emissions control
technologies designed to meet future more stringent diesel emissions regulations
for passenger cars and trucks and is an example of our strategy to grow through
expansion of our offerings.
Where appropriate, we intend to continue to pursue strategic alliances,
joint ventures, acquisitions and other transactions that complement or enhance
our existing products, technology, systems development efforts, customer base
and/or domestic or international presence. We strive to align with strong local
partners to help us further develop our leadership in systems integration and to
penetrate international markets. In addition, we align with companies that have
proven products, proprietary technology, research capabilities and/or market
penetration to help us achieve further leadership in product offerings, customer
relationships, and systems integration and overall presence.
GROWTH IN ADJACENT MARKETS
One of our goals is to apply our existing design, engineering and
manufacturing capabilities to penetrate a variety of adjacent markets and to
achieve growth in higher-margin businesses. For example, we are aggressively
leveraging our technology and engineering leadership in emission and ride
control into adjacent markets, such as the heavy-duty market for trucks, buses,
agricultural equipment, construction machinery and other commercial vehicles. As
an established leading supplier of heavy-duty ride control and elastomer
products, we are already serving customers like Volvo Truck, Navistar
(International), Freightliner and PACCAR. We also see tremendous opportunity to
expand our presence in the heavy-duty market with our emission control products
and systems, having recently entered this market in both North America and
Europe with diesel technologies that will help customers meet environmental
requirements.
IMPROVE EFFICIENCY AND REDUCE COSTS
We are a process-oriented company and have implemented and are continuing
to implement several programs designed to improve efficiency and reduce costs.
Our recent restructuring activities began in the fourth quarter of 2001,
when our Board of Directors approved a restructuring plan, a project known as
Project Genesis, which was designed to lower our fixed costs, relocate capacity,
reduce our work force, improve efficiency and utilization, and better optimize
our global footprint. We have subsequently engaged in various other
restructuring projects related to Project Genesis. We incurred $27 million in
restructuring and restructuring-related costs during 2006, of which $23 million
was recorded in cost of sales and $4 million was recorded in selling, general
and administrative expense. During 2007, we incurred $25 million in
restructuring and restructuring-related costs of which $22 million was recorded
in cost of sales, $2 million of which related to a charge for asset impairments,
and $3 million in selling, general and administrative expense. The majority of
the 2007 charges were related to the planned closing of our emission control
plant in Wissembourg, France. Since Project Genesis was initiated, we have
incurred costs of $155 million through December 31, 2007.
Under the terms of our amended and restated senior credit agreement that
took effect on March 16, 2007, we are allowed to exclude $80 million of cash
charges and expenses, before taxes, related to cost reduction initiatives
incurred after March 16, 2007 from the calculation of the financial covenant
ratios required under our senior credit facility. As of December 31, 2007, we
have excluded $23 million in allowable charges relating to restructuring
initiatives against the $80 million available under the terms of the March 2007
amendment and restatement of the senior credit facility.
In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will initiate actions that will
reduce our costs through implementing the most appropriate and efficient
logistics, distribution and manufacturing footprint for the future. We expect to
continue to undertake additional restructuring actions as deemed necessary,
however there can be no assurances we will undertake such actions. Actions that
we take, if any, will require the approval of our Board of Directors, or its
authorized committee. We plan to conduct any workforce reductions that result in
compliance with all legal and contractual requirements including obligations to
consult with workers' councils, union representatives and others.
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IMPROVE CASH FLOW
We are focused on a core set of goals designed to improve cash flow: (i)
continuing to reduce selling, general and administrative expenses plus
engineering, research and development costs ("SGA&E") as a percentage of sales,
while continuing to invest in sales and engineering; (ii) extracting significant
cash flow from working capital initiatives; (iii) offsetting to the greatest
extent possible pressures on overall gross margins in a challenging economic
environment; and (iv) strengthening existing customer relationships and winning
new long-term OE business. We intend to continue to use our cash flow after
capital expenditures and other investments in our business to repay our
borrowings.
ENVIRONMENTAL MATTERS
We estimate that we and our subsidiaries will make expenditures for plant,
property and equipment for environmental matters of approximately $12 million in
2008 and approximately $3 million in 2009.
For additional information regarding environmental matters, see Item 3,
"Legal Proceedings," Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental and Other Matters," and
Note 12 to the consolidated financial statements of Tenneco Inc. and
Consolidated Subsidiaries included in Item 8.
EMPLOYEES
As of December 31, 2007, we had approximately 21,000 employees of which
approximately 51 percent are covered by collective bargaining agreements. Of the
employees covered by collective bargaining agreements, 47 percent are also
governed by European works councils. Several of our existing labor agreements in
the United States and Mexico are scheduled for renegotiation in 2008, in
addition to fair agreements expiring in Europe covering plants in Spain, France,
Portugal and the United Kingdom. We regard our employee relations as generally
satisfactory.
OTHER
The principal raw material utilized by us is steel. We obtain steel from a
number of sources pursuant to various contractual and other arrangements. We
believe that an adequate supply of steel can presently be obtained from a number
of different domestic and foreign suppliers. However, we are actively addressing
higher steels costs which are expected to continue through 2008. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Outlook" included in Item 7 for more information.
We hold a number of domestic and foreign patents and trademarks relating to
our products and businesses. We manufacture and distribute our products
primarily under the Walker(R) and Monroe(R) brand names, which are well-
recognized in the marketplace and are registered trademarks. The patents,
trademarks and other intellectual property owned by or licensed to us are
important in the manufacturing, marketing and distribution of our products.
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ITEM 1A. RISK FACTORS.
AN ECONOMIC DOWNTURN OR OTHER FACTORS THAT REDUCE CONSUMER DEMAND FOR OUR
PRODUCTS OR REDUCE PRICES COULD MATERIALLY AND ADVERSELY IMPACT OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AND OUR DEBT MAKES US MORE
SENSITIVE TO THESE EFFECTS.
Demand for and pricing of our products are subject to economic conditions
and other factors present in the various domestic and international markets
where the products are sold. Demand for our OE products is subject to the level
of consumer demand for new vehicles that are equipped with our parts. The level
of new light vehicle purchases is cyclical, affected by such factors as general
economic conditions, interest rates, consumer confidence, consumer preferences,
patterns of consumer spending, fuel cost and the automobile replacement cycle.
For example, in 2006 North American light vehicle production of light trucks and
SUVs decreased 8.8 percent from 2005 to 2006 as consumers shifted their
preferences from light trucks and SUVs to other vehicles in light of higher fuel
costs. Because the percentage of our North American OE revenues related to light
trucks and SUVs is greater than the percentage of the total North American light
vehicle build rate represented by light trucks and SUVs, our North American OE
business is sensitive to this type of change in consumer preferences. A decline
in automotive sales and production would likely cause a decline in our sales to
vehicle manufacturers, and could result in a decline in our results of
operations and financial condition.
Demand for our aftermarket, or replacement, products varies based upon such
factors as general economic conditions, the level of new vehicle purchases,
which initially displaces demand for aftermarket products, the severity of
winter weather, which increases the demand for certain aftermarket products, and
other factors, including the average useful life of parts and number of miles
driven.
The highly cyclical nature of the automotive industry presents a risk that
is outside our control and that cannot be accurately predicted. For example,
many predict an economic downturn in the United States in 2008 and we cannot
assure you that we would be able to maintain or improve our results of
operations in a stagnant or recessionary economic environment. Further decreases
in demand for automobiles and automotive products generally, or in the demand
for our products in particular, could materially and adversely impact our
financial condition and results of operations. Our significant amount of debt
makes us more vulnerable to changes in our results of operations because we must
devote a significant portion of our cash flow to debt service, maintain
financial ratios in our debt agreements and comply with covenants in our debt
agreements that limit our flexibility in planning for or reacting to changes in
our business and our industry. Our failure to maintain or improve our cash flows
and other results of operations or our decision to otherwise increase our
leverage could have an adverse effect on our ability to service our
indebtedness, repay our debt at maturity, meet other obligations and fund other
liquidity needs, all of which could have a material adverse effect on us.
WE MAY BE UNABLE TO REALIZE SALES REPRESENTED BY OUR AWARDED BUSINESS,
WHICH COULD MATERIALLY AND ADVERSELY IMPACT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The realization of future sales from awarded business is inherently subject
to a number of important risks and uncertainties, including the number of
vehicles that our OE customers will actually produce, the timing of that
production and the mix of options that our OE customers and consumers may
choose. Substantially all of our North American vehicle manufacturing customers
have slowed or maintained at relatively flat levels new vehicle production for
the past several years. More recently, new vehicle production has varied year-
over-year from negative growth to positive growth. For example, production rates
for SUVs and light trucks increased 2.4 percent in 2007 compared to 2006 and
decreased 8.8 percent in 2006 compared to 2005. Production rates for passenger
cars decreased 6.4 percent in 2007 compared to 2006 and increased 5.1 percent in
2006 compared to 2005. We remain cautious regarding production volumes for 2008
due to rising oil and steel prices, current OE manufacturers' inventory levels
and uncertainty regarding the willingness of OE manufacturers to continue to
support vehicle sales. Production rates for SUVs and light trucks in North
America are expected to decrease by 5.7 percent and passenger car production
rates are expected to decrease by 3.7 percent in 2008. We expect the light
vehicle build for Asia to significantly increase in 2008 and production rates in
Eastern Europe and South America to increase slightly. All other regions are
expected to remain flat. In addition, our customers generally have the right to
replace us with another supplier at any time for a variety of
21
reasons and have increasingly demanded price decreases over the life of awarded
business. Accordingly, we cannot assure you that we will in fact realize any or
all of the future sales represented by our awarded business. Any failure to
realize these sales could have a material adverse effect on our financial
condition and results of operations.
In many cases, we must commit substantial resources in preparation for
production under awarded OE business well in advance of the customer's
production start date. In certain instances, the terms of our OE customer
arrangements permit us to recover these pre-production costs if the customer
cancels the business through no fault of our company. Although we have been
successful in recovering these costs under appropriate circumstances in the
past, we can give no assurance that our results of operations will not be
materially impacted in the future if we are unable to recover these types of
pre-production costs related to OE cancellation of awarded business.
WE ARE DEPENDENT ON LARGE CUSTOMERS FOR FUTURE REVENUE. THE LOSS OF ANY OF
THESE CUSTOMERS OR THE LOSS OF MARKET SHARE BY THESE CUSTOMERS COULD HAVE A
MATERIAL ADVERSE IMPACT ON US.
We depend on major vehicle manufacturers for a substantial portion of our
net sales. For example, during 2007, General Motors, Ford, Volkswagen, and
Daimler AG accounted for 20 percent, 14 percent, 9 percent, and 8 percent of our
net sales, respectively. The loss of all or a substantial portion of our sales
to any of our large-volume customers could have a material adverse effect on our
financial condition and results of operations by reducing cash flows and our
ability to spread costs over a larger revenue base. We may make fewer sales to
these customers for a variety of reasons, including: (1) loss of awarded
business; (2) reduced or delayed customer requirements; or (3) strikes or other
work stoppages affecting production by the customers.
During the past several years, General Motors, Ford and Chrysler have lost
market share particularly in the United States, primarily to Asian competitors.
While we are actively targeting Chinese and Korean automakers, any further
market share loss by these North American-based and European-based automakers
could, if we are unable to achieve increased sales to the Asian OE
manufacturers, have a material adverse effect on our business.
FINANCIAL DIFFICULTIES FACING OTHER AUTOMOTIVE COMPANIES MAY HAVE AN
ADVERSE IMPACT ON US.
A number of companies in the automotive industry are, and over the last
several years have been, facing severe financial difficulties. As a result,
there have been numerous recent bankruptcies of companies in the automotive
industry, including the 2005 bankruptcy of Delphi Corporation, one of the
world's largest automotive parts suppliers. In February 2008, Plastech
Engineered Products filed for Chapter 11 protection. Severe financial
difficulties at any major automotive manufacturer or automotive supplier could
have a significantly disruptive effect on the automotive industry in general,
including by leading to labor unrest, supply chain disruptions and weakness in
demand. In particular, severe financial difficulties at any of our major
suppliers could have a material adverse effect on us if we are unable to obtain
on a timely basis the quantity and quality of components we require to produce
our products. In addition, such financial difficulties at any of our major
customers could have a material adverse impact on us if such customer were
unable to pay for the products we provide or we experienced a loss of, or
material reduction in, business from such customer.
THE HOURLY WORKFORCE IN THE AUTOMOTIVE INDUSTRY IS HIGHLY UNIONIZED AND OUR
BUSINESS COULD BE ADVERSELY AFFECTED BY LABOR DISRUPTIONS.
Although we consider our current relations with our employees to be
satisfactory, if major work disruptions were to occur, our business could be
adversely affected by, for instance, a loss of revenues, increased costs or
reduced profitability. We have not experienced a material labor disruption in
our workforce in the last ten years, but there can be no assurance that we will
not experience a material labor disruption at one of our facilities in the
future in the course of renegotiation of our labor arrangements or otherwise. In
addition, substantially all of the hourly employees of North American vehicle
manufacturers and many of their other suppliers are represented by the United
Automobile, Aerospace and Agricultural Implement Workers of
22
America under collective bargaining agreements. Vehicle manufacturers and such
suppliers and their employees in other countries are also subject to labor
agreements. A work stoppage or strike at our production facilities, at those of
a significant customer, or at a significant supplier of ours or any of our
customers could have an adverse impact on us by disrupting demand for our
products and/or our ability to manufacture our products.
WE HAVE EXPERIENCED SIGNIFICANT INCREASES IN RAW MATERIALS PRICING, AND
FURTHER CHANGES IN THE PRICES OF RAW MATERIALS COULD HAVE A MATERIAL
ADVERSE IMPACT ON US.
Significant increases in the cost of certain raw materials used in our
products, to the extent they are not timely reflected in the price we charge our
customers or otherwise mitigated, could materially and adversely impact our
results. For example, since 2004, we have experienced significant increases in
processed metal and steel prices. High steel prices are expected to continue
into the foreseeable future. We expect that the pricing environment for steel
will increase our costs by up to $40 million in 2008. We addressed this increase
in 2005, 2006 and 2007 and will continue to address this issue in 2008 by
evaluating alternative materials and processes, reviewing material substitution
opportunities, increasing component and assembly outsourcing to low cost
countries and aggressively negotiating with our customers to allow us to recover
these higher costs from them. In addition to these actions, we continue to
pursue productivity initiatives and review opportunities to reduce costs through
restructuring activities. The situation remains fluid as we continue to pursue
these actions and, at this point, we cannot assure you that these actions will
be effective in containing margin pressures from these significant raw materials
price increases. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Outlook" included in Item 7 for more
information.
WE MAY BE UNABLE TO REALIZE OUR BUSINESS STRATEGY OF IMPROVING OPERATING
PERFORMANCE, GROWING OUR BUSINESS AND GENERATING SAVINGS AND IMPROVEMENTS
TO HELP OFFSET PRICING PRESSURES FROM OUR SUPPLIERS AND CUSTOMERS AND TO
OTHERWISE IMPROVE OUR RESULTS.
We regularly implement strategic and other initiatives designed to improve
our operating performance and grow our business. The failure to achieve the
goals of these initiatives could have a material adverse effect on our business,
particularly since we rely on these initiatives to offset pricing pressures from
our suppliers and our customers, as described above. Furthermore, the terms of
our senior credit agreement may restrict the types of initiatives we undertake,
as the agreement restricts our uses of cash, requires us to maintain financial
ratios and otherwise prohibits us from undertaking certain activities. In the
past we have been successful in obtaining the consent of our senior lenders
where appropriate in connection with our initiatives. We cannot assure you,
however, that we will be able to pursue, successfully implement or realize the
expected benefits of any initiative or that we will be able to sustain
improvements made to date.
In addition, we believe that increasingly stringent environmental standards
for automotive emissions have presented and will continue to present an
important opportunity for us to grow our emissions control business. We cannot
assure you, however, that environmental standards for automotive emissions will
continue to become more stringent or that the adoption of any new standards will
not be delayed beyond our expectations.
WE MAY INCUR MATERIAL COSTS RELATED TO PRODUCT WARRANTIES, ENVIRONMENTAL
AND REGULATORY MATTERS AND OTHER CLAIMS, WHICH COULD HAVE A MATERIAL
ADVERSE IMPACT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
From time to time, we receive product warranty claims from our customers,
pursuant to which we may be required to bear costs of repair or replacement of
certain of our products. Vehicle manufacturers are increasingly requiring their
outside suppliers to guarantee or warrant their products and to be responsible
for the operation of these component products in new vehicles sold to consumers.
Warranty claims may range from individual customer claims to full recalls of all
products in the field. We cannot assure you that costs associated with providing
product warranties will not be material, or that those costs will not exceed any
amounts reserved for them in our consolidated financial statements. For a
description of our accounting policies regarding warranty reserves, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Critical Accounting Policies" included in Item 7.
23
Additionally, we are subject to a variety of environmental and pollution
control laws and regulations in all jurisdictions in which we operate. Soil and
groundwater remediation activities are being conducted at certain of our current
and former real properties. We record liabilities for these activities when
environmental assessments indicate that the remedial efforts are probable and
the costs can be reasonably estimated. On this basis, we have established
reserves that we believe are adequate for the remediation activities at our
current and former real properties for which we could be held responsible.
Although we believe our estimates of remediation costs are reasonable and are
based on the latest available information, the cleanup costs are estimates and
are subject to revision as more information becomes available about the extent
of remediation required. In future periods, we could be subject to cash or non-
cash charges to earnings if we are required to undertake material additional
remediation efforts based on the results of our ongoing analyses of the
environmental status of our properties, as more information becomes available to
us.
We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities,
intellectual property matters, personal injury claims, taxes, employment matters
or commercial or contractual disputes. For example, we are subject to a number
of lawsuits initiated by a significant number of claimants alleging health
problems as a result of exposure to asbestos. Many of these cases involve
significant numbers of individual claimants. Many of these cases also involve
numerous defendants, with the number of defendants in some cases exceeding 200
defendants from a variety of industries. As major asbestos manufacturers or
other companies that used asbestos in their manufacturing processes continue to
go out of business, we may experience an increased number of these claims.
We vigorously defend ourselves in connection with all of the matters
described above. We cannot, however, assure you that the costs, charges and
liabilities associated with these matters will not be material, or that those
costs, charges and liabilities will not exceed any amounts reserved for them in
our consolidated financial statements. In future periods, we could be subject to
cash costs or non-cash charges to earnings if any of these matters is resolved
unfavorably to us. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental and Other Matters,"
included in Item 7 for further description.
WE MAY HAVE DIFFICULTY COMPETING FAVORABLY IN THE HIGHLY COMPETITIVE
AUTOMOTIVE PARTS INDUSTRY.
The automotive parts industry is highly competitive. Although the overall
number of competitors has decreased due to ongoing industry consolidation, we
face significant competition within each of our major product areas. The
principal competitive factors include price, quality, service, product
performance, design and engineering capabilities, new product innovation, global
presence and timely delivery. As a result, many suppliers have established or
are establishing themselves in emerging, low-cost markets to reduce their costs
of production and be more conveniently located for customers. Although we are
also pursuing a low-cost country production strategy and otherwise continue to
seek process improvements to reduce costs, we cannot assure you that we will be
able to continue to compete favorably in this competitive market or that
increased competition will not have a material adverse effect on our business by
reducing our ability to increase or maintain sales or profit margins.
THE DECREASING NUMBER OF AUTOMOTIVE PARTS CUSTOMERS AND SUPPLIERS COULD
MAKE IT MORE DIFFICULT FOR US TO COMPETE FAVORABLY.
Our financial condition and results of operations could be adversely
affected because the customer base for automotive parts is decreasing in both
the original equipment market and aftermarket. As a result, we are competing for
business from fewer customers. Due to the cost focus of these major customers,
we have been, and expect to continue to be, requested to reduce prices as part
of our initial business quotations and over the life of vehicle platforms we
have been awarded. We cannot be certain that we will be able to generate cost
savings and operational improvements in the future that are sufficient to offset
price reductions requested by existing customers and necessary to win additional
business.
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Furthermore, the trend toward consolidation and bankruptcies among
automotive parts suppliers is resulting in fewer, larger suppliers who benefit
from purchasing and distribution economies of scale. If we cannot achieve cost
savings and operational improvements sufficient to allow us to compete favorably
in the future with these larger companies, our financial condition and results
of operations could be adversely affected due to a reduction of, or inability to
increase, sales.
WE MAY NOT BE ABLE TO SUCCESSFULLY RESPOND TO THE CHANGING DISTRIBUTION
CHANNELS FOR AFTERMARKET PRODUCTS.
Major automotive aftermarket retailers, such as AutoZone and Advance Auto
Parts, are attempting to increase their commercial sales by selling directly to
automotive parts installers in addition to individual consumers. These
installers have historically purchased from their local warehouse distributors
and jobbers, who are our more traditional customers. We cannot assure you that
we will be able to maintain or increase aftermarket sales through increasing our
sales to retailers. Furthermore, because of the cost focus of major retailers,
we have occasionally been requested to offer price concessions to them. Our
failure to maintain or increase aftermarket sales, or to offset the impact of
any reduced sales or pricing through cost improvements, could have an adverse
impact on our business and operating results.
LONGER PRODUCT LIVES OF AUTOMOTIVE PARTS ARE ADVERSELY AFFECTING
AFTERMARKET DEMAND FOR SOME OF OUR PRODUCTS.
The average useful life of automotive parts has steadily increased in
recent years due to innovations in products and technologies. The longer product
lives allow vehicle owners to replace parts of their vehicles less often. As a
result, a portion of sales in the aftermarket has been displaced. This has
adversely impacted, and could continue to adversely impact, our aftermarket
sales. Also, any additional increases in the average useful lives of automotive
parts would further adversely affect the demand for our aftermarket products.
Recently, we have experienced relative stabilization in our aftermarket business
due to our ability to win new customers and recover steel price increases
through selling price increases. However, there can be no assurance that we will
be able to maintain this stabilization. Aftermarket sales represented
approximately 18 percent and 23 percent of our net sales in 2007 and 2006,
respectively.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SERIOUSLY HARM OUR
FINANCIAL CONDITION.
We may, from time to time, consider acquisitions of complementary
companies, products or technologies. Acquisitions involve numerous risks,
including difficulties in the assimilation of the acquired businesses, the
diversion of our management's attention from other business concerns and
potential adverse effects on existing business relationships with current
customers and suppliers. In addition, any acquisitions could involve the
incurrence of substantial additional indebtedness. We cannot assure you that we
will be able to successfully integrate any acquisitions that we pursue or that
such acquisitions will perform as planned or prove to be beneficial to our
operations and cash flow. Any such failure could seriously harm our business,
financial condition and results of operations.
WE ARE SUBJECT TO RISKS RELATED TO OUR INTERNATIONAL OPERATIONS.
We have manufacturing and distribution facilities in many regions and
countries, including Australia, China, India, North America, Europe and South
America, and sell our products worldwide. For 2007, approximately 53 percent of
our net sales were derived from operations outside North America. International
operations are subject to various risks which could have a material adverse
effect on those operations or our business as a whole, including:
- exposure to local economic conditions;
- exposure to local political conditions, including the risk of seizure of
assets by a foreign government;
- exposure to local social unrest, including any resultant acts of war,
terrorism or similar events;
- exposure to local public health issues and the resultant impact on
economic and political conditions;
25
- currency exchange rate fluctuations;
- hyperinflation in certain foreign countries;
- controls on the repatriation of cash, including imposition or increase of
withholding and other taxes on remittances and other payments by foreign
subsidiaries; and
- export and import restrictions.
EXCHANGE RATE FLUCTUATIONS COULD CAUSE A DECLINE IN OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
As a result of our international operations, we generate a significant
portion of our net sales and incur a significant portion of our expenses in
currencies other than the U.S. dollar. To the extent we are unable to match
revenues received in foreign currencies with costs paid in the same currency,
exchange rate fluctuations in that currency could have a material adverse effect
on our business. For example, where we have significantly more costs than
revenues generated in a foreign currency, we are subject to risk if the foreign
currency in which our costs are paid appreciates against the currency in which
we generate revenue because the appreciation effectively increases our cost in
that country.
The financial condition and results of operations of some of our operating
entities are reported in foreign currencies and then translated into U.S.
dollars at the applicable exchange rate for inclusion in our consolidated
financial statements. As a result, appreciation of the U.S. dollar against these
foreign currencies generally will have a negative impact on our reported
revenues and operating profit while depreciation of the U.S. dollar against
these foreign currencies will generally have a positive effect on reported
revenues and operating profit. For example, our European operations were
positively impacted in 2007 and 2006 due to the strengthening of the Euro
against the U.S. dollar. However, in 2005, the dollar strengthened against the
Euro which had a negative effect on our results of operations. Our South
American operations were negatively impacted by the devaluation in 2000 of the
Brazilian currency as well as by the devaluation of the Argentine currency in
2002. We do not generally seek to mitigate this translation effect through the
use of derivative financial instruments.
WE HAVE DISCLOSED A MATERIAL WEAKNESS IN OUR INTERNAL CONTROL OVER
FINANCIAL REPORTING RELATING TO OUR ACCOUNTING FOR INCOME TAXES WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO REPORT OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ACCURATELY AND ON A TIMELY BASIS.
In connection with our assessment of internal control over financial
reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we identified a
material weakness in our internal control over financial reporting relating to
our accounting for income taxes as of December 31, 2006. Although we believe our
processes have improved, during 2007, we believe we have a material weakness in
accounting for income taxes as of December 31, 2007. For a discussion of our
internal control over financial reporting and a description of the identified
material weakness, see "Management's Report on Internal Control over Financial
Reporting" under Item 8, "Financial Statements and Supplementary Data."
A material weakness in our internal control over financial reporting could
adversely impact our ability to provide timely and accurate financial
information. While we have taken measures to strengthen our internal controls in
response to the identified material weakness related to accounting for income
taxes, and engaged outside professionals to assist us in our efforts, additional
work remains to be done to address the identified material weakness. If we are
unsuccessful in implementing or following our remediation plan, we may not be
able to timely or accurately report our financial condition, results of
operations or cash flows or maintain effective disclosure controls and
procedures. If we are unable to report financial information timely and
accurately or to maintain effective disclosure controls and procedures, we could
be subject to, among other things, regulatory or enforcement actions by the SEC
and the NYSE, including a delisting from the NYSE, securities litigation, debt
rating agency downgrades or rating withdrawals, and a general loss of investor
confidence, any one of which could adversely affect our business prospects and
the valuation of our common stock.
26
ITEM 1B. UNRESOLVED STAFF COMMENTS.
NONE.
ITEM 2. PROPERTIES.
We lease our principal executive offices, which are located at 500 North
Field Drive, Lake Forest, Illinois, 60045.
Walker's consolidated businesses operate 13 manufacturing facilities in the
U.S. and 39 manufacturing facilities outside of the U.S., operate 5 engineering
and technical facilities worldwide and share 2 other such facilities with
Monroe. Twenty-four of these manufacturing plants are JIT facilities. In
addition, three joint ventures in which we hold a noncontrolling interest
operate a total of three manufacturing facilities outside the U.S., 2 of which
are JIT facilities.
Monroe's consolidated businesses operate 7 manufacturing facilities in the
U.S. and 21 manufacturing facilities outside the U.S., operate 8 engineering and
technical facilities worldwide and share 2 other such facilities with Walker.
Three of these manufacturing plants are JIT facilities.
The above-described manufacturing locations outside of the U.S. are located
in Argentina, Australia, Belgium, Brazil, Canada, China, the Czech Republic,
France, Germany, India, Mexico, New Zealand, Poland, Portugal, Russia, Spain,
South Africa, Sweden, Thailand and the United Kingdom. We also have sales
offices located in Croatia, Egypt, Greece, Hungary, Italy, Japan, Korea,
Lithuania, Singapore, Turkey and the Ukraine.
We own approximately one half of the properties described above and lease
the other half. We hold 13 of the above-described international manufacturing
facilities through 7 joint ventures in which we own a controlling interest. In
addition, three joint ventures in which we hold a noncontrolling interest
operate a total of three manufacturing facilities outside the U.S. We also have
distribution facilities at our manufacturing sites and at a few offsite
locations, substantially all of which we lease.
We believe that substantially all of our plants and equipment are, in
general, well maintained and in good operating condition. They are considered
adequate for present needs and, as supplemented by planned construction, are
expected to remain adequate for the near future.
We also believe that we have generally satisfactory title to the properties
owned and used in our respective businesses.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 2007, we are designated as a potentially responsible
party in one Superfund site. Including the Superfund site, we may have the
obligation to remediate current or former facilities, and we estimate our share
of environmental remediation costs at these facilities to be approximately $11
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 our warranty reserve is appropriate;
however, actual
27
claims incurred could differ from the original estimates requiring adjustments
to the reserve. The reserve is included in current and long-term liabilities on
the balance sheet. See Note 12 to the consolidated financial statements of
Tenneco Inc. and Consolidated Subsidiaries included in Item 8 for information
regarding our warranty reserves.
We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, and other product liability related matters), taxes,
employment matters, and commercial or contractual disputes, sometimes related to
acquisitions or divestitures. We vigorously defend ourselves against all of
these claims. In future periods, we could be subjected to cash costs or non-cash
charges to earnings if any of these matters is resolved on unfavorable terms.
However, although the ultimate outcome of any legal matter cannot be predicted
with certainty, based on present information, including our assessment of the
merits of the particular claim, we do not expect that these legal proceedings or
claims will have any material adverse impact on our future consolidated
financial position or results of operations.
In addition, we are subject to a number of lawsuits initiated by a
significant number of claimants alleging health problems as a result of exposure
to asbestos. A small percentage of claims have been asserted by railroad workers
alleging exposure to asbestos products in railroad cars manufactured by The
Pullman Company, one of our subsidiaries. Nearly all of the claims are related
to alleged exposure to asbestos in our automotive emission control products.
Only a small percentage of these claimants allege that they were automobile
mechanics and a significant number appear to involve workers in other industries
or otherwise do not include sufficient information to determine whether there is
any basis for a claim against us. We believe, based on scientific and other
evidence, it is unlikely that mechanics were exposed to asbestos by our former
muffler products and that, in any event, they would not be at increased risk of
asbestos-related disease based on their work with these products. Further, many
of these cases involve numerous defendants, with the number of each in some
cases exceeding 200 defendants from a variety of industries. Additionally, the
plaintiffs either do not specify any, or specify the jurisdictional minimum,
dollar amount for damages. As major asbestos manufacturers continue to go out of
business or file for bankruptcy, we may experience an increased number of these
claims. We vigorously defend ourselves against these claims as part of our
ordinary course of business. In future periods, we could be subject to cash
costs or non-cash charges to earnings if any of these matters is resolved
unfavorably to us. To date, with respect to claims that have proceeded
sufficiently through the judicial process, we have regularly achieved favorable
resolution. Accordingly, we presently believe that these asbestos-related claims
will not have a material adverse impact on our future financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the vote of security holders during the fourth
quarter of 2007.
28
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following provides information concerning the persons who serve as our
executive officers as of February 29, 2008.
NAME (AND AGE AT
DECEMBER 31, 2007) OFFICES HELD
------------------ -------------------------------------------------
Gregg Sherrill (54)...... Chairman and Chief Executive Officer
Hari N. Nair (47)........ Executive Vice President and
President -- International
Kenneth R. Trammell Executive Vice President and Chief Financial
(47)................... Officer
Brent J. Bauer (52)...... Senior Vice President and General
Manager -- North American Original Equipment
Emission Control
Timothy E. Jackson (50).. Senior Vice President and Chief Technology
Officer
Alain Michaelis (41)..... Senior Vice President, Global Supply Chain
Management and Manufacturing
Richard P. Schneider Senior Vice President -- Global Administration
(60)...................
David A. Wardell (53).... Senior Vice President, General Counsel and
Secretary
Neal A. Yanos (45)....... Senior Vice President and General
Manager -- North American Original Equipment Ride
Control and North American Aftermarket
Paul D. Novas (49)....... Vice President and Controller
GREGG SHERRILL -- Mr. Sherrill was named the Chairman and Chief Executive
Officer of Tenneco in January 2007. Mr. Sherrill joined us from Johnson Controls
Inc., where he served since 1998, most recently as President, Power Solutions.
From 2002 to 2003, Mr. Sherrill served as the Vice President and Managing
Director of Europe, South Africa and South America for Johnson Controls'
Automotive Systems Group. Prior to joining Johnson Controls, Mr. Sherrill held
various engineering and manufacturing assignments over a 22-year span at Ford
Motor Company, including Plant Manager of Ford's Dearborn, Michigan engine plant
and Director of Supplier Technical Assistance. Mr. Sherrill became a director of
our company in January 2007.
HARI N. NAIR -- Mr. Nair was named our Executive Vice President and
President -- International effective March 2007. Previously, Mr. Nair served as
Executive Vice President and Managing Director of our business in Europe, South
America and India. Before that, he was Senior Vice President and Managing
Director -- International. Prior to December 2000, Mr. Nair was the Vice
President and Managing Director -- Emerging Markets. Previously, Mr. Nair was
the Managing Director for Tenneco Automotive Asia, based in Singapore and
responsible for all operations and development projects in Asia. He began his
career with the former Tenneco Inc. in 1987, holding various positions in
strategic planning, marketing, business development, quality and finance. From
July 2006 until January 2007 during our search for our new Chief Executive
Officer, he served as a member of our interim management committee known as the
Office of the Chief Executive. Prior to joining Tenneco, Mr. Nair was a senior
financial analyst at General Motors Corp. focusing on European operations.
KENNETH R. TRAMMELL -- Mr. Trammell was promoted to Executive Vice
President and Chief Financial Officer in January 2006. Mr. Trammell was named
our Senior Vice President and Chief Financial Officer in September 2003, having
served as our Vice President and Controller from September 1999. From April 1997
to November 1999 he served as Corporate Controller of Tenneco Inc. He joined
Tenneco Inc. in May 1996 as Assistant Controller. From July 2006 until January
2007 during our search for our new Chief Executive Officer, he served as a
member of our interim management committee known as the Office of the Chief
Executive. Before joining Tenneco Inc., Mr. Trammell spent 12 years with the
international public accounting firm of Arthur Andersen LLP, last serving as a
senior manager.
BRENT J. BAUER -- Mr. Bauer joined Tenneco Automotive in August 1996 as a
Plant Manager and was named Vice President and General Manager -- European
Original Equipment Emission Control in September 1999. Mr. Bauer was named Vice
President and General Manager -- European and North American Original
29
Equipment Emission Control in July 2001. Currently, Mr. Bauer serves as the
Senior Vice President and General Manager -- North American Original Equipment
Emission Control. Prior to joining Tenneco, he was employed at AeroquipVickers
Corporation for 20 years in positions of increasing responsibility serving most
recently as Director of Operations.
TIMOTHY E. JACKSON -- Mr. Jackson joined us as Senior Vice President and
General Manager -- North American Original Equipment and Worldwide Program
Management in June 1999. He served in this position until August 2000, at which
time he was named Senior Vice President -- Global Technology. From 2002 to 2005,
Mr. Jackson served as Senior Vice President -- Manufacturing, Engineering, and
Global Technology. In July 2005, Mr. Jackson was named Senior Vice
President -- Global Technology and General Manager, Asia Pacific. In March 2007,
he was named our Chief Technology Officer. Mr. Jackson joined us from ITT
Industries where he was President of that company's Fluid Handling Systems
Division. With over 20 years of management experience, 14 within the automotive
industry, he was also Chief Executive Officer for HiSAN, a joint venture between
ITT Industries and Sanoh Industrial Company. Mr. Jackson has also served in
senior management positions at BF Goodrich Aerospace and General Motors
Corporation.
ALAIN MICHAELIS -- Mr. Michaelis joined Tenneco in July 2007 as Senior Vice
President, Global Supply Chain Management & Manufacturing. He is responsible for
the company's worldwide purchasing, logistics and material management functions,
as well as our global manufacturing programs. Mr. Michaelis returned to Tenneco
after working for three years at Wolseley PLC, where he served as the Supply
Chain Director for Europe. Before that, Mr. Michaelis worked for Tenneco since
1996, serving as the Executive Director for Exhaust Operations in Europe, as
well as holding operations and logistics positions for South America & Asia and
the United States. He began his career in London at Ove Arup Partnership as a
design engineer.
RICHARD P. SCHNEIDER -- Mr. Schneider was named as our Senior Vice
President -- Global Administration in 1999 and is responsible for the
development and implementation of human resources programs and policies and
employee communications activities for our worldwide operations. Prior to 1999,
Mr. Schneider served as our Vice President -- Human Resources. He joined us in
1994 from International Paper Company where, during his 20 year tenure, he held
key positions in labor relations, management development, personnel
administration and equal employment opportunity.
DAVID A. WARDELL -- Mr. Wardell joined Tenneco in May 2007 as Senior Vice
President, General Counsel and Corporate Secretary. He is responsible for
managing the company's worldwide legal affairs including corporate governance.
Prior to joining Tenneco, Mr. Wardell was associated with Abbott Laboratories
where he held several positions of increasing responsibility, most recently
being named Associate General Counsel, Pharmaceutical Products Group Legal
Operations in 2005. Before joining Abbott Laboratories, Mr. Wardell spent over
ten years in the legal department of Bristol-Myers Squibb Company, where he
spent six years living and working in London, England providing legal support to
various business units in Europe, Middle East and Africa. Mr. Wardell started
his legal career as a New York County Assistant District Attorney.
NEAL A. YANOS -- Mr. Yanos was named our Senior Vice President and General
Manager -- North American Original Equipment Ride Control and North American
Aftermarket in May 2003. He joined our Monroe ride control division as a process
engineer in 1988 and since that time has served in a broad range of assignments
including product engineering, strategic planning, business development,
finance, program management and marketing, including Director of our North
American original equipment GM/VW business unit and most recently as our Vice
President and General Manager -- North American Original Equipment Ride Control
from December 2000. From July 2006 until January 2007 during our search for our
new Chief Executive Officer, he served as a member of our interim management
committee known as the Office of the Chief Executive. Before joining our
company, Mr. Yanos was employed in various engineering positions by Sheller
Globe Inc. from 1985 to 1988.
PAUL D. NOVAS -- Mr. Novas was named our Vice President and Controller in
July 2006. Mr. Novas served as Vice President, Finance and Administration for
Tenneco Europe from January 2004 until July 2006 and as Vice President and
Treasurer of Tenneco from November 1999 until January 2004. Mr. Novas joined
Tenneco in 1996 as assistant treasurer responsible for corporate finance and
North American treasury
30
operations. Prior to joining Tenneco, Mr. Novas worked in the treasurer's office
of General Motors Corporation for ten years.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER REPURCHASES OF EQUITY SECURITIES.
Our outstanding shares of common stock, par value $.01 per share, are
listed on the New York, Chicago and London Stock Exchanges. The following table
sets forth, for the periods indicated, the high and low sales prices of our
common stock on the New York Stock Exchange Composite Transactions Tape.
SALES PRICES
---------------
QUARTER HIGH LOW
------- ------ ------
2007
1st........................................................... $27.34 $23.04
2nd........................................................... 35.81 25.49
3rd........................................................... 37.73 28.11
4th........................................................... 33.46 24.16
2006
1st........................................................... $23.33 $19.61
2nd........................................................... 27.55 20.64
3rd........................................................... 26.39 20.03
4th........................................................... 25.34 21.41
As of February 22, 2008, there were approximately 22,036 holders of record
of our common stock, including brokers and other nominees.
The declaration of dividends on our common stock is at the discretion of
our Board of Directors. The Board has not adopted a dividend policy as such;
subject to legal and contractual restrictions, its decisions regarding dividends
are based on all considerations that in its business judgment are relevant at
the time. These considerations may include past and projected earnings, cash
flows, economic, business and securities market conditions and anticipated
developments concerning our business and operations.
We are highly leveraged and restricted with respect to the payment of
dividends under the terms of our financing arrangements. On January 10, 2001, we
announced that our Board of Directors eliminated the regular quarterly dividend
on the Company's common stock. The Board took this action in response to then-
current industry conditions, primarily greater than anticipated production
volume reductions by original equipment manufacturers in North America and
continued softness in the global aftermarket. We have not paid dividends on our
common stock since the fourth quarter of 2000. There are no current plans to
reinstate a dividend on our common stock, as the Board of Directors intends to
retain any earnings for use in our business for the foreseeable future. For
additional information concerning our payment of dividends, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7.
See "Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters" included in Item 12 for information regarding
securities authorized for issuance under our equity compensation plans.
31
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 fourth quarter of 2007. All of these purchases
reflect shares withheld upon vesting of restricted stock to satisfy minimum tax
withholding obligations.
TOTAL NUMBER OF AVERAGE PRICE
PERIOD SHARES PURCHASED PAID
------ ---------------- -------------
October 2007...................................... 85 $30.69
November 2007..................................... -- --
December 2007..................................... -- --
-- ------
Total............................................. 85 $30.69
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.
RECENT SALES OF UNREGISTERED SECURITIES
On November 20, 2007, we sold $250 million of 8 1/8 percent Senior Notes
due 2015 through offerings to "qualified institutional buyers" (as defined in
Rule 144A under the Securities Act of 1933, as amended), and, outside the United
States, to non-U.S. persons in reliance on Regulation S under the Securities
Act. We offered and sold the notes to the initial purchasers in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act. The
initial purchasers then sold the Notes to qualified institutional buyers
pursuant to the exemption from registration provided by Rule 144A under the
Securities Act. Banc of America Securities LLC and Citigroup Global Markets Inc.
were the principal initial purchasers of the Notes. In connection with the
transaction, we paid offering fees and expenses, including fees to the initial
purchasers, of approximately $5 million. We used the net proceeds of $245
million and cash on hand to repurchase $230 million of our outstanding 10 1/4
percent Senior Notes due 2013 pursuant to a tender offer that closed on November
14, 2007.
For further discussion of the issuance, see "Liquidity and Capital
Resources" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
32
ITEM 6. SELECTED FINANCIAL DATA.
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2007 2006(A) 2005(A) 2004(A)(B)(D) 2003(B)(C)(D)
----------- ----------- ----------- ------------- -------------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
STATEMENTS OF INCOME (LOSS) DATA:
Net sales and operating
revenues --
North America............... $ 2,910 $ 1,963 $ 2,033 $ 1,966 $ 1,889
Europe, South America and
India..................... 3,135 2,387 2,110 1,940 1,611
Asia Pacific................ 560 436 371 380 322
Intergroup sales............ (421) (104) (74) (73) (54)
----------- ----------- ----------- ----------- -----------
$ 6,184 $ 4,682 $ 4,440 $ 4,213 $ 3,768
=========== =========== =========== =========== ===========
Income before interest expense,
income taxes, and minority
interest --
North America............... $ 120 $ 103 $ 148 $ 131 $ 128
Europe, South America and
India..................... 99 81 53 19 20
Asia Pacific................ 33 12 16 20 23
----------- ----------- ----------- ----------- -----------
Total..................... 252 196 217 170 171
Interest expense (net of interest
capitalized)................... 164 136 133 178 146
Income tax expense (benefit)..... 83 5 26 (21) (6)
Minority interest................ 10 6 2 4 6
----------- ----------- ----------- ----------- -----------
Net income (loss)................ $ (5) $ 49 $ 56 $ 9 $ 25
=========== =========== =========== =========== ===========
Average number of shares of
common stock outstanding
Basic.......................... 45,809,730 44,625,220 43,088,558 41,534,810 40,426,136
Diluted........................ 45,809,730 46,755,573 45,321,225 44,180,460 41,767,959
Basic earnings (loss) per share
of common stock................ $ (0.11) $ 1.11 $ 1.30 $ 0.22 $ 0.60
=========== =========== =========== =========== ===========
Diluted earnings (loss) per share
of common stock................ $ (0.11) $ 1.05 $ 1.24 $ 0.21 $ 0.58
=========== =========== =========== =========== ===========
33
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
2007 2006(A) 2005(A) 2004(A)(B)(D) 2003(B)(C)(D)
------ ------- ------- ------------- -------------
(MILLIONS EXCEPT RATIO AND PERCENT AMOUNTS)
BALANCE SHEET DATA:
Total assets.......................... $3,590 $3,274 $2,945 $3,134 $2,883
Short-term debt....................... 46 28 22 19 20
Long-term debt........................ 1,328 1,357 1,361 1,402 1,410
Minority interest..................... 31 28 24 24 23
Shareholders' equity.................. 400 226 137 170 81
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating
activities......................... $ 165 $ 203 $ 123 $ 218 $ 290
Net cash used by investing
activities......................... (202) (172) (164) (131) (134)
Net cash provided (used) by financing
activities......................... (17) 12 (28) (15) (51)
Cash Payments for plant, property and
equipment.......................... (177) (177) (140) (132) (130)
OTHER DATA:
EBITDA(e)............................. $ 457 $ 380 $ 394 $ 347 $ 334
Ratio of EBITDA to interest expense... 2.79 2.79 2.96 1.95 2.29
Ratio of total debt to EBITDA......... 3.01 3.64 3.51 4.10 4.28
Ratio of earnings to fixed
charges(f)......................... 1.46 1.35 1.55 0.95 1.15
--------
NOTE: Our consolidated financial statements for the three years ended December
31, 2007, which are discussed in the following notes, are included in this Form
10-K under Item 8.
(a) These amounts reflect the restatement discussed in Note 4 to the
consolidated financial statements of Tenneco Inc. and Consolidated
Subsidiaries included in Item 8 -- Financial Statements and Supplementary
Data.
For a discussion of the significant items affecting comparability of the
financial information for the years ended 2007, 2006 and 2005, see Item
7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(b) Prior to the first quarter of 2005, inventories in the U.S. based
operations (17 percent and 19 percent of our total consolidated
inventories at December 31, 2004 and 2003, respectively) were valued
using the last-in, first-out ("LIFO") method and all other inventories
were valued using the first-in, first-out ("FIFO") or average cost
methods at the lower of cost or market value. Effective January 1, 2005,
we changed our accounting method for valuing inventory for our U.S. based
operations from the LIFO method to the FIFO method. As a result, all U.S.
inventories are now stated at the lower of cost, determined on a FIFO
basis, or market. We elected to change to the FIFO method as we believe
it is preferable for the following reasons: 1) the change will provide
better matching of revenue and expenditures and 2) the change will
achieve greater consistency in valuing our global inventory.
Additionally, we initially adopted LIFO as it provided certain U.S. tax
benefits which we no longer realize due to our U.S. net operating losses
(when applied for tax purposes, tax laws require that LIFO be applied for
accounting principles generally accepted in the United States of America
("GAAP") as well). As a result of the change, we also expect to realize
administrative efficiencies. In accordance with GAAP, the change in
inventory accounting has been applied by restating prior years'
consolidated financial statements. The effect of the change on our
financial position and results of operations are presented below.
34
(c) Similar correcting entries have been made to the 2003 amounts for the
restatement discussed in Note 4 to the consolidated financial statements
of Tenneco Inc. and Consolidated Subsidiaries included in Item
8 -- Financial Statements and Supplementary Data.
AS OF DECEMBER 31,
-------------------
2004 2003
----- ------
(MILLIONS EXCEPT
PER SHARE AMOUNTS)
Inventories................................................ $ 14 $ 11
Deferred income tax assets (noncurrent).................... $ (5) $ (4)
Shareholders' equity....................................... $ 9 $ 7
Income (loss) before interest expense, income taxes and
minority interest........................................ $ 3 $ (2)
Income tax expense (benefit)............................... 1 (1)
----- ------
Income (loss) before cumulative effect of change in
accounting principle and net income (loss)............... $ 2 $ (1)
===== ======
Basic earnings (loss) per share of common stock............ $0.04 $(0.03)
===== ======
Diluted earnings (loss) per share of common stock.......... $0.04 $(0.03)
===== ======
(d) In October 2004 and July 2005, we announced a change in the structure of
our organization which changed the components of our reportable segments.
The European segment now includes our South American and Indian
operations. While this has no impact on our consolidated results, it
changes our segment results.
(e) EBITDA represents income before extraordinary item, cumulative effect of
change in accounting principle, interest expense, income taxes, minority
interest and depreciation and amortization. EBITDA is not a calculation
based upon generally accepted accounting principles. The amounts included
in the EBITDA calculation, however, are derived from amounts included in
the historical statements of income data. In addition, EBITDA should not
be considered as an alternative to net income or operating income as an
indicator of our operating performance, or as an alternative to operating
cash flows as a measure of liquidity. We have reported EBITDA because we
regularly review EBITDA as a measure of our company's performance. In
addition, we believe our debt holders utilize and analyze our EBITDA for
similar purposes. We also believe EBITDA assists investors in comparing a
company's performance on a consistent basis without regard to
depreciation and amortization, which can vary significantly depending
upon many factors. However, the EBITDA measure presented in this document
may not always be comparable to similarly titled measures reported by
other companies due to differences in the components of the calculation.
EBITDA is derived from the statements of income (loss) as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2007 2006(A) 2005(A) 2004(A)(B) 2003(B)(C)
---- ------- ------- ---------- ----------
(MILLIONS)
Net income (loss)........................ $ (5) $ 49 $ 56 $ 9 $ 25
Minority interest........................ 10 6 2 4 6
Income tax expense (benefit)............. 83 5 26 (21) (6)
Interest expense, net of interest
capitalized............................ 164 136 133 178 146
Depreciation and amortization of other
intangibles............................ 205 184 177 177 163
---- ---- ---- ---- ----
Total EBITDA............................. $457 $380 $394 $347 $334
==== ==== ==== ==== ====
(f) For purposes of computing this ratio, earnings generally consist of
income before income taxes and fixed charges excluding capitalized
interest. Fixed charges consist of interest expense, the portion of
rental expense considered representative of the interest factor and
capitalized interest. For the year ended December 31, 2004, earnings were
insufficient by $9 million to cover fixed charges. See Exhibit 12 to this
Form 10-K for the calculation of this ratio.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As you read the following review of our financial condition and results of
operations, you should also read our consolidated financial statements and
related notes beginning on page 66. As discussed in Note 4 to the consolidated
financial statements of Tenneco Inc. and Consolidated Subsidiaries included in
Item 8, we
35
restated our financial statements as of December 31, 2006 and 2005 and for the
three year period ended December 31, 2006. This management's discussion and
analysis reflects that restatement.
EXECUTIVE SUMMARY
We are one of the world's leading manufacturers of automotive emission
control and ride control products and systems. We serve both original equipment
(OE) vehicle designers and manufacturers and the repair and replacement markets,
or aftermarket, globally through leading brands, including Monroe(R), Rancho(R),
Clevite(R) Elastomers and Fric Rot(TM) ride control products and Walker(R),
Fonos(TM), and Gillet(TM) emission control products. Worldwide we serve more
than 39 different original equipment manufacturers, and our products or systems
are included on eight of the top 10 passenger car models produced for sale in
Europe and nine of the top 10 light truck and SUV models produced for sale in
North America for 2007. Our aftermarket customers are comprised of full-line and
specialty warehouse distributors, retailers, jobbers, installer chains and car
dealers. We operate 80 manufacturing facilities worldwide and employ
approximately 21,000 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 a shift
in consumer preferences to other vehicles in response to higher fuel costs and
other economic and social factors, increasing technologically sophisticated
content, changing aftermarket distribution channels, increasing environmental
standards and extended product life of automotive parts, also play a critical
role in our success. Other factors that are critical to our success include
adjusting to industry and economic challenges such as increases in the cost of
raw materials and our ability to successfully reduce the impact of any such cost
increases through material substitutions, cost reduction initiatives and other
methods.
We have a substantial amount of indebtedness. As such, our ability to
generate cash -- both to fund operations and service our debt -- is also a
significant area of focus for our company. See "Liquidity and Capital Resources"
below for further discussion of cash flows.
Total revenues for 2007 were $6.2 billion, a 32 percent increase compared
to 2006. Excluding the impact of currency and substrate sales, revenue was up
$552 million, or 15 percent, driven primarily by volume ramp-ups on platform
launches in North America, and higher OE revenues in Europe and Asia, more than
offsetting lower aftermarket sales. In addition to the benefit of the new
launches, our geographic balance and diverse customer base helped offset the
overall North American industry production decline.
Gross margin for 2007 was 15.8 percent, down 2.3 percentage points from
18.1 percent in 2006. Higher substrate sales, which typically carry lower
margins, driven by significant diesel platforms in North America and Europe, and
a shift toward a lower percentage of revenue generated by higher margin
aftermarket business negatively impacted overall gross margin. Also impacting
gross margin were increased steel and other material costs, and reduced North
American production volumes, all of which more than offset savings and improved
efficiencies from Lean manufacturing, Six Sigma programs, cost recoveries and
other cost reduction initiatives.
We reported selling, general, administrative and engineering expenses for
2007 of 8.3 percent of revenues, as compared to 9.8 percent of revenues for
2006. The improvement in this ratio was due to leveraging our higher revenues by
tightly controlling selling, general and administrative spending while still
making investments in engineering for next generation ride and emission control
technologies.
Earnings before interest expense, taxes and minority interest ("EBIT") was
$252 million for 2007, up $56 million from the $196 million reported in 2006.
Global sales growth on OE platforms, benefits from the company's ongoing
manufacturing efficiency programs, favorable currency and lower restructuring
and aftermarket customer changeover costs more than offset higher material
costs, reduced North American industry production volumes and softer global
aftermarket conditions.
36
RESULTS FROM OPERATIONS
NET SALES AND OPERATING REVENUES FOR YEARS 2007 AND 2006
The following tables reflect our revenues for the years of 2007 and 2006.
We present these reconciliations of revenues in order to reflect the trend in
our sales in various product lines and geographic regions separately from the
effects of doing business in currencies other than the U.S. dollar. We have not
reflected any currency impact in the 2006 table since this is the base period
for measuring the effects of currency during 2007 on our operations. We believe
investors find this information useful in understanding period-to-period
comparisons in our revenues.
Additionally, we show the component of our revenue represented by substrate
sales in the following table. While we generally have primary design,
engineering and manufacturing responsibility for OE emission control systems, we
do not manufacture substrates. Substrates are porous ceramic filters coated with
a catalyst -- precious metals such as platinum, palladium and rhodium. These are
supplied to us by Tier 2 suppliers and directed by our OE customers. We
generally earn a small margin on these components of the system. As the need for
more sophisticated emission control solutions increases to meet more stringent
environmental regulations, and as we capture more diesel aftertreatment
business, these substrate components have been increasing as a percentage of our
revenue. While these substrates dilute our gross margin percentage, they are a
necessary component of an emission control system. We view the growth of
substrates as a key indicator that our value-add content in an emission control
system is moving toward the higher technology hot-end gas and diesel business.
Our value-add content in an emission control system includes designing the
system to meet environmental regulations through integration of the substrates
into the system, maximizing use of thermal energy to heat up the catalyst
quickly, efficiently managing airflow to reduce back pressure as the exhaust
stream moves past the catalyst, managing the expansion and contraction of the
emission control system components due to temperature extremes experienced by an
emission control system, using advanced acoustic engineering tools to design the
desired exhaust sound, minimizing the opportunity for the fragile components of
the substrate to be damaged when we integrate it into the emission control
system and reducing unwanted noise, vibration and harshness transmitted through
the emission control system.
37
We present these substrate sales separately in the following table because
we believe investors utilize this information to understand the impact of this
portion of our revenues on our overall business and because it removes the
impact of potentially volatile precious metals pricing from our revenues. While
our original equipment customers generally assume the risk of precious metals
pricing volatility, it impacts our reported revenues. Excluding "substrate"
catalytic converter and diesel particulate filter sales removes this impact.
YEAR ENDED DECEMBER 31, 2007
----------------------------------------------------------
REVENUES
SUBSTRATE EXCLUDING
REVENUES SALES CURRENCY AND
CURRENCY EXCLUDING EXCLUDING SUBSTRATE
REVENUES IMPACT CURRENCY CURRENCY SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control........................ $ 514 $ -- $ 514 $ -- $ 514
Emission Control.................... 1,850 5 1,845 924 921
------ ---- ------ ------ ------
Total North America Original
Equipment...................... 2,364 5 2,359 924 1,435
North America Aftermarket
Ride Control........................ 385 -- 385 -- 385
Emission Control.................... 152 -- 152 -- 152
------ ---- ------ ------ ------
Total North America Aftermarket.. 537 -- 537 -- 537
Total North America............ 2,901 5 2,896 924 1,972
Europe Original Equipment
Ride Control........................ 427 37 390 -- 390
Emission Control.................... 1,569 120 1,449 511 938
------ ---- ------ ------ ------
Total Europe Original Equipment.. 1,996 157 1,839 511 1,328
Europe Aftermarket
Ride Control........................ 201 15 186 -- 186
Emission Control.................... 207 16 191 -- 191
------ ---- ------ ------ ------
Total Europe Aftermarket......... 408 31 377 -- 377
South America & India................. 333 24 309 39 270
Total Europe, South America &
India....................... 2,737 212 2,525 550 1,975
Asia.................................. 352 15 337 123 214
Australia............................. 194 23 171 25 146
------ ---- ------ ------ ------
Total Asia Pacific............. 546 38 508 148 360
------ ---- ------ ------ ------
Total Tenneco......................... $6,184 $255 $5,929 $1,622 $4,307
====== ==== ====== ====== ======
38
YEAR ENDED DECEMBER 31, 2006
----------------------------------------------------------
REVENUES
SUBSTRATE EXCLUDING
REVENUES SALES CURRENCY AND
CURRENCY EXCLUDING EXCLUDING SUBSTRATE
REVENUES IMPACT CURRENCY CURRENCY SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control........................ $ 483 $-- $ 483 $ -- $ 483
Emission Control.................... 928 -- 928 272 656
------ --- ------ ---- ------
Total North America Original
Equipment...................... 1,411 -- 1,411 272 1,139
North America Aftermarket
Ride Control........................ 383 -- 383 -- 383
Emission Control.................... 162 -- 162 -- 162
------ --- ------ ---- ------
Total North America Aftermarket.. 545 -- 545 -- 545
Total North America............ 1,956 -- 1,956 272 1,684
Europe Original Equipment
Ride Control........................ 380 -- 380 -- 380
Emission Control.................... 1,264 -- 1,264 519 745
------ --- ------ ---- ------
Total Europe Original Equipment.. 1,644 -- 1,644 519 1,125
Europe Aftermarket
Ride Control........................ 178 -- 178 -- 178
Emission Control.................... 211 -- 211 -- 211
------ --- ------ ---- ------
Total Europe Aftermarket......... 389 -- 389 -- 389
South America & India................. 272 -- 272 32 240
Total Europe, South America and
India....................... 2,305 -- 2,305 551 1,754
Asia.................................. 246 -- 246 85 161
Australia............................. 175 -- 175 19 156
------ --- ------ ---- ------
Total Asia Pacific............. 421 -- 421 104 317
------ --- ------ ---- ------
Total Tenneco......................... $4,682 $-- $4,682 $927 $3,755
====== === ====== ==== ======
Revenues from our North American operations increased $945 million in 2007
compared to the same period last year. Higher sales from new North American OE
platform launches more than offset lower aftermarket revenues. Total North
American OE revenues increased 68 percent to $2,364 million in 2007 from $1,411
million in 2006. North American OE emission control revenues were up 99 percent
to $1,850 million, from $928 million in the prior year. Substrate emission
control sales excluding currency increased 239 percent to $924 million, from
$272 million in 2006. Excluding substrate sales and currency impact, OE emission
control sales increased 41 percent from the prior year. This increase was
primarily due to significant new OE platform launches which included GM's Lambda
crossover, the Ford Super Duty gas and diesel pick-up trucks, GM's light duty
pick-up trucks and vans with Duramax diesel engines, Toyota's Tundra gasoline
pick-up truck, the International Truck and Engine medium duty diesel platform,
GM's three-quarter ton gasoline powered pick-up trucks, and the Dodge Ram three-
quarter ton diesel pick-up truck. North American OE ride control revenues for
2007 increased seven percent from the prior year. Expanded ride-control content
on the GMT900 platform, the launch of the GMT360 platform, and strong sales of
Chrysler's Jeep Wrangler, and Ford Ranger and Superduty, was partially offset by
lower ride-control commercial vehicle sales. Total North American light vehicle
production fell by two percent with a seven percent production decrease in
passenger cars being partially offset by a three percent increase in light truck
and SUV production. Aftermarket revenues for North America were $537 million in
2007, representing a decrease of $8 million compared to 2006. Volume decreases
on our continuing business were partially offset by new customer wins and price
increases to recover
39
steel costs. Aftermarket ride control revenues were $385 million in 2007, an
increase of $2 million from the prior year. Aftermarket emission control
revenues were $152 million in 2007, down $10 million from the prior year.
Our European, South American and Indian segment's revenues increased $432
million or 19 percent in 2007 compared to last year. Total Europe OE revenues
were $1,996 million, up 21 percent from last year. Excluding favorable currency
and substrate sales, total European OE revenue was up 18 percent while total
light vehicle production for Europe was up six percent. Europe OE emission
control revenues increased 24 percent to $1,569 million from $1,264 million in
the prior year. Excluding the impact of $120 million of favorable currency and
$511 million in substrate sales, OE emission control revenues increased 26
percent from 2006 due to a growing position on the hot-end of exhaust platforms,
new launches and higher OE volumes on the BMW 1 and 3-Series, Daimler's
Sprinter, C-Class, and Smart, Volvo's V50 and V70, PSA's Picasso and Ford's
Mondeo. Europe OE ride control revenues increased by $47 million in 2007, up 12
percent from $380 million a year ago. Excluding currency, revenues increased by
three percent in 2007 due to improved volumes on the Ford Focus, Ford Galaxy and
Mondeo with electronic shocks, Dacia Logan, VW Transporter, Mazda 2, and
Mercedes C-Class with electronic shocks, partially offset with lower volumes on
the Audi A4 and a shift in some production for the Audi A6 to our Chinese
operations. European aftermarket sales were $408 million in 2007 compared to
$389 million last year. Excluding $31 million of favorable currency, European
aftermarket revenues declined three percent in 2007 compared to last year. Ride
control aftermarket revenues, excluding the impact of currency, were up five
percent from the prior year, reflecting strong volumes and improved pricing.
Emission control aftermarket revenues were down nine percent, excluding $16
million in currency benefit, due to lower volumes which more than offset
improved pricing. South American and Indian revenues were $333 million in 2007,
compared to $272 million in the prior year. Stronger OE and aftermarket sales
and currency appreciation drove this increase.
Revenues from our Asia Pacific segment, which includes Asia and Australia,
increased $125 million to $546 million in 2007, as compared to $421 million in
the prior year. Excluding the impact of substrate sales and currency, Asian
revenues increased $53 million in 2007 compared to last year driven by higher OE
sales in China due to new launches and higher emission control volumes on
existing platforms. In Australia, industry OE production declines negatively
impacted revenues. Excluding substrate sales and favorable currency of $23
million, Australian revenue was down $10 million due to lower volumes.
40
NET SALES AND OPERATING REVENUES FOR YEARS 2006 AND 2005
The following tables reflect our revenues for the years of 2006 and 2005.
See "Net Sales and Operating Revenues for Years 2007 and 2006" for a description
of why we present these reconciliations of revenue.
YEAR ENDED DECEMBER 31, 2006
----------------------------------------------------------
REVENUES
SUBSTRATE EXCLUDING
REVENUES SALES CURRENCY AND
CURRENCY EXCLUDING EXCLUDING SUBSTRATE
REVENUES IMPACT CURRENCY CURRENCY SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control........................ $ 483 $-- $ 483 $ -- $ 483
Emission Control.................... 928 6 922 272 650
------ --- ------ ---- ------
Total North America Original
Equipment...................... 1,411 6 1,405 272 1,133
North America Aftermarket
Ride Control........................ 383 -- 383 -- 383
Emission Control.................... 162 -- 162 -- 162
------ --- ------ ---- ------
Total North America Aftermarket.. 545 -- 545 -- 545
Total North America............ 1,956 6 1,950 272 1,678
Europe Original Equipment
Ride Control........................ 380 10 370 -- 370
Emission Control.................... 1,264 34 1,230 504 726
------ --- ------ ---- ------
Total Europe Original Equipment.. 1,644 44 1,600 504 1,096
Europe Aftermarket
Ride Control........................ 178 3 175 -- 175
Emission Control.................... 211 5 206 -- 206
------ --- ------ ---- ------
Total Europe Aftermarket......... 389 8 381 -- 381
South America & India................. 272 14 258 32 226
Total Europe, South America &
India....................... 2,305 66 2,239 536 1,703
Asia.................................. 246 -- 246 85 161
Australia............................. 175 (1) 176 19 157
------ --- ------ ---- ------
Total Asia Pacific............. 421 (1) 422 104 318
------ --- ------ ---- ------
Total Tenneco......................... $4,682 $71 $4,611 $912 $3,699
====== === ====== ==== ======
41
YEAR ENDED DECEMBER 31, 2005
----------------------------------------------------------
REVENUES
SUBSTRATE EXCLUDING
REVENUES SALES CURRENCY AND
CURRENCY EXCLUDING EXCLUDING SUBSTRATE
REVENUES IMPACT CURRENCY CURRENCY SALES
-------- -------- --------- --------- ------------
(MILLIONS)
North America Original Equipment
Ride Control........................ $ 495 $-- $ 495 $ -- $ 495
Emission Control.................... 1,011 -- 1,011 272 739
------ --- ------ ---- ------
Total North America Original
Equipment...................... 1,506 -- 1,506 272 1,234
North America Aftermarket
Ride Control........................ 361 -- 361 -- 361
Emission Control.................... 160 -- 160 -- 160
------ --- ------ ---- ------
Total North America Aftermarket.. 521 -- 521 -- 521
Total North America............ 2,027 -- 2,027 272 1,755
Europe Original Equipment
Ride Control........................ 378 -- 378 -- 378
Emission Control.................... 1,078 -- 1,078 327 751
------ --- ------ ---- ------
Total Europe Original Equipment.. 1,456 -- 1,456 327 1,129
Europe Aftermarket
Ride Control........................ 169 -- 169 -- 169
Emission Control.................... 195 -- 195 -- 195
------ --- ------ ---- ------
Total Europe Aftermarket......... 364 -- 364 -- 364
South America & India................. 233 -- 233 20 213
Total Europe, South America and
India....................... 2,053 -- 2,053 347 1,706
Asia.................................. 149 -- 149 43 106
Australia............................. 211 -- 211 19 192
------ --- ------ ---- ------
Total Asia Pacific............. 360 -- 360 62 298
------ --- ------ ---- ------
Total Tenneco......................... $4,440 $-- $4,440 $681 $3,759
====== === ====== ==== ======
Revenues from our North American operations decreased $71 million in 2006
compared to the same period in 2005 reflecting lower sales in OE partially
offset by increased aftermarket sales. Total North American OE revenues
decreased six percent to $1,411 million in 2006. North American industry
production of SUVs and light trucks was down year-over-year which had a
significant impact on OE volumes, particularly on key exhaust platforms. OE
emission control revenues were down eight percent to $928 million from $1,011
million in 2005. Substrate emission control sales remained the same as 2005 at
$272 million. Adjusted for substrate sales and currency, OE emission control
sales were down 12 percent from 2005. This decline was primarily driven by the
impact from lower OE production of light trucks and SUVs on key exhaust
platforms. In addition, the timing on the transition of one of GM's largest
light truck platforms negatively impacted revenue. OE ride control revenues for
2006 decreased two percent from 2005. Increased heavy duty and commercial
volumes were more than offset by lower OE production of light trucks and SUVs.
Total OE revenues, excluding substrate sales and currency, decreased eight
percent in 2006. Total North American light vehicle production fell by three
percent with a nine percent decline in light truck and SUV production being
partially offset by a five percent production increase in passenger cars.
Aftermarket revenues for North America were $545 million in 2006, representing
an increase of five percent compared to 2005. Aftermarket ride control revenues
increased $22 million or six percent in 2006, primarily due to increased sales
to new and existing customers and price increases to help offset higher material
costs. Aftermarket emission control
42
revenues were $162 million in 2006, up $2 million from 2005. Price increases
driven by higher steel costs more than offset lower volumes.
Our European, South American and Indian segment's revenues increased $252
million or 12 percent in 2006 compared to 2005. Total Europe OE revenues were
$1,644 million, up 13 percent from 2005. Excluding favorable currency and
increased substrate sales, total European OE revenue was down three percent
while total light vehicle production for Europe was up three percent. OE
emission control revenues increased 17 percent to $1,264 million from $1,078
million in 2005. Excluding the impact of $34 million of favorable currency and
$177 million in higher substrate sales, OE emission control revenues decreased
three percent from 2005 primarily driven by OE price concessions. OE ride
control revenues increased by $2 million in 2006, up one percent from $378
million in 2005. We changed our reporting in the second quarter of 2005 for an
"assembly-only" contract with a European OE ride control customer and began
accounting for those revenues as net of the related cost of sales. If we had
reported our 2005 revenues in the same manner, they would have been lower by $15
million. Excluding a $10 million benefit from currency appreciation, OE ride
control revenues decreased two percent. European aftermarket sales were $389
million in 2006 compared to $364 million in 2005. Excluding $8 million of
favorable currency, European aftermarket revenues increased five percent in 2006
compared to 2005. Ride control aftermarket revenues, excluding the impact of
currency, were up four percent from 2005, reflecting increased volumes.
Aftermarket emission control revenues were up six percent from 2005 excluding
the benefits of currency. Improved pricing, market share gains, and the
introduction of new diesel particulate filter business drove the increase. South
American and Indian revenues, excluding the benefits of currency appreciation
and substrate sales, were up six percent compared to 2005. Higher volumes and
improved pricing drove this increase.
Revenues from our Asia Pacific segment, which includes Australia and Asia,
increased $61 million to $421 million in 2006, as compared to $360 million in
2005. Excluding substrate sales, revenues increased $55 million at our Asian
operations in 2006 compared to 2005 driven by higher OE volumes in China. In
Australia, industry OE production declines and unfavorable currency negatively
impacted revenues. Australian revenues were down 17 percent compared to 2005, or
18 percent when the impact of currency and substrate sales were excluded.
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST ("EBIT")
FOR YEARS 2007 AND 2006
YEAR ENDED
DECEMBER
31,
-----------
2007 2006 CHANGE
---- ---- ------
(MILLIONS)
North America......................................... $120 $103 $17
Europe, South America and India....................... 99 81 18
Asia Pacific.......................................... 33 12 21
---- ---- ---
$252 $196 $56
==== ==== ===
43
The EBIT results shown in the preceding table include the following items,
discussed below under "Restructuring and Other Charges" and "Liquidity and
Capital Resources -- Capitalization", which have an effect on the comparability
of EBIT results between periods:
YEAR ENDED
DECEMBER
31,
-----------
2007 2006
---- ----
(MILLIONS)
North America
Restructuring and restructuring-related expenses........... $ 3 $13
New aftermarket customer changeover costs(1)............... 5 6
Pension replacement(2)..................................... -- (7)
Reserve for receivable from former affiliate............... -- 3
Europe, South America and India
Restructuring and restructuring-related expenses........... 22 8
Asia Pacific
Restructuring and restructuring-related expenses........... -- 6
--------
(1) Represents costs associated with changing new aftermarket customers from
their prior suppliers to an inventory of our products. Although our
aftermarket business regularly incurs changeover costs, we specifically
identify in the table above those changeover costs that, based on the
size or number of customers involved, we believe are of an unusual nature
for the quarter in which they were incurred.
(2) In August 2006, we announced that we were freezing future accruals under
our U.S. defined benefit pension plans for substantially all our U.S.
salaried and non-union hourly employees effective December 31, 2006. In
lieu of those benefits, we are offering additional benefits under our
defined contribution plan.
EBIT for North American operations increased to $120 million from $103
million in the prior year. The improvement was primarily driven by the $22
million impact of higher OE volumes due to new platform launches, lower selling,
general and administrative expenses, manufacturing efficiencies of $25 million
driven by Lean and Six Sigma, lower changeover cost and lower restructuring
costs of $10 million. These increases were partially offset by higher steel
costs of $38 million, incremental launch costs of $2 million, increased spending
on engineering and a softer aftermarket. Included in North America's 2007 EBIT
is $3 million in restructuring and restructuring-related expenses and $5 million
in customer changeover costs. Included in North America's 2006 EBIT were $13
million in restructuring and restructuring-related expenses, $6 million in
customer changeover costs, $3 million of expense in connection with booking a
reserve for a receivable from a former affiliate and a $7 million dollar benefit
due to changes to our U.S. retirement plans for salaried and non-union hourly
employees described above. Currency had a $1 million favorable impact on North
American EBIT for 2007.
Our European, South American and Indian segment's EBIT was $99 million for
2007, up $18 million from $81 million in 2006. Higher OE volumes on existing
business and new platform launches had a combined $28 million impact, favorable
currency of $10 million, manufacturing efficiencies of $43 million gained
through Lean manufacturing and Six Sigma programs drove the improvement. These
increases were partially offset by material cost increases which included $26
million of higher steel costs, higher SG&A of $8 million, net alloy surcharge of
$10 million and increased spending on engineering of $5 million. Restructuring
and restructuring-related expenses of $22 million were included in EBIT of 2007
compared to $8 million in 2006.
EBIT for our Asia Pacific segment, which includes Asia and Australia,
increased $21 million to $33 million in 2007 compared to $12 million in the
prior year. Increased volume had an impact of $10 million driven primarily by OE
production and new launches in China, reduced restructuring charges of $6
million and favorable currency of $4 million was partially offset by $5 million
of increased steel costs and reduced light vehicle production in Australia.
Included in Asia Pacific's 2006 EBIT were $6 million in restructuring and
restructuring-related expenses.
44
Currency had a $15 million favorable impact on overall company EBIT for
2007, as compared to the prior year.
EBIT FOR YEARS 2006 AND 2005
YEARS ENDED
DECEMBER
31,
-----------
2006 2005 CHANGE
---- ---- ------
(MILLIONS)
North America......................................... $103 $148 $(45)
Europe, South America and India....................... 81 53 28
Asia Pacific.......................................... 12 16 (4)
---- ---- ----
$196 $217 $(21)
==== ==== ====
The EBIT results shown in the preceding table include the following items,
discussed below under "Restructuring and Other Charges" and "Liquidity and
Capital Resources -- Capitalization", which have an effect on the comparability
of EBIT results between periods:
YEAR ENDED
DECEMBER
31,
-----------
2006 2005
---- ----
(MILLIONS)
North America
Restructuring and restructuring-related expenses........... $13 $ 4
New aftermarket customer changeover costs(1)............... 6 10
Pension replacement(2)..................................... (7) --
Stock-based compensation accounting change(3).............. 1 --
Reserve for receivable from former affiliate............... 3 --
Europe, South America and India
Restructuring and restructuring-related expenses........... 8 8
Asia Pacific
Restructuring and restructuring-related expenses........... 6 --
--------
(1) Represents costs associated with changing new aftermarket customers from
their prior suppliers to an inventory of our products. Although our
aftermarket business regularly incurs changeover costs, we specifically
identify in the table above those changeover costs that, based on the
size or number of customers involved, we believe are of an unusual nature
for the quarter in which they were incurred.
(2) In August 2006, we announced that we were freezing future accruals under
our U.S. defined benefit pension plans for substantially all our U.S.
salaried and non-union hourly employees effective December 31, 2006. In
lieu of those benefits, we are offering additional benefits under defined
contribution plans.
(3) Represents the expense associated with the change to the new stock-based
accounting standard, Statement of Financial Accounting Standards No.
123(R), "Share-Based Payment."
EBIT for North American operations decreased to $103 million from $148
million in 2005. The decline was primarily driven by lower OE volumes of $27
million, OE price concessions of $17 million and higher material and
restructuring costs. Partially offsetting these negative items were higher
aftermarket sales, OE manufacturing efficiencies and lower selling, general and
administrative costs of $16 million. Included in North America's 2006 EBIT were
$13 million in restructuring and restructuring-related expenses, $6 million in
customer changeover costs, $1 million of stock-based compensation expense due to
an accounting change, $3 million of expense in connection with booking a reserve
for a receivable from a former affiliate and a $7 million dollar benefit due to
changes to our U.S. retirement plans for salaried and non-union hourly employees
described above. Included in North America's 2005 EBIT were $4 million in
restructuring and restructuring-related expenses and $10 million in customer
changeover costs.
45
Our European, South American and Indian segment's EBIT was $81 million for
2006, up $28 million from $53 million in 2005. Increased European aftermarket
sales benefited EBIT by $5 million. Higher European OE volumes from both
emission and ride control product lines, improved European OE manufacturing
efficiencies of $34 million, particularly in our exhaust operations, and
favorable currency all contributed to the EBIT improvement. These improvements
were partially offset by higher steel costs and price concessions of $11
million. South America and India EBIT benefited from higher revenues. Included
in Europe, South America and India's EBIT were $8 million in restructuring and
restructuring-related expenses in both 2006 and 2005.
EBIT for our Asia Pacific segment, which includes Asia and Australia,
decreased $4 million to $12 million in 2006 compared to $16 million in 2005.
Lower Australian production volumes of $4 million and higher material and
restructuring costs more than offset stronger volumes of $5 million in Asia.
Included in Asia Pacific's 2006 EBIT were $6 million in restructuring and
restructuring-related expenses.
EBIT AS A PERCENTAGE OF REVENUE FOR YEARS 2007, 2006 AND 2005
YEAR ENDED
DECEMBER 31,
------------------
2007 2006 2005
---- ---- ----
North America............................................ 4% 5% 7%
Europe, South America and India.......................... 4% 4% 3%
Asia Pacific............................................. 6% 3% 4%
Total Tenneco.......................................... 4% 4% 5%
In North America, EBIT as a percentage of revenue for 2007 was down one
percentage point from prior year levels. The benefits from our new platform
launches, lower selling, general and administrative expenses and manufacturing
efficiencies were more than offset by the margin impact from an increase in
lower margin substrate sales, lower North American light vehicle production
volumes, higher material costs, incremental launch costs, increased investments
in engineering and soft aftermarket conditions. During 2007, North American
results included lower restructuring and restructuring-related charges and lower
aftermarket changeover costs. In Europe, South America and India, EBIT margin
for 2007 was flat with prior year. Higher European OE volumes on existing
business, new platform launches, favorable currency and manufacturing
efficiencies were offset by higher material costs and restructuring charges.
Restructuring and restructuring-related expenses were higher than prior year.
EBIT as a percentage of revenue for our Asia Pacific segment increased three
percentage points in 2007 versus the prior year. OE production increases in
China, favorable currency and benefits from last year's restructuring activities
drove the improvement. Lower restructuring and restructuring-related expenses
also benefited EBIT margin.
In North America, EBIT as a percentage of revenue for 2006 was down two
percentage points from 2005 levels. Lower OE volumes, OE price concessions and
higher material and restructuring costs, were partially offset by higher
aftermarket sales, OE manufacturing efficiencies and lower selling, general and
administrative costs. Our Europe, South America and India EBIT margin for 2006
increased one percentage point over 2005. Increased European aftermarket sales,
as well as increased sales in South America and India, along with higher
European OE volumes, improved European OE manufacturing efficiencies,
particularly in our exhaust operations, and favorable currency drove the
improvement to EBIT margin. These improvements were partially offset by higher
steel costs, price concessions and a margin shift due to higher substrate sales.
EBIT as a percentage of revenue for our Asia Pacific operations decreased one
percentage point in 2006 compared to 2005. Higher revenues in Asia were more
than offset by lower Australian production volumes and higher material and
restructuring costs.
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $164 million in 2007 compared to $136
million in 2006, net of interest capitalized of $6 million in each year. Of the
increase, $5 million related to a charge to expense the unamortized portion of
debt issuance costs related to our 2003 amended and restated senior credit
facility in
46
connection with our debt refinancing in the first quarter of 2007 and $21
million related to a net charge to expense the costs associated with the tender
premium and fees, the write-off of deferred debt issuance costs and the write-
off of previously recognized debt issuance premium in connection with our
November 2007 refinancing transaction. The requirement to mark the fixed-to-
floating interest rate swaps to market reduced interest expense by $6 million in
2007 and increased expense by $1 million in 2006. The remainder of the change
was due to higher borrowing during the year to fund growth.
We reported interest expense of $136 million in 2006 compared to $133
million in 2005, net of interest capitalized of $6 million in 2006 and $3
million in 2005. The increase in expense was due to higher LIBOR rates on the
variable portion of our debt and higher average borrowings, offset by lower
expense associated with our swaps. See more detailed explanations on our debt
structure, prepayments and the amendment and restatement of our senior credit
facility in March 2007 and our November 2007 refinancing transaction, and their
impact on our interest expense, in "Liquidity and Capital
Resources -- Capitalization" later in this Management's Discussion and Analysis.
We have three fixed-to-floating interest rate swaps that effectively
convert $150 million of our 10.25 percent fixed interest rate senior secured
notes into floating interest rate debt at an annual rate of LIBOR plus 5.68
percent. Based upon the current LIBOR rate of 4.08 percent (which is in effect
until July 15, 2008) these swaps are expected to reduce our interest expense by
$1 million in 2008 excluding any impact from marking the swaps to market. Since
entering into these swaps, we have realized a net cumulative benefit of $2
million through December 31, 2007, in reduced cash interest payments. On
December 31, 2007, we had $1,010 million in long-term debt obligations that have
fixed interest rates. Of that amount, $245 million is fixed through July 2013,
$500 million is fixed through November 2014, $250 million is fixed through
November 2015 while the remaining $15 million is fixed over the 2008 through
2025 timeframe. Of the $245 million, $150 million has been swapped to floating
rate debt and we also have $169 million in long-term debt obligations
outstanding under our senior secured credit facility that are subject to
variable interest rates. See Note 6 to the consolidated financial statements of
Tenneco Inc. and Consolidated Subsidiaries included in Item 8.
INCOME TAXES
Income tax expense was $83 million in 2007, $5 million in 2006 and $26
million in 2005. The effective tax rate for 2007 was 94 percent as compared to 8
percent for 2006. The rate for 2007 included net tax expense of $56 million,
including $66 million in non-cash tax expenses to realign the company's European
ownership structure and net tax benefits of $10 million related to a reduction
in foreign income tax rates and adjustments for prior year income tax returns.
Included in 2006 were tax benefits of $15 million comprised of a FAS 109
adjustment, adjustments for prior year income tax returns, Czech Investment
Credit and resolution of tax issues with former affiliates. Included in 2005
were benefits of $5 million, including settlements of prior year tax issues,
prior year true-ups and resolution of some tax contingencies with our foreign
operations.
RESTRUCTURING AND OTHER CHARGES
Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. Prior to the change in accounting required for exit or disposal
activities, we recorded charges to income related to these plans for costs that
did not benefit future activities in the period in which the plans were
finalized and approved, while actions necessary to affect these restructuring
plans occurred over future periods in accordance with established plans.
Our recent restructuring activities began in the fourth quarter of 2001,
when our Board of Directors approved a restructuring plan, a project known as
Project Genesis, which was designed to lower our fixed costs, relocate capacity,
reduce our work force, improve efficiency and utilization, and better optimize
our global footprint. We have subsequently engaged in various other
restructuring projects related to Project Genesis. We incurred $27 million in
restructuring and restructuring-related costs during 2006, of which $23 million
was recorded in cost of sales and $4 million was recorded in selling, general
and administrative expense. In 2007, we incurred $25 million in restructuring
and restructuring-related costs of which $22 million
47
was recorded in cost of sales, $2 million of which related to a charge for asset
impairments for the plant closure in France, and $3 million was recorded in
selling, general and administrative expense. The majority of the 2007 charges
were related to the planned closing of our emission control plant in
Wissenbourg, France. Since Project Genesis was initiated, we have incurred costs
of $155 million through December 31, 2007. We estimate that our current annual
savings rate for completed projects is approximately $102 million. When all
actions are complete, we expect an additional $6 million of annual savings.
Under the terms of our amended and restated senior credit agreement that
took effect on March 16, 2007, we are allowed to exclude $80 million of cash
charges and expenses, before taxes, related to cost reduction initiatives
excluding any charge for asset impairments incurred after March 16, 2007 from
the calculation of the financial covenant ratios required under our senior
credit facility. As of December 31, 2007, we have excluded $23 million in
allowable charges relating to restructuring initiatives against the $80 million
available under the terms of the March 2007 amendment and restatement of the
senior credit facility.
In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will initiate actions that will
reduce our costs through implementing the most appropriate and efficient
logistics, distribution and manufacturing footprint for the future. We expect to
continue to undertake additional restructuring actions as deemed necessary,
however, there can be no assurances we will undertake such actions. Actions that
we take, if any, will require the approval of our Board of Directors, or its
authorized committee. We plan to conduct any workforce reductions that result in
compliance with all legal and contractual requirements including obligations to
consult with workers' councils, union representatives and others.
EARNINGS PER SHARE
We reported a net loss of $5 million or $0.11 per diluted common share for
2007, as compared to net income of $49 million or $1.05 per diluted common share
for 2006. Included in the results for 2007 were negative impacts from expenses
related to our restructuring activities, new aftermarket customer changeover
costs, charges relating to refinancing activities and tax adjustments. The net
impact of these items decreased earnings per diluted share by $1.93. Included in
the results for 2006 were negative impacts from expenses related to our
restructuring activities, new aftermarket customer changeover costs and expense
in connection with booking a reserve for a receivable from a former affiliate,
partially offset by a positive impact from tax adjustments and a benefit from
replacing the defined benefit pension plans in the U.S. The net impact of these
items decreased earnings per diluted share by $0.10.
We reported net income of $56 million or $1.24 per diluted share for 2005.
Included in the results for 2005 were expenses related to our restructuring
activities, customer changeover costs and favorable tax adjustments. The net
impact of these items decreased earnings per diluted share by $0.23. Please read
Note 8 to the consolidated financial statements of Tenneco Inc. and Consolidated
Subsidiaries included in Item 8 for more detailed information on earnings per
share.
DIVIDENDS ON COMMON STOCK
On January 10, 2001, we announced that our Board of Directors eliminated
the quarterly dividend on our common stock. The Board took the action in
response to industry conditions, primarily greater than anticipated production
volume reductions by original equipment manufacturers and continued softness in
the global light vehicle aftermarket. There are no current plans to reinstate a
dividend on our common stock.
OUTLOOK
Total North American OE light vehicle production levels for 2007 were 15.0
million units, down two percent from 2006. Of this, production of passenger cars
was down six percent while production of SUVs and light trucks was up two
percent. Currently 2008 North American OE light vehicle production levels are
expected to be down five percent, with passenger cars down four percent and SUVs
and light trucks down six percent. We anticipate that 2008 will be another
challenging year due to volatile oil prices, increasing demand for steel, and
consumer caution due to recession concerns. We believe that new product
launches, continued growth from existing platforms that launched in the first
half of 2007, our position on top-selling platforms,
48
our position with Japanese OE customers, flexible cost structure and a strong
new product and technology pipeline will help us offset pressures from North
American production rates. European light vehicle production volumes were 22.1
million units during 2007 compared to 20.9 million units in 2006. Expectations
for 2008 indicate production will increase three percent in Europe. North
American heavy-duty truck production rates for 2007 decreased by 54 percent.
North American heavy-duty production rates for 2008 are expected to increase two
percent. In China, 2007 light vehicle production levels were 8.1 million units,
up 22 percent from last year. Light vehicle production levels in China are
anticipated to grow 15 percent in 2008. In the global aftermarket we anticipate
soft market conditions. We also plan to continue our efforts to increase new and
existing sales in the global aftermarket business.
Tenneco estimates that its global original equipment revenues will be
approximately $5.5 billion in 2008 and $6.0 billion in 2009. Adjusted for lower
margin substrate sales, the company's global original equipment value-added
revenues are estimated to be approximately $3.7 billion in 2008 and $4.1 billion
in 2009. In addition, we project we will achieve an average compounded annual OE
revenue growth rate of 11% to 13% between 2008 and 2012, primarily driven by
tightening emission control regulations globally. These revenue estimates are
based on original equipment manufacturers' programs that have been formally
awarded to the company; programs where the company is highly confident that it
will be awarded business based on informal customer indications consistent with
past practices; Tenneco's status as supplier for the existing program and its
relationship with the customer; and the actual original equipment revenues
achieved by the company for each of the last several years compared to the
amount of those revenues that the company estimated it would generate at the
beginning of each year. Our revenue estimate is subject to increase or decrease
due to changes in customer requirements, customer and consumer preferences, and
the number of vehicles actually produced by our customers. We do not intend,
however, to update the amounts shown above due to these changes. In addition,
our revenue estimate is based on our anticipated pricing for each applicable
program over its life. However, we are under continuing pricing pressures from
our OE customers. We do not intend to update the amounts shown above for any
price changes. Finally, for our foreign operations, our revenue estimate assumes
a fixed foreign currency value. This value is used to translate foreign business
to the US dollar. Currency in our foreign operations is subject to fluctuation
based on the economic conditions in each of our foreign operations. We do not
intend to update the amounts shown above due to these fluctuations. See
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995" and Item 1A, "Risk Factors."
We expect the pricing environment for steel will increase gross steel costs
year-over-year up to $40 million in 2008, which we anticipate fully offsetting
through cost reductions, manufacturing efficiencies, material substitutions,
low-cost country sourcing and customer recovery. We are leveraging our position
in 2008 as we prepare for our new product launches to negotiate the best
possible pricing. We worked hard in 2007 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.
CASH FLOWS FOR 2007 AND 2006
YEARS ENDED
DECEMBER 31,
-------------
2007 2006
----- -----
(MILLIONS)
Cash provided (used) by:
Operating activities..................................... $ 165 $ 203
Investing activities..................................... (202) (172)
Financing activities..................................... (17) 12
49
Operating Activities
For the year ended December 31, 2007, cash flow provided from operating
activities was $165 million as compared to $203 million in the prior year. For
2007 cash used by working capital was $56 million compared to cash provided of
$6 million for 2006. Receivables were a cash use of $117 million for 2007, a $93
million increase from last year. Inventory was a use of cash of $66 million
compared to cash use of $57 million in the prior year. Inventory was up year
over year due to the ramp-up of future platform launches. The year-over-year
increase in the use of cash for both accounts receivable and inventory was
primarily a result of working capital requirements for our new platform launches
in North America. In addition to the higher level of receivables related to the
revenue increase, we must carry higher inventory levels for these new platforms,
a portion of which relates to higher value substrates sourced from South Africa.
This inventory from South Africa increased our cash outflow from operating
activities during 2007 by $33 million. Accounts payable provided cash of $123
million versus last year's cash inflow of $92 million. Cash interest payments of
$177 million in 2007 were higher than prior year payments of $137 million as a
result of higher interest rates on our variable portion of debt, increased
average borrowings, and costs related to our refinancing activities of $26
million. Cash tax payments were $60 million in 2007 compared to $26 million in
2006. We made tax payments in 2007 to resolve audits related to prior years'
operations and for separation from the old Tenneco packaging company. In
addition, cash collected from former affiliaties in 2006 offset other cash tax
payments.
Negotiable Financial Instruments -- One of our European subsidiaries
receives payment from one of its OE customers whereby the account receivables
are satisfied through the delivery of negotiable financial instruments. These
financial instruments are then sold at a discount to a European bank. The sales
of these financial instruments are not included in the account receivables sold.
Any of these financial instruments which were not sold as of December 31, 2007
and 2006 are classified as other current assets and are excluded from our
definition of cash equivalents. We had sold approximately $15 million of these
instruments at December 31, 2007 and $26 million at December 31, 2006.
In certain instances several of our Chinese subsidiaries receive payment
from OE customers and satisfy vendor payments through the receipt and delivery
of negotiable financial instruments. Financial instruments used to satisfy
vendor payables and not redeemed totaled $23 million and $12 million at December
31, 2007 and 2006, respectively, and were classified as notes payable. Financial
instruments received from OE customers and not redeemed totaled $8 million and
$9 million at December 31, 2007 and 2006, respectively and were classified as
other current assets. One of our Chinese subsidiaries is required to maintain a
cash balance at a financial institution issuing the financial instruments which
are used to satisfy vendor payments. No financial instruments were outstanding
at that Chinese subsidiary as of December 31, 2007. As of December 31, 2006 the
required cash balance was less than $1 million and was classified as cash and
cash equivalents.
Investing Activities
Cash used for investing activities was $202 million in 2007, $30 million
greater than the same period a year ago. In 2007 we received $10 million in cash
from the sale of assets. Cash payments for plant, property and equipment (PP&E)
were $177 million in 2007, equal to 2006. In 2007, we spent $16 million to
acquire Combustion Components Associates' ELIM-NOx(TM) technology. Cash payments
for software-related intangible assets were $19 million in 2007 compared to $13
million in 2006.
Financing Activities
Cash flow from financing activities was a $17 million outflow in 2007
compared to an inflow of $12 million in 2006. The primary reason for the change
is debt issuance costs due to our long-term debt refinancing activities in the
year.
50
CASH FLOWS FOR 2006 AND 2005
YEARS ENDED
DECEMBER 31,
-------------
2006 2005
----- -----
(MILLIONS)
Cash provided (used) by:
Operating activities..................................... $ 203 $ 123
Investing activities..................................... (172) (164)
Financing activities..................................... 12 (28)
Operating Activities
For the year ended December 31, 2006, cash flow provided from operating
activities was $203 million as compared to $123 million in 2005. For 2006 cash
provided by working capital was $6 million compared to cash used of $95 million
for 2005. Receivables were a cash outflow of $24 million, a $62 million
improvement from 2005, which was impacted by the discontinuation of the advance
payment programs with three major OE customers in North America in 2005.
Inventory was a use of cash of $57 million compared to cash provided of $6
million in 2005. Inventory was up year over year due to the ramp-up of future
platform launches. Accounts payable provided cash of $92 million versus last
year's cash outflow of $9 million. Cash interest payments of $137 million in
2006 were higher than 2005 payments of $126 million as a result of higher
interest rates on our variable portion of debt and increased average borrowings.
Cash tax payments were $26 million in 2006 compared to $23 million in 2005.
Other operating activity was a use of $5 million in cash for 2006, compared to a
cash outflow of $22 million in 2005 which was primarily related to an increase
in pension contributions during 2005.
Negotiable Financial Instruments -- One of our European subsidiaries
receives payment from one of its OE customers whereby the account receivables
are satisfied through the delivery of negotiable financial instruments. These
financial instruments are then sold at a discount to a European bank. The sales
of these financial instruments are not included in the account receivables sold.
Any of these financial instruments which were not sold as of December 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 December 31, 2006 and $34 million at December 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 $12 million and $8 million at December
31, 2006 and 2005, respectively, and were classified as notes payable. Financial
instruments received from OE customers and not redeemed totaled $9 million at
both December 31, 2006 and 2005 and were classified as other current assets. One
of our Chinese subsidiaries is required to maintain a cash balance at a
financial institution issuing the financial instruments which are used to
satisfy vendor payments. The balance was less than $1 million at December 31,
2006 and $3 million at December 31, 2005 and was classified as cash and cash
equivalents.
Investing Activities
Cash used for investing activities was $8 million higher in 2006 compared
to 2005. In 2006 we received $17 million in cash from the sale of assets. Cash
payments for plant, property and equipment (PP&E) were $177 million in 2006
versus $140 million in 2005. The increase of $37 million in cash payments for
plant, property and equipment was primarily due to the timing of future OE
customer platform launches. Without adjusting for changes in the balance of
accounts payable relating to acquisitions of PP&E, the amount of PP&E acquired
in 2006 and 2005 was $7 million lower and $3 million higher, respectively, than
the cash payments reported. Acquisitions for PP&E were $170 million in 2006 and
$143 million in 2005. Cash payments for software-related intangible assets were
$13 million in 2006 compared to $14 million in 2005.
51
In 2005 we used $11 million in cash to acquire the exhaust operations of
Gabilan Manufacturing and $3 million to acquire the remaining minority interest
in India's Hydraulics joint venture operations, partially offset by net proceeds
from the sale of assets of $4 million.
Financing Activities
Cash flow from financing activities was a $12 million inflow in 2006
compared to an outflow of $28 million in the same period of 2005. The primary
reason for the change is attributable to $45 million in cash used to reduce our
long-term debt during 2005.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America.
Preparing our consolidated 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 consolidated 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 and diesel particulate filters or components thereof including
precious metals ("substrates") on behalf of our customers which are used in the
assembled system. These substrates are included in our inventory and "passed
through" to the customer at our cost, plus a small margin, since we take title
to the inventory and are responsible for both the delivery and quality of the
finished product. Revenues recognized for substrate sales were $1,673 million,
$927 million and $681 million in 2007, 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. Certain taxes assessed by governmental
authorities on revenue producing transactions, such as value added taxes, are
excluded from revenue and recorded on a net basis. Shipping and handling costs
billed to customers are included in revenues and the related costs are included
in cost of sales in our Statements of Income (Loss).
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
consolidated financial statements.
Pre-production Design and Development and Tooling Assets
We expense pre-production design and development costs as incurred unless
we have a contractual guarantee for reimbursement from the original equipment
customer. We had long-term receivables of $20 million and $22 million on the
balance sheet at December 31, 2007 and 2006, respectively, for guaranteed pre-
production design and development reimbursement arrangements with our customers.
In addition, plant, property and equipment includes $62 million and $63 million
at December 31, 2007 and 2006, respectively, for original equipment tools and
dies that we own, and prepayments and other includes $33 million and $38 million
at December 31, 2007 and 2006, respectively, for in-process tools and dies that
we are building for our original equipment customers.
Income Taxes
We have a U.S. Federal tax net operating loss carryforward ("NOL") at
December 31, 2007, of $518 million, which will expire in varying amounts from
2020 to 2027. The federal tax effect of that NOL is
52
recorded as a deferred tax asset on our balance sheet for $181 million and $209
million at December 31, 2007 and 2006, respectively. We also have state NOL
carryforwards at December 31, 2007 of $767 million, which will expire in various
years through 2027. The tax effect of the state NOL, net of a valuation
allowance, is recorded as a deferred tax asset on our balance sheet for $40
million and $29 million at December 31, 2007 and 2006, respectively. We
estimate, based on available evidence both positive and negative, that it is
more likely than not that we will utilize these NOLs within the prescribed
carryforward period. That estimate is based upon our expectations regarding
future taxable income of our U.S. operations and the implementation of available
tax planning strategies that accelerate usage of the NOL. Circumstances that
could change that estimate include future U.S. earnings at lower than expected
levels or a majority ownership change as defined in the rules of the U.S. tax
law. If that estimate changed, we would be required to cease recognizing an
income tax benefit for any new NOL and could be required to record a reserve for
some or all of the asset currently recorded on our balance sheet.
Stock-Based Compensation
Effective January 1, 2006, we began accounting 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. As of December 31, 2007, 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 0.8 years as compared to $4 million, net of tax, and a weighted
average period of 1.0 years as of December 31, 2006.
Goodwill and Other Intangible Assets
We utilize an impairment-only approach to value our purchased goodwill in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year
in the fourth quarter, we perform an impairment analysis on the balance of
goodwill. Inherent in this calculation is the use of estimates as the fair value
of our designated reporting units is based upon the present value of our
expected future cash flows. In addition, our calculation includes our best
estimate of our weighted average cost of capital and growth rate. If the
calculation results in a fair value of goodwill which is less than the book
value of goodwill, an impairment charge would be recorded in the operating
results of the impaired reporting unit.
Pension and Other Postretirement Benefits
We have various defined benefit pension plans that cover substantially all
of our employees. We also have postretirement health care and life insurance
plans that cover a majority of our domestic employees. Our pension and
postretirement health care and life insurance expenses and valuations are
dependent on assumptions used by our actuaries in calculating those amounts.
These assumptions include discount rates, health care cost trend rates, long-
term return on plan assets, retirement rates, mortality rates and other factors.
Health care cost trend rate assumptions are developed based on historical cost
data and an assessment of likely long-term trends. Retirement rates are based
primarily on actual plan experience while mortality rates are based upon the
general population experience which is not expected to differ materially from
our experience.
Our approach to establishing the discount rate assumption for both our
domestic and foreign plans starts with high-quality investment-grade bonds
adjusted for an incremental yield based on actual historical performance. This
incremental yield adjustment is the result of selecting securities whose yields
are higher than the "normal" bonds that comprise the index. Based on this
approach, for 2007 we raised the weighted average discount rate for all of our
pension plans to 5.9 percent, from 5.5 percent. The discount rate for
postretirement benefits was raised from approximately 5.9 percent for 2006 to
approximately 6.2 percent for 2007.
53
Our approach to determining expected return on plan asset assumptions
evaluates both historical returns as well as estimates of future returns, and is
adjusted for any expected changes in the long-term outlook for the equity and
fixed income markets. As a result, our estimate of the weighted average long-
term rate of return on plan assets for all of our pension plans was left
unchanged at 8.2 percent for 2007.
Except in the U.K., our pension plans generally do not require employee
contributions. Our policy is to fund our pension plans in accordance with
applicable U.S. and foreign government regulations and to make additional
payments as funds are available to achieve full funding of the accumulated
benefit obligation. At December 31, 2007 and 2006, all legal funding
requirements had been met. Other postretirement benefit obligations, such as
retiree medical, and certain foreign pension plans are not funded.
Effective December 31, 2006, we froze future accruals under our defined
benefit plans for substantially all U.S. salaried and non-union hourly employees
and replaced these benefits with additional contributions under defined
contribution plans. These changes reduced expense by approximately $11 million
in 2007. These changes will continue to generate savings in future years but
those savings will vary based on many factors, including the performance of our
pension fund investments. Additionally, we realized a one-time benefit of $7
million in the fourth quarter 2006 related to curtailing the defined benefit
pension plans.
CHANGES IN ACCOUNTING PRONOUNCEMENTS
In February 2008, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) 140-3, "Accounting for Transfers of Financial Assets
and Repurchase Financing Transactions". FSP 140-3 provides guidance on
accounting for a transfer of a financial asset and a repurchase financing which
is a repurchase agreement that relates to a previously transferred financial
asset between the same counterparties that is entered into contemporaneously
with, or in contemplation of, the initial transfer. FSP 140-3 is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. We are evaluating FSP 140-3 to
determine the effect on our financial statements and related disclosures.
In February 2008, the FASB issued FSP 157-1, "Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement Under Statement 13". FSP 157-1 provides a scope exception to SFAS
No. 157 which does not apply under Statement 13 and other accounting
pronouncements that address fair value measurements for purposes of lease
classification or measurement under Statement 13. FSP 157-1 is effective upon
the initial adoption of SFAS No. 157. We do not expect the adoption of FSP 157-1
to have a material impact to our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" (SFAS No. 141(R)). SFAS No. 141(R) requires an acquirer to
recognize the assets acquired, the liabilities assumed, contractual
contingencies and any noncontrolling interest in the acquiree at the acquisition
date at their fair values as of that date. SFAS No. 141(R) provides guidance on
the accounting for acquisition-related costs, restructuring costs related to the
acquisition and the measurement of goodwill and a bargain purchase. SFAS No.
141(R) applies prospectively to business combinations for which the acquisition
date is on or after December 15, 2008. We do not expect the adoption of this
statement to have a material impact to our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements-an amendment of ARB No. 5." SFAS No. 160
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling (minority) interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarified that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements, establishes a single method of
accounting for changes in a parent's ownership interest in a subsidiary that
does not result in deconsolidation and provides for expanded disclosure in the
consolidated financial statements relating to the interests of the parent's
owners and the interests of the noncontrolling owners of the subsidary. SFAS No.
160 applies prospectively (except for the presentation and disclosure
requirements) for fiscal years and interim periods within those fiscal years
beginning on or after December 15, 2008. The presentation and disclosure
54
requirements will be applied retrospectively for all periods presented. We are
evaluating this statement to determine the effect on our financial statements
and related disclosures.
In December 2007, the Securities and Exchange Commission issued Staff
Accounting Bulleting No. 110 (SAB 110). SAB 110 amends and replaces Question 6
of Section D.2 Topic 14, "Share-Based Payment." Question 6 of Topic 14:D.2 (as
amended) expresses the views of the staff regarding the use of a "simplified"
method in developing an estimate of the expected term of "plain vanilla" share
options in accordance with SFAS No. 123 (revised 2004), "Share-Based Payment"
(SFAS No. 123(R)). SAB 110 is effective January 1, 2008. The adoption of SAB 110
will have no impact to our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement."
This statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. In February 2008,
the FASB issued FSP 157-2, "Effective Date of FASB Statement No. 157," which
delays the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. We do not
expect the adoption of this statement to have a material impact to our
consolidated financial statements.
In June 2007, the Emerging Issues Task Force (EITF) issued EITF 06-11,
"Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards."
EITF 06-11 provides the final consensus on the application of paragraphs 62 and
63 of SFAS No. 123(R) on the accounting for income tax benefits relating to the
payment of dividends on equity-classified employee share-based payment awards
that are charged to retained earnings. EITF 06-11 affirms that the realized
income tax benefit from dividends or dividend equivalents that are charged to
retained earnings for equity classified nonvested equity shares, nonvested
equity share units, and outstanding equity share options should be recognized as
an increase in additional paid-in-capital. Additionally, EITF 06-11 provides
guidance on the amount of tax benefits from dividends that are reclassified from
additional paid-in-capital to the income statement when an entity's estimate of
forfeitures changes. EITF 06-11 is effective prospectively to the income tax
benefits that result from dividends on equity-classified employee share-based
payment awards that are declared in fiscal years beginning after December 15,
2007. We do not expect the adoption of EITF 06-11 to have a material impact on
our consolidated financial statements.
In June 2007, the EITF issued EITF 07-3, "Accounting for Nonrefundable
Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities." EITF 07-3 requires the deferral and capitalization of
nonrefundable advance payments for goods or services that an entity will use in
research and development activities pursuant to an executory contractual
agreement. Expenditures which are capitalized under EITF 07-3 should be expensed
as the goods are delivered or the related services are performed. EITF 07-3 is
effective prospectively for fiscal years beginning after December 15, 2007 and
interim periods within those fiscal years. EITF 07-3 is applicable to new
contracts entered into after the effective date of this Issue. We do not expect
the adoption of EITF 07-3 to have a material impact on our consolidated
financial statements.
In May 2007, the FASB issued Interpretation No. 48-1, "Definition of
Settlement in FASB Interpretation No. 48" (FIN 48-1). FIN 48-1 is effective for
fiscal years beginning after December 15, 2006 and provides guidance on how a
reporting entity should determine when a tax position is effectively settled. We
began applying FIN 48-1 in the second quarter. The adoption of FIN 48-1 did not
have a material impact to our consolidated financial statements and related
disclosures. See Note 7 to the consolidated financial statements of Tenneco Inc.
and Consolidated Subsidiaries included in Item 8.
In April 2007, the FASB issued Interpretation No. 39-1, "Amendment of FASB
Interpretation No. 39" (FIN 39-1). This amendment allows a reporting entity to
offset fair value amounts recognized for derivative instruments with fair value
amounts recognized for the right to reclaim or realize cash collateral.
Additionally, this amendment requires disclosure of the accounting policy on the
reporting entity's election to offset or not offset amounts for derivative
instruments. FIN 39-1 is effective for fiscal years beginning after November 15,
2007. We do not expect the adoption of FIN 39-1 to have a material impact on our
consolidated financial statements.
55
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This statement permits companies to
choose to measure at fair value many financial instruments and certain other
items that are not currently required to be measured at fair value. SFAS No. 159
is effective for financial statements issued for fiscal years beginning on or
after November 15, 2007. We do not believe the statement will have a material
effect on our consolidated financial statements and related disclosures.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)." Part of this Statement was effective as
of December 31, 2006, and requires companies that have defined benefit pension
plans and other postretirement benefit plans to recognize the funded status of
those plans on the balance sheet on a prospective basis from the effective date.
The funded status of these plans is determined as of the plans' measurement
dates and represents the difference between the amount of the obligations owed
to participants under each plan (including the effects of future salary
increases for defined benefit plans) and the fair value of each plan's assets
dedicated to paying those obligations. To record the funded status of those
plans, unrecognized prior service costs and net actuarial losses experienced by
the plans will be recorded in the Accumulated Other Comprehensive Loss section
of shareholders' equity on the balance sheet. The initial adoption as of
December 31, 2006 resulted in a reduction of Accumulated Other Comprehensive
Loss in shareholders' equity of $59 million.
In addition, SFAS No. 158 requires that companies using a measurement date
for their defined benefit pension plans and other postretirement benefit plans
other than their fiscal year end, change the measurement date effective for
fiscal years ending after December 15, 2008. Effective January 1, 2007, we
elected to early adopt the measurement date provision of SFAS No. 158. Adoption
of this part of the statement was not material to our financial position and
results of operations. See Note 10 to the consolidated financial statements of
Tenneco Inc. and Consolidated Subsidiaries included in Item 8.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
YEAR ENDED
DECEMBER 31,
---------------
2007 2006 % CHANGE
------ ------ --------
(MILLIONS)
Short-term debt and current maturities............ $ 46 $ 28 64%
Long-term debt.................................... 1,328 1,357 (2)
------ ------ --
Total debt........................................ 1,374 1,385 (1)
------ ------ --
Total minority interest........................... 31 28 11
Shareholders' equity.............................. 400 226 77
------ ------ --
Total capitalization.............................. $1,805 $1,639 10
====== ====== ==
General. Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries, was $46 million and $28
million as of December 31, 2007 and December 31, 2006, respectively. Borrowings
under our revolving credit facilities, which are now classified as long-term
debt, were approximately $169 million as of December 31, 2007. There were no
borrowings outstanding on our revolving credit facilities as of December 31,
2006.
The 2007 increase in shareholders' equity primarily resulted from $138
million of translation of foreign balances into U.S. dollars partially offset by
a net loss of $5 million. In addition, the implementation of the measurement
date provision of SFAS No. 158, additional liability for pension benefits and
other transactions contributed $41 million to shareholders' equity. While our
book equity balance was small at December 31, 2007, it had no effect on our
business operations. We have no debt covenants that are based upon our book
equity, and there are no other agreements that are adversely impacted by our
relatively low book equity. You
56
should also read Note 5 to the consolidated financial statements Tenneco Inc.
and Consolidated Subsidiaries included in Item 8.
Overview and Recent Transactions. Our financing arrangements are primarily
provided by a committed senior secured financing arrangement with a syndicate of
banks and other financial institutions. The arrangement is secured by
substantially all our domestic assets and pledges of 66 percent of the stock of
certain first-tier foreign subsidiaries, as well as guarantees by our material
domestic subsidiaries.
On November 20, 2007, we issued $250 million of 8 1/8 percent Senior Notes
due November 15, 2015 through a private placement offering. The offering and
related transactions were designed to (1) reduce our interest expense and extend
the maturity of a portion of our debt (by using the proceeds of the offering to
tender for $230 million of our outstanding $475 million 10 1/4 percent senior
secured notes due 2013), (2) facilitate the realignment of the ownership
structure of some of our foreign subsidiaries and (3) otherwise amend certain of
the covenants in the indenture for our 10 1/4 percent senior secured notes to be
consistent with those contained in our 8 5/8 percent senior subordinated notes,
including conforming the limitation on incurrence of indebtedness and the
absence of a limitation on issuances or transfers of restricted subsidiary
stock, and make other minor modifications.
The ownership structure realignment is designed to more effectively align
our domestic and foreign assets and revenues with expenses in the appropriate
local currencies. Some of the desired results of the realignment will be to
allow us to more rapidly use our U.S. net operating losses and reduce our cash
tax payments. At present, the ownership structure realignment involves a new
European holding company which will own some of our foreign entities. We may
alter the components of the realignment from time to time. If market conditions
permit in 2008, we may offer debt issued by the new European holding company.
The proceeds of that debt would be used to repay any outstanding intercompany
debt and, in turn, to fund the redemption of any remaining 10 1/4 percent senior
secured notes. This realignment involves utilizing part of our U.S. net
operating tax losses. Consequently, we recorded a non-cash charge of $66 million
in the fourth quarter of 2007.
The offering of new notes and related repurchase of our senior secured
notes will reduce our annual interest expense by approximately $3 million for
2008 and increased our total debt outstanding to third-parties by approximately
$20 million. In connection with the offering and the related repurchase of our
senior secured notes, we also recorded non-recurring pre-tax charges related to
the tender premium and fees, the write-off of deferred debt issuance costs, and
the write-off of previously recognized issuance premium totaling $21 million in
the fourth quarter of 2007.
In March 2007, we refinanced our $831 million senior credit facility. This
transaction reduced the interest rates we pay on all portions of the facility.
While the total amount of the new senior credit facility is $830 million,
approximately the same as the previous facility, we changed the components of
the facility to enhance our financial flexibility. We increased the amount of
commitments under our revolving loan facility from $320 million to $550 million,
reduced the amount of commitments under our tranche B-1 letter of
credit/revolving loan facility from $155 million to $130 million and replaced
the $356 million term loan B with a $150 million term loan A. As of December 31,
2007, the senior credit facility consisted of a five-year, $150 million term
loan A maturing in March 2012, a five-year, $550 million revolving credit
facility maturing in March 2012, and a seven-year $130 million tranche B-1
letter of credit/revolving loan facility maturing in March 2014.
The refinancing of the prior facility allowed us to: (i) amend the
consolidated net debt to EBITDA ratio, (ii) eliminate the fixed charge coverage
ratio, (iii) eliminate the restriction on capital expenditures, (iv) increase
the amount of acquisitions permitted to $250 million, (v) improve the
flexibility to repurchase and retire higher cost junior debt, (vi) increase our
ability to enter into capital leases, (vii) increase the ability of our foreign
subsidiaries to incur debt, (viii) increase our ability to pay dividends and
repurchase common stock, (ix) increase our ability to invest in joint ventures,
(x) allow for the increase in the existing tranche B-1 facility and/or the term
loan A or the addition of a new term loan of up to $275 million in order to
reduce our 10.25 percentage senior secured notes, and (xi) make other
modifications.
57
Following the refinancing, the term loan A facility is payable in twelve
consecutive quarterly installments, commencing June 30, 2009 as follows: $6
million due each of June 30, September 30, December 31, 2009 and March 31, 2010,
$15 million due each of June 30, September 30, December 31, 2010 and March 31,
2011, and $17 million due each of June 30, September 30, December 31, 2011 and
March 16, 2012. The revolving credit facility requires that any amounts drawn be
repaid by March 2012. Prior to that date, funds may be borrowed, repaid and
reborrowed under the revolving credit facility without premium or penalty.
Letters of credit may be issued under the revolving credit facility.
The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by March 2014. We can borrow revolving loans and issue letters of
credit under the $130 million tranche B-1 letter of credit/revolving loan
facility. The tranche B-1 letter of credit/revolving loan facility lenders have
deposited $130 million with the administrative agent, who has invested that
amount in time deposits. We do not have an interest in any of the funds on
deposit. When we draw revolving loans under this facility, the loans are funded
from the $130 million on deposit with the administrative agent. When we make
repayments, the repayments are redeposited with the administrative agent.
The tranche B-1 letter of credit/revolving loan facility is reflected as
debt on our balance sheet only if we borrow money under this facility or if we
use the facility to make payments for letters of credit. We will not be liable
for any losses to or misappropriation of any (i) return due to the
administrative agent's failure to achieve the return described above or to pay
all or any portion of such return to any lender under such facility or (ii)
funds on deposit in such account by such lender (other than the obligation to
repay funds released from such accounts and provided to us as revolving loans
under such facility).
Senior Credit Facility -- Interest Rates and Fees. Prior to the March 2007
refinancing, borrowings under the term loan B facility and the tranche B-1
letter of credit/revolving loan facility bore interest at an annual rate equal
to, at our option, either (i) the London Interbank Offering Rate plus a margin
of 200 basis points; or (ii) a rate consisting of the greater of the JP Morgan
Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin
of 100 basis points. As of December 31, 2007 borrowings under the term loan A
facility and the tranche B-1 letter of credit/revolving loan facility bore
interest at an annual rate equal to, at our option, either (i) the London
Interbank Offering Rate plus a margin of 150 basis points; or (ii) a rate
consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds
rate plus 50 basis points, plus a margin of 50 basis points. The interest margin
for borrowings under the facilities are subject to adjustment based on the
consolidated net leverage ratio (consolidated indebtedness net of cash divided
by consolidated EBITDA as defined in the senior credit facility agreement). The
margin we pay on the term loan A and the tranche B-1 facility is reduced by 25
basis points following each fiscal quarter for which the consolidated net
leverage ratio is less than 2.5 beginning in March 2007, and would increase by
25 basis points following each fiscal quarter for which the consolidated net
leverage ratio exceeds 3.5. There is no cost to us for issuing letters of credit
under the tranche B-1 letter of credit/revolving loan facility, however
outstanding letters of credit reduce our availability to borrow revolving loans
under this portion of the facility. If a letter of credit issued under this
facility is subsequently paid and we do not reimburse the amount paid in full,
then a ratable portion of each lender's deposit would be used to fund the letter
of credit. We pay the tranche B-1 lenders a fee which is equal to LIBOR plus 150
basis points. This fee is offset by the return on the funds deposited with the
administrative agent which earn interest at a per annum rate approximately equal
to LIBOR. Outstanding revolving loans reduce the funds on deposit with the
administrative agent which in turn reduce the earnings of those deposits and
effectively increases our interest expense at a per annum rate equal to LIBOR.
Prior to the March 2007 refinancing, borrowings under the revolving credit
facility bore interest at an annual rate equal to, at our option, either (i) the
London Interbank Offering Rate plus a margin of 275 basis points; or (ii) a rate
consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds
rate plus 37.5 basis points, plus a margin of 175 basis points. As of December
31, 2007 borrowings under the revolving credit facility bore interest at an
annual rate equal to, at our option, either (i) the London Interbank Offering
Rate plus a margin of 150 basis points; or (ii) a rate consisting of the greater
of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis
points, plus a margin of 50 basis points. Letters of credit issued under the
revolving credit facility accrue a letter of credit fee at a per annum rate of
150 basis points for the pro rata account of the lenders under such facility and
a fronting fee for the ratable account of the issuers
58
thereof at a per annum rate in an amount to be agreed upon payable quarterly in
arrears. We also pay a commitment fee of 35 basis points on the unused portion
of the revolving credit facility. The interest margins for borrowings and
letters of credit issued under the revolving credit facility are subject to
adjustment based on the consolidated net leverage ratio (consolidated
indebtedness net of cash divided by consolidated EBITDA as defined in the senior
credit facility agreement) measured at the end of each quarter. The margin we
pay on the revolving credit facility is reduced by 25 basis points and the
commitment fee we pay on the revolving credit facility is reduced by 5 basis
points following each fiscal quarter for which the consolidated net leverage
ratio is less than 2.5 beginning in March 2007. The margin and the commitment
fee would increase by 25 basis points and 2.5 basis points, respectively,
following each fiscal quarter for which the consolidated net leverage ratio
exceeds 3.5.
Senior Credit Facility -- Other Terms and Conditions. As described above,
we are highly leveraged. Our refinanced senior credit facility requires that we
maintain financial ratios equal to or better than the following consolidated net
leverage ratio (consolidated indebtedness net of cash divided by consolidated
EBITDA, as defined in the senior credit facility agreement), and consolidated
interest coverage ratio (consolidated EBITDA divided by consolidated interest
expense, as defined under the senior credit facility agreement) at the end of
each period indicated. Failure to maintain these ratios will result in a default
under our senior credit facility, which could result in all amounts due
immediately, as well as most of our other debt, being declared immediately due
and payable. The financial ratios required under the amended and restated senior
credit facility and, the actual ratios we achieved for the four quarters of
2007, are shown in the following tables:
QUARTER ENDED
-----------------------------------------------------
SEPTEMBER DECEMBER
MARCH 31, JUNE 30, 30, 31,
2007 2007 2007 2007
----------- ----------- ----------- -----------
REQ. ACT. REQ. ACT. REQ. ACT. REQ. ACT.
---- ---- ---- ---- ---- ---- ---- ----
Leverage Ratio (maximum).............. 4.25 3.27 4.25 2.99 4.25 2.97 4.25 2.53
Interest Coverage Ratio (minimum)..... 2.10 3.09 2.10 3.21 2.10 3.35 2.10 3.61
2008 2009 2010 2011 2012
REQ. REQ. REQ. REQ. REQ.
---- ---- ---- ---- ----
Leverage Ratio (maximum)............................ 4.00 3.75 3.50 3.50 3.50
Interest Coverage Ratio (minimum)................... 2.10 2.25 2.40 2.55 2.75
The senior credit facility agreement provides the ability to refinance our
senior subordinated notes and/or our senior secured notes in an amount equal to
the sum of (i) the net cash proceeds of equity issued after the closing date
plus (ii) the portion of annual excess cash flow (as defined in the senior
credit facility agreement) that is not required to be applied to the payment of
the credit facilities and which is not used for other purposes, provided that
the amount of the subordinated notes and the aggregate amount of the senior
secured notes and the subordinated notes that may be refinanced is capped based
upon the pro forma consolidated leverage ratio after giving effect to such
refinancing as shown in the following table:
AGGREGATE SENIOR AND
SUBORDINATED NOTES SUBORDINATE NOTE
PROFORMA CONSOLIDATED LEVERAGE RATIO MAXIMUM AMOUNT MAXIMUM AMOUNT
------------------------------------ ------------------ --------------------
Greater than or equal to 3.0x................ $ 50 million $150 million
Greater than or equal to 2.5x................ $100 million $300 million
Less than 2.5x............................. $125 million $375 million
In addition, the senior secured notes may be refinanced with (i) the net
cash proceeds of incremental facilities and permitted refinancing indebtedness
(as defined in the senior credit facility agreement), (ii) the net cash proceeds
of any new senior or subordinated unsecured indebtedness, (iii) proceeds of
revolving credit loans (as defined in the senior credit facility agreement),
(iv) up to E200 million of unsecured indebtedness of the company's foreign
subsidiaries and (v) cash generated by the company's operations.
The refinanced senior credit facility agreement also contains restrictions
on our operations that are customary for similar facilities, including
limitations on: (i) incurring additional liens; (ii) sale and leaseback
transactions (except for the permitted transactions as described in the amended
and restated agreement);
59
(iii) liquidations and dissolutions; (iv) incurring additional indebtedness or
guarantees; (v) investments and acquisitions; (vi) dividends and share
repurchases; (vii) mergers and consolidations; and (viii) refinancing of
subordinated and 10.25 percent senior secured notes. Compliance with these
requirements and restrictions is a condition for any incremental borrowings
under the senior credit facility agreement and failure to meet these
requirements enables the lenders to require repayment of any outstanding loans.
As of December 31, 2007, we were in compliance with all the financial covenants
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, Senior and Subordinated Notes. Our outstanding debt also
includes $245 million of 10 1/4 percent senior secured notes due July 15, 2013,
$250 million of 8 1/8 percent senior notes due November 15, 2015, and $500
million of 8 5/8 percent senior subordinated notes due November 15, 2014. We can
redeem some or all of the notes at any time after July 15, 2008 in the case of
the senior secured notes, November 15, 2009 in the case of the senior
subordinated notes and November 15, 2011 in the case of the senior 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 notes with the proceeds of certain equity offerings
completed before November 15, 2010.
Our senior secured, senior 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, be greater than 2.00. We have not incurred any of the types of
indebtedness not otherwise permitted by the indentures. The indentures also
contain restrictions on our operations, including limitations on: (i) incurring
additional indebtedness or liens; (ii) dividends; (iii) distributions and stock
repurchases; (iv) investments; (v) asset sales and (vi) mergers and
consolidations. Subject to limited exceptions, all of our existing and future
material domestic wholly owned subsidiaries fully and unconditionally guarantee
these notes on a joint and several basis. In addition, the senior secured notes
and related guarantees are secured by second priority liens, subject to
specified exceptions, on all of our and our subsidiary guarantors' assets that
secure obligations under our senior credit facility, except that only a portion
of the capital stock of our subsidiary guarantor's domestic subsidiaries is
provided as collateral and no assets or capital stock of our direct or indirect
foreign subsidiaries secure the notes or guarantees. There are no significant
restrictions on the ability of the subsidiaries that have guaranteed these notes
to make distributions to us. The senior subordinated notes rank junior in right
of payment to our senior credit facility and any future senior debt incurred. As
of December 31, 2007, we were in compliance with the covenants and restrictions
of these indentures.
Accounts Receivable Securitization. In addition to our senior credit
facility, senior secured notes, senior 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 $100 million and $85 million as of December 31,
2007 and 2006, respectively. This program is subject to cancellation prior to
its maturity date if we (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 2008, this program was renewed for 364 days
to January 26, 2009 at a facility size of $120 million. We also sell some
receivables in our European operations to regional banks in Europe. As of
December 31, 2007, we sold $57 million of accounts receivable in Europe up from
$48 million at December 31, 2006. The arrangements to sell receivables in Europe
are not committed and can be cancelled at any time. If we were not able to sell
receivables under either the North American or European securitization programs,
our borrowings under our revolving credit agreements may increase. These
accounts receivable securitization programs provide us with access to cash at
costs that are generally favorable to alternative sources of financing, and
allow us to reduce borrowings under our revolving credit agreements.
60
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 renegotiations with our senior credit
lenders, additional cost reduction or restructuring initiatives, sales of assets
or common stock, or other alternatives to enhance our financial and operating
position. Should we be required to implement any of these actions to meet our
cash flow needs, we believe we can do so in a reasonable time frame.
Contractual Obligations.
Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments as of December 31, 2007, are
shown in the following table:
PAYMENTS DUE IN:
--------------------------------------------------
BEYOND
2008 2009 2010 2011 2012 2012 TOTAL
---- ---- ---- ---- ---- ------ ------
(MILLIONS)
Obligations:
Revolver borrowings................... $ -- $ -- $ -- $ -- $ -- $ 169 $ 169
Senior term loans..................... -- 17 50 66 17 -- 150
Senior secured notes.................. 2 -- -- -- -- 246 248
Senior subordinated notes............. -- -- -- -- -- 500 500
Senior notes.......................... -- -- -- -- -- 250 250
Capital leases........................ 3 3 3 -- -- -- 9
Other subsidiary debt................. 1 -- -- -- -- 2 3
Short-term debt....................... 40 -- -- -- -- -- 40
---- ---- ---- ---- ---- ------ ------
Debt and capital lease obligations.. 46 20 53 66 17 1,167 1,369
Operating leases...................... 17 14 11 9 5 2 58
Interest payments..................... 110 110 108 104 99 165 696
Capital commitments................... 48 -- -- -- -- -- 48
---- ---- ---- ---- ---- ------ ------
Total Payments........................ $221 $144 $172 $179 $121 $1,334 $2,171
==== ==== ==== ==== ==== ====== ======
If we do not maintain compliance with the terms of our senior credit
facility, senior secured notes indenture, senior 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, senior
subordinated notes, and senior notes is calculated using the fixed rates of
10 1/4 percent, 8 5/8 percent, and 8 1/8 percent respectively. Interest on our
variable rate debt is calculated as 150 basis points plus LIBOR of 4.60 percent
which was the rate at December 31, 2007. We have assumed that LIBOR will remain
unchanged for the outlying years. See
61
"-- Capitalization." In addition we have included the impact of our interest
rate swaps entered into in April 2004, excluding any impact marking the swaps to
market may have. See "Interest Rate Risk" below.
We have also included an estimate of expenditures required after December
31, 2007 to complete the projects authorized at December 31, 2007, in which we
have made substantial commitments in connection with purchasing plant, property
and equipment for our operations. For 2008, we expect our capital expenditure
budget to be $200 million to $220 million.
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 domestically. 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 $39 million to those plans in 2008. Pension and postretirement
contributions beyond 2008 will be required but those amounts will vary based
upon many factors, including the performance of our pension fund investments
during 2008. In addition, we have not included cash requirements for
environmental remediation. Based upon current estimates we believe we will be
required to spend approximately $11 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.
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, our senior 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 $245 million senior secured
notes is also secured by second-priority liens on substantially all our domestic
assets, excluding some of the stock of our domestic subsidiaries. No assets or
capital stock of our direct or indirect foreign subsidiaries secure these notes.
You should also read Note 13 of the consolidated financial statements of Tenneco
Inc. and Consolidated Subsidiaries included in Item 8, 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. As of December 31, 2007, we have guaranteed $18
million in letters of credit to support some of our subsidiaries' insurance
arrangements. In addition, we have issued $13 million in guarantees through
letters of credit to guarantee other obligations of subsidiaries primarily
related to foreign employee benefit programs, environmental remediation
activities, and cash management requirements.
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Currency Exchange Rate Risk
We use derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
our exposure to changes in foreign currency exchange rates. Our primary exposure
to changes in foreign currency rates results from intercompany loans made
between affiliates to minimize the need for borrowings from third parties.
Additionally, we enter into foreign currency forward
62
purchase and sale contracts to mitigate our exposure to changes in exchange
rates on certain intercompany and third-party trade receivables and payables. We
manage counter-party credit risk by entering into derivative financial
instruments with major financial institutions that can be expected to fully
perform under the terms of such agreements. We do not enter into derivative
financial instruments for speculative purposes.
In managing our foreign currency exposures, we identify and aggregate
existing offsetting positions and then hedge residual exposures through third-
party derivative contracts. The following table summarizes by major currency the
notional amounts, weighted average settlement rates, and fair value for foreign
currency forward purchase and sale contracts as of December 31, 2007. All
contracts in the following table mature in 2008.
DECEMBER 31, 2007
------------------------------------------------------
NOTIONAL AMOUNT WEIGHTED AVERAGE FAIR VALUE IN
IN FOREIGN CURRENCY SETTLEMENT RATES U.S. DOLLARS
------------------- ---------------- -------------
(MILLIONS EXCEPT SETTLEMENT RATES)
Australian dollars................ --Purchase 13 .876 $ 11
--Sell (2) .876 (2)
British pounds.................... --Purchase 4 1.987 8
--Sell (1) 1.987 (2)
European euro..................... --Purchase 1 1.464 1
--Sell (98) 1.461 (143)
South Africa rand................. --Purchase 409 .146 60
--Sell (92) .146 (13)
U.S. dollars...................... --Purchase 136 1.000 136
--Sell (62) 1.003 (62)
Other............................. --Purchase 414 .009 4
--Sell -- -- --
-----
$ (2)
=====
Interest Rate Risk
Our financial instruments that are sensitive to market risk for changes in
interest rates are primarily our debt securities and our interest rate swaps. We
use our revolving credit facilities to finance our short-term and long-term
capital requirements. We pay a current market rate of interest on these
borrowings. Our long-term capital requirements have been financed with long-term
debt with original maturity dates ranging from five to ten years. On December
31, 2007, we had $1,010 million in long-term debt obligations that have fixed
interest rates. Of that amount, $245 million is fixed through July 2013, $500
million is fixed through November 2014, $250 million is fixed through November
2015, and the remainder is fixed from 2008 through 2025. Of the $245 million,
$150 million has been swapped to floating and we also have $169 million in long-
term debt obligations outstanding under our senior secured credit facility that
are subject to variable interest rates. See Note 5 to the consolidated financial
statements of Tenneco Inc. and Consolidated Subsidiaries included in Item 8.
We estimate that the fair value of our long-term debt at December 31, 2007
was about 99 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,
excluding the effect on interest expense of marking the swaps to market.
63
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 environmental condition caused by past operations 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 consolidated financial statements.
As of December 31, 2007, we are designated as a potentially responsible
party in one Superfund site. Including the Superfund site, we may have the
obligation to remediate current or former facilities, and we estimate our share
of environmental remediation costs at these facilities to be approximately $11
million. For the Superfund site and the current and former facilities, we have
established reserves that we believe are adequate for these costs. Although we
believe our estimates of remediation costs are reasonable and are based on the
latest available information, the cleanup costs are estimates and are subject to
revision as more information becomes available about the extent of remediation
required. At some sites, we expect that other parties will contribute to the
remediation costs. In addition, at the Superfund site, the Comprehensive
Environmental Response, Compensation and Liability Act provides that our
liability could be joint and several, meaning that we could be required to pay
in excess of our share of remediation costs. Our understanding of the financial
strength of other potentially responsible parties at the Superfund site, and of
other liable parties at our current and former facilities, has been considered,
where appropriate, in our determination of our estimated liability. We believe
that any potential costs associated with our current status as a potentially
responsible party in the Superfund site, or as a liable party at our current or
former facilities, will not be material to our results of operations or
consolidated financial position.
We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, and other product liability related matters), taxes,
employment matters, and commercial or contractual disputes, sometimes related to
acquisitions or divestitures. We vigorously defend ourselves against all of
these claims. In future periods, we could be subjected to cash costs or non-cash
charges to earnings if any of these matters is resolved on unfavorable terms.
However, although the ultimate outcome of any legal matter cannot be predicted
with certainty, based on current information, including our assessment of the
merits of the particular claim, we do not expect that these legal proceedings or
claims will have any material adverse impact on our future consolidated
financial position or results of operations.
In addition, we are subject to a number of lawsuits initiated by a
significant number of claimants alleging health problems as a result of exposure
to asbestos. A small percentage of claims have been asserted by railroad workers
alleging exposure to asbestos products in railroad cars manufactured by the
Pullman Company, one of our subsidiaries. Nearly all of the claims are related
to alleged exposure to asbestos in our automotive emission control products.
Only a small percentage of these claimants allege that they were automobile
mechanics and a significant number appear to involve workers in other industries
or otherwise do not include sufficient information to determine whether there is
any basis for a claim against us. We believe, based on scientific and other
evidence, it is unlikely that mechanics were exposed to asbestos by our former
muffler products and that, in any event, they would not be at increased risk of
asbestos-related disease based
64
on their work with these products. Further, many of these cases involve numerous
defendants, with the number of each in some cases exceeding 200 defendants from
a variety of industries. Additionally, the plaintiffs either do not specify any,
or specify the jurisdictional minimum, dollar amount for damages. As major
asbestos manufacturers continue to go out of business or file for bankruptcy, we
may experience an increased number of these claims. We vigorously defend
ourselves against these claims as part of our ordinary course of business. In
future periods, we could be subject to cash costs or non-cash charges to
earnings if any of these matters is resolved unfavorably to us. To date, with
respect to claims that have proceeded sufficiently through the judicial process,
we have regularly achieved favorable resolution. Accordingly, we presently
believe that these asbestos-related claims will not have a material adverse
impact on our future financial condition or results of operations.
EMPLOYEE STOCK OWNERSHIP PLANS
We have established Employee Stock Ownership Plans for the benefit of our
employees. Under the plans, subject to limitations in the Internal Revenue Code,
participants may elect to defer up to 75 percent of their salary through
contributions to the plan, which are invested in selected mutual funds or used
to buy our common stock. We currently match in cash 50 percent of each
employee's contribution up to eight percent of the employee's salary. In
connection with freezing the defined benefit pension plans for nearly all U.S.
based salaried and hourly employees effective December 31, 2006, and the related
replacement of those defined benefit plans with defined contribution plans, we
are making additional contributions to the Employee Stock Ownership Plans. We
recorded expense for these matching and defined benefit replacement
contributions of approximately $17 million for December 31, 2007 and $7 million
for each of the years ended December 31, 2006 and 2005. Matching contributions
vest immediately. Defined benefit replacement contributions fully vest on the
employee's third anniversary of employment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The section entitled "Derivative Financial Instruments" in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
65
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES
PAGE
----
Management's Report on Internal Control Over Financial Reporting........ 67
Reports of Independent Registered Public Accounting Firm................ 69
Statements of income (loss) for each of the three years in the period
ended December 31, 2007............................................... 72
Balance sheets -- December 31, 2007 and 2006............................ 73
Statements of cash flows for each of the three years in the period ended
December 31, 2007..................................................... 74
Statements of changes in shareholders' equity for each of the three
years in the period ended December 31, 2007........................... 75
Statements of comprehensive income (loss) for each of the three years in
the period ended December 31, 2007.................................... 76
Notes to financial statements........................................... 77
Schedule II -- Valuation and Qualifying Accounts........................ 128
66
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Tenneco Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934). Management's internal
control system is designed to provide reasonable assurance regarding the
preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error or circumvention or
overriding of controls. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation and may not prevent or detect misstatements in
financial reporting. Further, due to changing conditions and adherence to
established policies and controls, internal control effectiveness may vary over
time.
Management assessed the company's effectiveness of internal controls over
financial reporting. In making this assessment, it used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO")
in Internal Control-Integrated Framework.
Based on our assessment we believe that the company's internal control over
financial reporting was not effective as a result of the material weakness
related to accounting for income taxes as of December 31, 2007.
A material weakness is a deficiency, or combination of control
deficiencies, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis. Accounting for income taxes was identified as a
material weakness as of December 31, 2006. In response to this material
weakness, we took substantial actions to strengthen our controls and processes.
Despite our efforts, as of December 31, 2007, we believe additional controls are
needed related to the oversight and review of tax coordination, documentation
and reporting. We did not maintain effective controls over the monitoring of
specific balance sheet accounts relating to obligations under a tax sharing
agreement with a former subsidiary, the foreign currency valuation of foreign
affiliate transactions which are subject to changes in exchange rates, and the
accuracy and completeness of the tax components of a foreign affiliate.
This control deficiency resulted in audit adjustments to the tax accounts
for our financial statements as of December 31, 2007, as our internal controls
did not operate effectively to detect errors that were or could have been,
individually or in the aggregate, material.
Our internal control over financial reporting as of December 31, 2007 has
been audited by Deloitte & Touche LLP, our independent registered public
accounting firm, as stated in their report, which is included herein.
February 29, 2008
67
REMEDIATION PLANS FOR A MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
To address the 2006 material weakness related to accounting for income
taxes, we took the following actions to strengthen our internal controls over
accounting for income taxes including:
- With the assistance of an outside professional service provider, during
the fourth quarter of 2006 we implemented procedures to more effectively
and accurately accumulate detailed support for approximately 70 foreign
tax basis balance sheets and related processes to quantify deferred tax
balances.
- We changed the tax provision reporting processes (including U.S. federal
and state tax provision processes) to improve visibility, timeliness and
accuracy, as well as technical support and documentation standards.
- We reorganized functional responsibilities in the tax department to
better control and manage the income tax data that is collected and
enhance our current process for completing the provision and performing
analysis.
Despite our efforts, as of December 31, 2007, we encountered errors
relating to obligations under a tax sharing agreement with a former subsidiary,
the foreign currency valuation of foreign affiliate transactions which are
subject to changes in exchange rates, and the accuracy and completeness of the
tax components of a foreign affiliate. In addition, we believe additional
controls are needed related to the oversight and review of tax coordination,
documentation and reporting. As a result of these internal control deficiencies,
there is a reasonable possibility that a material misstatement of the our annual
and interim income tax provision and tax account balances will not be prevented
or detected on a timely basis. Consequently, we concluded that we did not
maintain effective controls over the monitoring of income tax accounts. To
address the current material weakness in accounting for income taxes, we will
undertake the following actions:
1. We will require that all income tax entries approved for recording at
the consolidated level include supporting documentation which will be provided
to the local finance personnel with instructions for recording the transactions
on the local ledgers.
2. We will formalize a process for documenting decisions and journal
entries made based upon the review of tax packages or any other supporting
information provided.
3. Based on review of each entity's quarterly balance sheet and income tax
provision reconciliation, we will identify variances requiring additional
balance sheet and income tax provision reconciliations. The tax department will
institute a process whereby a member of the tax department will work with the
location to review the tax accounting if an analysis of the balance sheet and
income tax provision reconciliation identifies multiple and/or significant tax
reporting variances requiring further analysis and training.
4. We will accelerate year end tax analysis and reporting activities to
periods earlier in the year in order to provide additional analysis and
reconciliation time.
We are in the process of developing additional remediation plans which will
be implemented to address the material weakness in internal controls in
accounting for income taxes. Although the remediation plans include accelerating
the occurrence of many of the controls to earlier in the year, many of the
controls and procedures will only be executed annually during the year-end
closing process. Our assessment of the remediation will remain open until that
time.
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tenneco Inc.
We have audited the internal control over financial reporting of Tenneco
Inc. and subsidiaries (the "Company") as of December 31, 2007, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. The Company's management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management Report on Internal
Controls Over Financial Reporting. Our responsibility is to express an opinion
on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely basis. The
following material weakness has been identified and included in management's
assessment: accounting for income taxes. Specifically, the Company did not
maintain effective controls over the monitoring of specific balance sheet
accounts relating to obligations under a tax sharing agreement with a former
subsidiary, the foreign currency valuation of foreign affiliate transactions
which are subject to changes in exchange rates, and the accuracy and
completeness of the tax components of a foreign affiliate. In addition,
additional controls are needed related to the oversight and review of tax
coordination, documentation and reporting. This material weakness was considered
in determining the nature, timing, and extent of audit tests applied in our
audit of the consolidated balance sheet of the Company as of December 31, 2007
and the related consolidated statements of income (loss), cash flows, changes in
shareholders' equity and comprehensive income (loss) and financial statement
schedule for the year ended December 31, 2007, of the Company and this report
does not affect our report on such financial statements and financial statement
schedule.
69
In our opinion, because of the effect of the material weakness identified
above on the achievement of the objectives of the control criteria, the Company
has not maintained effective internal control over financial reporting as of
December 31, 2007, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of the Company as of December 31, 2007 and the related consolidated
statements of income (loss), cash flows, changes in shareholders' equity and
comprehensive income (loss) and financial statement schedule for the year ended
December 31, 2007, and our report dated February 29, 2008 expressed an
unqualified opinion on those financial statements and financial statement
schedule and included an explanatory paragraph regarding the Company's adoption
of the measurement date provisions of Statement of Financial Accounting
Standards ("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans -- an amendment of FASB Statements No. 87, 88,
106, and 132(R)" as of January 1, 2007.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 29, 2008
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tenneco Inc.
We have audited the accompanying consolidated balance sheets of Tenneco Inc
and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the
related consolidated statements of income (loss), cash flows, changes in
shareholders' equity, and comprehensive income (loss) for each of the three
years in the period ended December 31, 2007. Our audits also included the
financial statement schedule listed in the Index at Item 8. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 10, effective January 1, 2007, the Company adopted the
measurement date provisions of Statement of Financial Accounting Standards
("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans -- an amendment of FASB Statements No. 87, 88, 106, and
132(R)."
As described in Note 8 to the consolidated financial statements, on January
1, 2006 , the Company adopted Statement of Financial Accounting Standards No.
123(R), "Share-Based Payment" and as discussed in Note 1 to the consolidated
financial statements, on December 31, 2006, the Company adopted the recognition
and disclosure provisions of Statement of Financial Accounting Standards No.
158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans -- an amendment of FASB Statements No. 87, 88, 106 and 132(R)."
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiaries as
of December 31, 2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2007, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Company's internal
control over financial reporting as of December 31, 2007, based on the criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
February 29, 2008 expressed an adverse opinion on the effectiveness of the
Company's internal control over financial reporting because of a material
weakness.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 29, 2008
71
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME (LOSS)
YEAR ENDED DECEMBER 31,
---------------------------------------
2007 2006 2005
----------- ----------- -----------
(MILLIONS EXCEPT SHARE AND PER SHARE
AMOUNTS)
REVENUES
Net sales and operating revenues.............. $ 6,184 $ 4,682 $ 4,440
----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation and
amortization shown below).................. 5,210 3,836 3,578
Engineering, research, and development........ 114 88 83
Selling, general, and administrative.......... 399 373 384
Depreciation and amortization of intangibles.. 205 184 177
----------- ----------- -----------
5,928 4,481 4,222
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Loss on sale of receivables................... (10) (9) (6)
Other income.................................. 6 4 5
----------- ----------- -----------
(4) (5) (1)
----------- ----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES,
AND MINORITY INTEREST......................... 252 196 217
Interest expense (net of interest capitalized
of $6 million, $6 million and $3 million,
respectively).............................. 164 136 133
Income tax expense............................ 83 5 26
Minority interest............................. 10 6 2
----------- ----------- -----------
NET INCOME (LOSS)............................... $ (5) $ 49 $ 56
=========== =========== ===========
EARNINGS (LOSS) PER SHARE
Average shares of common stock outstanding --
Basic...................................... 45,809,730 44,625,220 43,088,558
Diluted.................................... 45,809,730 46,755,573 45,321,225
Basic earnings (loss) per share of common
stock -- ..................................... $ (0.11) $ 1.11 $ 1.30
Diluted earnings (loss) per share of common
stock -- ..................................... $ (0.11) $ 1.05 $ 1.24
The accompanying notes to consolidated financial statements are an integral
part of these statements of income (loss).
72
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
DECEMBER 31,
-----------------
2007 2006
------- -------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 188 $ 202
Receivables --
Customer notes and accounts, net.......................... 732 578
Other..................................................... 25 17
Inventories.................................................. 539 441
Deferred income taxes........................................ 36 51
Prepayments and other........................................ 121 126
------- -------
1,641 1,415
------- -------
Other assets:
Long-term notes receivable, net.............................. 19 26
Goodwill..................................................... 208 203
Intangibles, net............................................. 26 8
Deferred income taxes........................................ 370 397
Other........................................................ 141 132
------- -------
764 766
------- -------
Plant, property, and equipment, at cost........................ 2,978 2,643
Less -- Accumulated depreciation and amortization............ (1,793) (1,550)
------- -------
1,185 1,093
------- -------
$ 3,590 $ 3,274
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term
debt)..................................................... $ 46 $ 28
Trade payables............................................... 987 781
Accrued taxes................................................ 41 49
Accrued interest............................................. 22 33
Accrued liabilities.......................................... 213 194
Other........................................................ 49 34
------- -------
1,358 1,119
------- -------
Long-term debt................................................. 1,328 1,357
------- -------
Deferred income taxes.......................................... 114 107
------- -------
Postretirement benefits........................................ 288 350
------- -------
Deferred credits and other liabilities......................... 71 87
------- -------
Commitments and contingencies Minority interest................ 31 28
------- -------
Shareholders' equity:
Common stock................................................. -- --
Premium on common stock and other capital surplus............ 2,800 2,790
Accumulated other comprehensive loss......................... (73) (252)
Retained earnings (accumulated deficit)...................... (2,087) (2,072)
------- -------
640 466
Less -- Shares held as treasury stock, at cost............... 240 240
------- -------
400 226
------- -------
$ 3,590 $ 3,274
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
73
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER
31,
---------------------
2007 2006 2005
----- ----- -----
(MILLIONS)
OPERATING ACTIVITIES
Net income (loss).......................................... $ (5) $ 49 $ 56
Adjustments to reconcile net income (loss) to cash provided
by operating activities --
Depreciation and amortization of other intangibles....... 205 184 177
Stock-based compensation................................. 9 7 3
Deferred income taxes.................................... 25 (41) 1
Loss on sale of assets................................... 8 3 3
Changes in components of working capital (net of
acquisition) --
(Increase) decrease in receivables.................... (117) (24) (86)
(Increase) decrease in inventories.................... (66) (57) 6
(Increase) decrease in prepayments and other current
assets.............................................. 15 (25) 4
Increase (decrease) in payables....................... 123 92 (9)
Increase (decrease) in accrued taxes.................. (25) 15 13
Increase (decrease) in accrued interest............... (10) 2 4
Increase (decrease) in other current liabilities...... 24 3 (27)
Other.................................................... (21) (5) (22)
----- ----- -----
Net cash provided by operating activities.................. 165 203 123
----- ----- -----
INVESTING ACTIVITIES
Proceeds from sale of assets............................... 10 17 4
Cash payments for plant, property, and equipment........... (177) (177) (140)
Cash payments for software related intangible assets....... (19) (13) (14)
Cash payment for net assets purchased...................... (16) -- --
Acquisition of businesses (net of cash acquired)........... -- -- (14)
Investments and other...................................... -- 1 --
----- ----- -----
Net cash used by investing activities...................... (202) (172) (164)
----- ----- -----
FINANCING ACTIVITIES
Issuance of common shares.................................. 8 17 7
Issuance of long-term debt................................. 400 -- 1
Debt issuance costs on long-term debt...................... (11) -- --
Retirement of long-term debt............................... (591) (4) (45)
Net increase (decrease) in revolver borrowings and short-
term debt excluding current maturities of long-term
debt..................................................... 183 3 9
Distribution to minority interest partners................. (6) (4) --
----- ----- -----
Net cash provided (used) by financing activities........... (17) 12 (28)
----- ----- -----
Effect of foreign exchange rate changes on cash and cash
equivalents.............................................. 40 18 (4)
----- ----- -----
Increase (decrease) in cash and cash equivalents........... (14) 61 (73)
Cash and cash equivalents, January 1....................... 202 141 214
----- ----- -----
Cash and cash equivalents, December 31 (Note).............. $ 188 $ 202 $ 141
===== ===== =====
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest..................... $ 177 $ 137 $ 126
Cash paid during the year for income taxes (net of
refunds)................................................. $ 60 $ 26 $ 23
NON-CASH INVESTING AND FINANCING ACTIVITIES
Retirement of obligation and exchange of property.......... $ -- $ -- $ (2)
Period ended balance of payables for plant, property, and
equipment................................................ $ 40 $ 18 $ 25
----------
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 consolidated financial statements are an integral
part of these statements of cash flows.
74
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2007 2006 2005
------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- ------- ---------- -------
(MILLIONS EXCEPT SHARE AMOUNTS)
COMMON STOCK
Balance January 1.................. 47,085,274 $ -- 45,544,668 $ -- 44,275,594 $ --
Issued (Reacquired) pursuant to
benefit plans................. 209,558 -- (104,240) -- 283,797 --
Stock options exercised.......... 597,700 -- 1,644,846 -- 985,277 --
---------- ------- ---------- ------- ---------- -------
Balance December 31................ 47,892,532 -- 47,085,274 -- 45,544,668 --
========== ======= ========== ======= ========== =======
PREMIUM ON COMMON STOCK AND OTHER
CAPITAL SURPLUS
Balance January 1.................. 2,790 2,776 2,765
Premium on common stock issued
pursuant to benefit plans..... 10 14 11
------- ------- -------
Balance December 31................ 2,800 2,790 2,776
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE
LOSS
Balance January 1.................. (252) (281) (184)
Adoption of Statement of
Financial Accounting Standard
(SFAS) No. 158, net of tax.... -- (59) --
Other comprehensive income
(loss)........................ 179 88 (97)
------- ------- -------
Balance December 31................ (73) (252) (281)
------- ------- -------
RETAINED EARNINGS (ACCUMULATED
DEFICIT)
Balance January 1.................. (2,072) (2,118) (2,171)
Net income (loss)................ (5) 49 56
Measurement date implementation
of SFAS No. 158, net of tax... (8) -- --
Other............................ (2) (3) (3)
------- ------- -------
Balance December 31................ (2,087) (2,072) (2,118)
------- ------- -------
LESS -- COMMON STOCK HELD AS
TREASURY STOCK, AT COST
Balance January 1 and December 31.. 1,294,692 240 1,294,692 240 1,294,692 240
========== ------- ========== ------- ========== -------
Total............................ $ 400 $ 226 $ 137
======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements of changes in shareholders' equity.
75
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
2007 2006 2005
------------------------------ ---------------------------- ----------------------------
ACCUMULATED ACCUMULATED ACCUMULATED
OTHER OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME INCOME INCOME
(LOSS) (LOSS) (LOSS) (LOSS) (LOSS) (LOSS)
------------- ------------- ------------- ------------- ------------- -------------
(MILLIONS)
NET INCOME (LOSS)........... $ (5) $ 49 $ 56
---- ---- ----
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
CUMULATIVE TRANSLATION
ADJUSTMENT
Balance January 1......... $ (53) $(149) $ (62)
Translation of foreign
currency statements.. 138 138 96 96 (87) (87)
----- ----- -----
Balance December 31....... 85 (53) (149)
----- ----- -----
ADDITIONAL LIABILITY FOR
PENSION BENEFITS
Balance January 1......... (199) (132) (122)
Additional liability
for pension
benefits............. 27 27 (5) (5) (16) (16)
Measurement date
implementation of
SFAS No. 158, net of
tax.................. 14 14 -- -- -- --
Income tax benefit..... -- -- -- -- 6 6
Deferred tax valuation
allowance
adjustment........... -- -- (3) (3) -- --
----- ----- -----
Balance December 31....... (158) (140) (132)
----- ----- -----
ADOPTION OF SFAS NO. 158,
NET OF TAX............. -- -- (59) -- -- --
----- ----- -----
Balance December 31......... $ (73) $(252) $(281)
===== ---- ===== ---- ===== ----
Other comprehensive income
(loss).................... 179 88 (97)
---- ---- ----
COMPREHENSIVE INCOME
(LOSS).................... $174 $137 $(41)
==== ==== ====
The accompanying notes to consolidated financial statements are an integral part
of these
statements of comprehensive income (loss).
76
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Consolidation and Presentation
Our consolidated financial statements include all majority-owned
subsidiaries. We carry investments in 20 percent to 50 percent owned companies
as an equity method investment, at cost plus equity in undistributed earnings
since the date of acquisition and cumulative translation adjustments. We have
eliminated all significant intercompany transactions.
Sales of Accounts Receivable
We entered into an agreement to sell an interest in some of our U.S. trade
accounts receivable to a third party. Receivables become eligible for the
program on a daily basis, at which time the receivables are sold to the third
party, net of a factoring discount, through a wholly-owned subsidiary. Under
this agreement, as well as individual agreements with third parties in Europe,
we sell accounts receivable throughout the year. As of December 31, 2007, 2006,
and 2005, we have sold accounts receivables of $157 million, $133 million and
$129 million, respectively. We recognized losses of approximately $10 million,
$9 million and $6 million during 2007, 2006, and 2005, respectively, on these
sales of trade accounts receivable, representing the discount from book values
at which these receivables were sold to the third party. The discount rate
varies based on funding cost incurred by the third party, and it averaged six
percent during 2007. We retained ownership of the remaining interest in the pool
of receivables not sold to the third party. The retained interest represents a
credit enhancement for the program. We value the retained interest based upon
the amount we expect to collect from our customers, which approximates book
value.
Inventories
At December 31, 2007 and 2006, inventory by major classification was as
follows:
2007 2006
---- ----
(MILLIONS)
Finished goods.............................................. $212 $193
Work in process............................................. 175 90
Raw materials............................................... 111 122
Materials and supplies...................................... 41 36
---- ----
$539 $441
==== ====
Our inventories are stated at the lower of cost or market value using the
first-in, first-out ("FIFO") or average cost methods.
Goodwill and Intangibles, net
As required by Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," each year in the fourth quarter, or
more frequently if events indicate it is warranted, we compare the estimated
fair value of our reporting units with goodwill to the carrying value of the
unit's assets and liabilities to determine if impairment exists within the
recorded 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 the reporting unit which is
less than its book value, a goodwill impairment charge would be recorded in the
operating results of the impaired reporting unit. We also evaluate the carrying
value of our intangible assets with indefinite lives by comparing it to their
estimated fair value. If the carrying value exceeds the estimated fair value, we
would record an impairment charge.
77
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The changes in the net carrying amount of goodwill for the twelve months
ended December 31, 2007, are as follows:
EUROPE,
NORTH SOUTH AMERICA ASIA
AMERICA AND INDIA PACIFIC TOTAL
------- ------------- ------- -----
(MILLIONS)
Balance at December 31, 2006............... $138 $56 $ 9 $203
Translation adjustments.................... -- 4 1 5
---- --- --- ----
Balance at December 31, 2007............... $138 $60 $10 $208
==== === === ====
We have capitalized certain intangible assets, primarily trademarks and
patents, based on their estimated fair value at the date we acquired them. We
amortize these intangible assets on a straight-line basis over periods ranging
from five to 30 years. Amortization of intangibles amounted to $1 million in
2007, and less than $1 million in 2006 and 2005, and is included in the
statements of income caption "Depreciation and amortization of other
intangibles." The carrying amount and accumulated amortization are as follows:
DECEMBER 31, 2007 DECEMBER 31, 2006
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
VALUE AMORTIZATION VALUE AMORTIZATION
-------------- ------------ -------------- ------------
(MILLIONS) (MILLIONS)
Amortized Intangible Assets
Customer contract............. $ 8 $(1) $ 6 $--
Patents....................... 3 (2) 3 (2)
Noncompete covenants.......... -- -- -- --
Trademarks.................... -- -- 1 (1)
Technology rights & capital
subsidies.................. 20 (2) 2 (1)
--- --- --- ---
Total......................... $31 $(5) $12 $(4)
=== === === ===
Estimated amortization of intangible assets over the next five years is
expected to be $2 million each year. During 2007, we spent $16 million to
acquire Combustion Components Associates' ELIM-NOx(TM) technology which we will
begin to amortize in 2008.
Plant, Property, and Equipment, at Cost
At December 31, 2007 and 2006, plant, property, and equipment, at cost, by
major category were as follows:
2007 2006
------ ------
(MILLIONS)
Land, buildings, and improvements......................... $ 496 $ 432
Machinery and equipment................................... 2,288 2,027
Other, including construction in progress................. 194 184
------ ------
$2,978 $2,643
====== ======
We depreciate these properties excluding land on a straight-line basis over
the estimated useful lives of the assets. Useful lives range from 10 to 50 years
for buildings and improvements and from three to 25 years for machinery and
equipment.
78
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Notes and Accounts Receivable and Allowance for Doubtful Accounts
Short and long-term notes receivable outstanding were $23 million and $29
million at December 31, 2007 and 2006, respectively. The allowance for doubtful
accounts on short-term and long-term notes receivable was $3 million at December
31, 2007, and $3 million at December 31, 2006.
At December 31, 2007 and 2006, the allowance for doubtful accounts on
short-term and long-term accounts receivable was $22 million and $20 million,
respectively.
Pre-production Design and Development and Tooling Assets
We expense pre-production design and development costs as incurred unless
we have a contractual guarantee for reimbursement from the original equipment
customer. We had long-term receivables of $20 million and $22 million on the
balance sheet at December 31, 2007 and 2006, respectively, for guaranteed pre-
production design and development reimbursement arrangements with our customers.
In addition, plant, property and equipment includes $62 million and $63 million
at December 31, 2007 and 2006, respectively, for original equipment tools and
dies that we own, and prepayments and other includes $33 million and $38 million
at December 31, 2007 and 2006, respectively, for in-process tools and dies that
we are building for our original equipment customers.
Internal Use Software Assets
We capitalize certain costs related to the purchase and development of
software that we use in our business operations. We amortize the costs
attributable to these software systems over their estimated useful lives,
ranging from three to 12 years, based on various factors such as the effects of
obsolescence, technology, and other economic factors. Capitalized software
development costs, net of amortization, were $86 million and $81 million at
December 31, 2007 and 2006, respectively, and are recorded in other long-term
assets. Amortization of software development costs was approximately $21
million, $17 million and $16 million for the years ended December 31, 2007, 2006
and 2005, respectively, and is included in the statements of income caption
"Depreciation and Amortization of other intangibles." Additions to capitalized
software development costs, including payroll and payroll-related costs for
those employees directly associated with developing and obtaining the internal
use software, are classified as investing activities in the statements of cash
flows.
Income Taxes
We have a U.S. Federal tax net operating loss carryforward ("NOL") at
December 31, 2007, of $518 million, which will expire in varying amounts from
2020 to 2027. The federal tax effect of that NOL is recorded as a deferred tax
asset on our balance sheet for $181 million and $209 million at December 31,
2007 and 2006, respectively. We also have state NOL carryforwards at December
31, 2007 of $767 million, which will expire in various years through 2027. The
tax effect of the state NOL, net of a valuation allowance, is recorded as a
deferred tax asset on our balance sheet for $40 million and $29 million at
December 31, 2007 and 2006, respectively. 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.
79
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and diesel particulate filters or components thereof including
precious metals ("substrates") on behalf of our customers which are used in the
assembled system. These substrates are included in our inventory and "passed
through" to the customer at our cost, plus a small margin, since we take title
to the inventory and are responsible for both the delivery and quality of the
finished product. Revenues recognized for substrate sales were $1,673 million,
$927 million and $681 million in 2007, 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. Certain taxes assessed by governmental
authorities on revenue producing transactions, such as value added taxes, are
excluded from revenue and recorded on a net basis. Shipping and handling costs
billed to customers are included in revenues and the related costs are included
in cost of sales in our Statements of Income (Loss).
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
consolidated financial statements.
Earnings Per Share
We compute basic earnings per share by dividing income available to common
shareholders by the weighted-average number of common shares outstanding. The
computation of diluted earnings per share is similar to the computation of basic
earnings per share, except that we adjust the weighted-average number of shares
outstanding to include estimates of additional shares that would be issued if
potentially dilutive common shares had been issued. In addition, we adjust
income available to common shareholders to include any changes in income or loss
that would result from the assumed issuance of the dilutive common shares. Due
to the net loss for the year ended December 31, 2007, the calculation of diluted
earnings per share does not include the dilutive effect from shares of
restricted stock and stock options. See Note 8 to the consolidated financial
statements of Tenneco Inc. and Consolidated Subsidiaries.
Engineering, Research and Development
We expense engineering, research, and development costs as they are
incurred. Engineering, research and development expenses were $114 million for
2007, $88 million for 2006 and $83 million for 2005, net of reimbursements from
our customers. Of these amounts, $18 million in 2007, $13 million in 2006 and
$11 million in 2005 relate to research and development, which includes the
research, design, and development of a new unproven product or process.
Additionally, $59 million, $45 million and $47 million of engineering, research,
and development expense for 2007, 2006, and 2005, respectively, relates to
improvements and enhancements to existing products and processes. The remainder
of the expenses in each year relate to engineering costs we incurred for
application of existing products and processes to vehicle platforms. Further,
our customers reimburse us for engineering, research, and development costs on
some platforms when we prepare prototypes and incur costs before platform
awards. Our engineering research and development expense for 2007, 2006, and
2005 has been reduced by $72 million, $61 million and $51 million, respectively,
for these reimbursements.
80
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation
We translate the consolidated financial statements of foreign subsidiaries
into U.S. dollars using the exchange rate at each balance sheet date for assets
and liabilities and a weighted-average exchange rate for revenues and expenses
in each period. We record translation adjustments for those subsidiaries whose
local currency is their functional currency as a component of accumulated other
comprehensive loss in shareholders' equity. We recognize transaction gains and
losses arising from fluctuations in currency exchange rates on transactions
denominated in currencies other than the functional currency in earnings as
incurred, except for those transactions which hedge purchase commitments and for
those intercompany balances which are designated as long-term investments. Net
income included foreign currency transaction gains of $15 million in 2007 and
losses of $8 million and $5 million in 2006 and 2005, respectively.
Risk Management Activities
We use derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
our exposure to changes in foreign currency exchange rates, and interest rate
swaps to manage our exposure to changes in interest rates. Our primary exposure
to changes in foreign currency rates results from intercompany loans made
between affiliates to minimize the need for borrowings from third parties. Net
gains or losses on these foreign currency exchange contracts that are designated
as hedges are recognized in the income statement to offset the foreign currency
gain or loss on the underlying transaction. From time to time we may enter into
foreign currency forward purchase and sale contracts to mitigate our exposure to
changes in exchange rates on some intercompany and third party trade receivables
and payables. Since these anticipated transactions are not firm commitments, we
mark these forward contracts to market each period and record any gain or loss
in the income statement. We recognize the after-tax net gains or losses on these
contracts on the accrual basis in the balance sheet caption "Accumulated other
comprehensive loss." In the statement of cash flows, cash receipts or payments
related to these exchange contracts are classified consistent with the cash
flows from the transaction being hedged.
We do not enter into derivative financial instruments for speculative
purposes.
Changes in Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) 140-3, "Accounting for Transfers of Financial Assets
and Repurchase Financing Transactions". FSP 140-3 provides guidance on
accounting for a transfer of a financial asset and a repurchase financing which
is a repurchase agreement that relates to a previously transferred financial
asset between the same counterparties that is entered into contemporaneously
with, or in contemplation of, the initial transfer. FSP 140-3 is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. We are evaluating FSP 140-3 to
determine the effect on our financial statements and related disclosures.
In February 2008, the FASB issued FSP 157-1, "Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement Under Statement 13". FSP 157-1 provides a scope exception to SFAS
No. 157 which does not apply under Statement 13 and other accounting
pronouncements that address fair value measurements for purposes of lease
classification or measurement under Statement 13. FSP 157-1 is effective upon
the initial adoption of SFAS No. 157. We do not expect the adoption of FSP 157-1
to have a material impact to our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" (SFAS No. 141(R)). SFAS No. 141(R) requires an acquirer to
recognize the assets acquired, the liabilities assumed, contractual
contingencies and any noncontrolling interest in the acquiree at the acquisition
date at their fair
81
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
values as of that date. SFAS No. 141(R) provides guidance on the accounting for
acquisition-related costs, restructuring costs related to the acquisition and
the measurement of goodwill and a bargain purchase. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after December 15, 2008. We do not expect the adoption of this statement to have
a material impact to our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements-an amendment of ARB No. 51." SFAS No. 160
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling (minority) interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarified that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements, establishes a single method of
accounting for changes in a parent's ownership interest in a subsidiary that
does not result in deconsolidation and provides for expanded disclosure in the
consolidated financial statements relating to the interests of the parent's
owners and the interests of the noncontrolling owners of the subsidary. SFAS No.
160 applies prospectively (except for the presentation and disclosure
requirements) for fiscal years and interim periods within those fiscal years
beginning on or after December 15, 2008. The presentation and disclosure
requirements will be applied retrospectively for all periods presented. We are
evaluating this statement to determine the effect on our financial statements
and related disclosures.
In December 2007, the Securities and Exchange Commission issued Staff
Accounting Bulleting No. 110 (SAB 110). SAB 110 amends and replaces Question 6
of Section D.2 Topic 14, "Share-Based Payment." Question 6 of Topic 14:D.2 (as
amended) expresses the views of the staff regarding the use of a "simplified"
method in developing an estimate of the expected term of "plain vanilla" share
options in accordance with SFAS No. 123 (revised 2004), "Share-Based Payment"
(SFAS No. 123(R)). SAB 110 is effective January 1, 2008. The adoption of SAB 110
will have no impact to our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement."
This statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. In February 2008,
the FASB issued FSP 157-2, "Effective Date of FASB Statement No. 157," which
delays the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. We do not
expect the adoption of this statement to have a material impact to our
consolidated financial statements.
In June 2007, the Emerging Issues Task Force (EITF) issued EITF 06-11,
"Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards."
EITF 06-11 provides the final consensus on the application of paragraphs 62 and
63 of SFAS No. 123(R) on the accounting for income tax benefits relating to the
payment of dividends on equity-classified employee share-based payment awards
that are charged to retained earnings. EITF 06-11 affirms that the realized
income tax benefit from dividends or dividend equivalents that are charged to
retained earnings for equity classified nonvested equity shares, nonvested
equity share units, and outstanding equity share options should be recognized as
an increase in additional paid-in-capital. Additionally, EITF 06-11 provides
guidance on the amount of tax benefits from dividends that are reclassified from
additional paid-in-capital to the income statement when an entity's estimate of
forfeitures changes. EITF 06-11 is effective prospectively to the income tax
benefits that result from dividends on equity-classified employee share-based
payment awards that are declared in fiscal years beginning after December 15,
2007. We do not expect the adoption of EITF 06-11 to have a material impact on
our consolidated financial statements.
In June 2007, the EITF issued EITF 07-3, "Accounting for Nonrefundable
Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities." EITF 07-3 requires the deferral and capitalization of
nonrefundable advance payments for goods or services that an entity will use in
research and development activities pursuant to an executory contractual
agreement. Expenditures which are capitalized
82
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under EITF 07-3 should be expensed as the goods are delivered or the related
services are performed. EITF 07-3 is effective prospectively for fiscal years
beginning after December 15, 2007 and interim periods within those fiscal years.
EITF 07-3 is applicable to new contracts entered into after the effective date
of this Issue. We do not expect the adoption of EITF 07-3 to have a material
impact on our consolidated financial statements.
In May 2007, the FASB issued Interpretation No. 48-1, "Definition of
Settlement in FASB Interpretation No. 48" (FIN 48-1). FIN 48-1 is effective for
fiscal years beginning after December 15, 2006 and provides guidance on how a
reporting entity should determine when a tax position is effectively settled. We
began applying FIN 48-1 in the second quarter. The adoption of FIN 48-1 did not
have a material impact to our consolidated financial statements and related
disclosures. See Note 7 to the consolidated financial statements of Tenneco Inc.
and Consolidated Subsidiaries included in Item 8.
In April 2007, the FASB issued Interpretation No. 39-1, "Amendment of FASB
Interpretation No. 39" (FIN 39-1). This amendment allows a reporting entity to
offset fair value amounts recognized for derivative instruments with fair value
amounts recognized for the right to reclaim or realize cash collateral.
Additionally, this amendment requires disclosure of the accounting policy on the
reporting entity's election to offset or not offset amounts for derivative
instruments. FIN 39-1 is effective for fiscal years beginning after November 15,
2007. We do not expect the adoption of FIN 39-1 to have a material impact on our
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This statement permits companies to
choose to measure at fair value many financial instruments and certain other
items that are not currently required to be measured at fair value. SFAS No. 159
is effective for financial statements issued for fiscal years beginning on or
after November 15, 2007. We do not believe the statement will have a material
effect on our consolidated financial statements and related disclosures.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)." Part of this Statement was effective as
of December 31, 2006, and requires companies that have defined benefit pension
plans and other postretirement benefit plans to recognize the funded status of
those plans on the balance sheet on a prospective basis from the effective date.
The funded status of these plans is determined as of the plans' measurement
dates and represents the difference between the amount of the obligations owed
to participants under each plan (including the effects of future salary
increases for defined benefit plans) and the fair value of each plan's assets
dedicated to paying those obligations. To record the funded status of those
plans, unrecognized prior service costs and net actuarial losses experienced by
the plans will be recorded in the Accumulated Other Comprehensive Loss section
of shareholders' equity on the balance sheet. The initial adoption as of
December 31, 2006 resulted in a reduction of Accumulated Other Comprehensive
Loss in shareholders' equity of $59 million.
In addition, SFAS No. 158 requires that companies using a measurement date
for their defined benefit pension plans and other postretirement benefit plans
other than their fiscal year end, change the measurement date effective for
fiscal years ending after December 15, 2008. Effective January 1, 2007, we
elected to early adopt the measurement date provision of SFAS No. 158. Adoption
of this part of the statement was not material to our financial position and
results of operations. See Note 10 to the consolidated financial statements of
Tenneco Inc. and Consolidated Subsidiaries included in Item 8.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of
83
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates include,
among others allowances for doubtful receivables, promotional and product
returns, pension and post-retirement benefit plans, income taxes, and
contingencies. These items are covered in more detail elsewhere in Note 1, Note
7, Note 10, and Note 12 of the consolidated financial statements of Tenneco Inc.
and Consolidated Subsidiaries. Actual results could differ from those estimates.
2. RESTRUCTURING AND OTHER CHARGES
Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by the Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. Prior to the change in accounting required for exit or disposal
activities, we recorded charges to income related to these plans for costs that
did not benefit future activities in the period in which the plans were
finalized and approved, while actions necessary to affect these restructuring
plans occurred over future periods in accordance with established plans.
Our recent restructuring activities began in the fourth quarter of 2001,
when our Board of Directors approved a restructuring plan, a project known as
Project Genesis, which was designed to lower our fixed costs, relocate capacity,
reduce our work force, improve efficiency and utilization, and better optimize
our global footprint. We have subsequently engaged in various other
restructuring projects related to Project Genesis. We incurred $27 million in
restructuring and restructuring-related costs during 2006, of which $23 million
was recorded in cost of sales and $4 million was recorded in selling, general
and administrative expense. In 2007, we incurred $25 million in restructuring
and restructuring-related costs of which $22 million was recorded in cost of
sales, $2 million of which related to a charge for asset impairments for the
plant closure in France and $3 million was recorded in selling, general and
administrative expense. At December 31, 2007, our restructuring reserve balance
was $18 million, of which, $15 million relates to our remaining obligations for
the Wissembourg, France plant closure. Since Project Genesis was initiated, we
have incurred costs of $155 million through December 31, 2007.
Under the terms of our amended and restated senior credit agreement that
took effect on March 16, 2007, we are allowed to exclude $80 million of cash
charges and expenses, before taxes, related to cost reduction initiatives
excluding any charge for asset impairments incurred after March 16, 2007 from
the calculation of the financial covenant ratios required under our senior
credit facility. As of December 31, 2007, we have excluded $23 million in
allowable charges relating to restructuring initiatives against the $80 million
available under the terms of the March 2007 amended and restated senior credit
facility.
In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will initiate actions that will
reduce our costs through implementing the most appropriate and efficient
logistics, distribution and manufacturing footprint for the future. We expect to
continue to undertake additional restructuring actions as deemed necessary,
however, there can be no assurance 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.
3. ACQUISITIONS
In September 2007, we completed the acquisition of Combustion Components
Associates' ELIM-NOx(TM) technology for $16 million. The acquisition included a
complete reactant dosing system design and associated intellectual property
including granted patents and patent applications yet to be granted for
selective catalytic reduction emission control systems that reduce emissions of
oxides of nitrogen from diesel powered vehicles. The technology can be used for
both urea and hydrocarbon injection. We have recorded the acquisition as part
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of intangible assets on our balance sheet. The final allocation of the purchase
price for the assets will be completed in the first quarter of 2008.
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.
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.
4. RESTATEMENT
Subsequent to the issuance of our consolidated financial statements for the
year ended December 31, 2006, we determined that an error existed in our
consolidated financial statements relating to our accounting for three interest
rate swaps. The error did not change the underlying economics of the transaction
and had no effect on our cash flow or liquidity.
In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two financial institutions. These agreements swapped a total of
$150 million of our fixed 10.25% senior secured notes to floating interest rate
debt at LIBOR plus an average spread of 5.68 percentage points. From the
inception of the interest rate swaps, we applied the so-called "short-cut"
method of fair value hedge accounting under Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." To qualify for the short-cut method of hedge accounting, the terms
of an interest rate swap must be an exact match, or "mirror image," of the terms
of the debt it is hedging. When these conditions are met, a company can assume
the changes in the value of the hedges and the underlying debt offset each
other. Any unrealized gains and losses in fair value of the swap agreements are
recorded as an offset to long-term debt thereby having no effect on earnings.
While we believed we had appropriately matched the terms of the swaps and
the underlying debt, differences have subsequently been identified. One
difference is between the 30-day notice period to terminate the swaps and the 30
to 60 day notice period to redeem the notes. Another difference relates to the
fact that while the debt and swaps can both be redeemed before their maturity
dates, the notes allow us to make redemptions in increments of $1,000 while the
interest rate swap agreements imply that they can only be redeemed in their full
amounts.
As a result, we determined that these transactions do not meet the
requirements for hedge accounting treatment under SFAS No. 133 and we corrected
our past accounting for the swaps as hedges. Therefore, we recorded the changes
in the fair value of the interest rate swaps as increases or decreases to
interest expense in each period since we entered into them, instead of recording
the changes in fair value as an offset to the underlying debt.
In connection with the restatement, we requested and received from the
lenders under the senior credit facility a waiver of any default or event of
default that would otherwise have arisen because our prior consolidated
financial statements could no longer be relied upon.
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other restatement adjustments
We also corrected other errors as part of this restatement that we
originally determined to be immaterial, individually and in the aggregate, to
our consolidated financial statements. In addition, we have conducted a detailed
reconciliation of our deferred income tax balances. The corrections include the
following:
Stock option expense -- We moved the fourth quarter 2006 expense
related to past administration of stock options to the periods to which the
charges relate. In certain years our administrative procedures for
determining the final allocation of the options granted to middle
management were not finalized until after the Board approved the grants and
set the exercise price. During certain years, at the time the
administrative procedures were completed, the market value of the option
was greater than the grant price. As a result, we are required to recognize
expense for the difference in price. Approximately $1 million of expense
was recorded in periods prior to 2006.
Currency gains and losses -- In the second quarter of 2005, we
recorded an expense to correct a system error in calculating realized and
unrealized currency gains and losses. We have moved this expense from the
second quarter of 2005 and recorded the expense in the periods to which it
relates. Approximately $2 million was recorded in the fourth quarter of
2004 and $1 million was recorded in the first quarter of 2005.
Deferred income taxes -- As part of our efforts to improve our
internal control environment surrounding accounting for income taxes, we
undertook a detailed reconciliation of deferred tax balances. As a result,
we recorded a net increase of approximately $16 million in our net deferred
tax assets. This tax adjustment recognized historical book to tax basis
differences identified in the reconciliation including depreciation,
property transfers and disposals, and state income taxes. A substantial
portion of the adjustment also relates to the 1999 spin-off of our former
packaging subsidiary now known as Pactiv, Inc., a 1996 acquisition and a
1994 U.K. business restructuring.
Fees on Receivables Sold -- We corrected the classification of costs
associated with our European receivables sale program. These costs were
recorded in interest expense and selling, general and administrative
expenses and should have been recorded in other income and expense. This
change reduced interest expense by $1 million in each of the years ended
December 31, 2006 and 2005 and selling, general and administrative expense
by $2 million in each of the years ended December 31, 2006 and 2005, with a
corresponding increase in other expense. This represents the discount from
book values at which these receivables were sold to the third party. This
adjustment did not impact net income.
As a result, we filed restated financial statements for the year ended
December 31, 2006 on Form 10-K/A on August 14, 2007.
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS
Long-Term Debt
A summary of our long-term debt obligations at December 31, 2007 and 2006,
is set forth in the following table:
2007 2006
------ ------
(MILLIONS)
Tenneco Inc. --
Revolver borrowings due 2012, average effective interest
rate 5.8% in 2007....................................... $ 169 $ --
Senior Term Loans due 2012, average effective interest
rate 7.2% in 2007 and 7.1% in 2006...................... 150 356
10 1/4% Senior Secured Notes due 2013, including
unamortized premium.................................. 250 488
8 5/8% Senior Subordinated Notes due 2014............... 500 500
8 1/8% Senior Notes due 2015............................ 250 --
Debentures due 2008 through 2025, average effective
interest rate 9.3% in both 2007 and 2006............. 3 3
Notes due 2007, average effective interest rate 7.5% in
both 2007 and 2006................................... -- 2
Other subsidiaries -- Notes due 2008 through 2016, average
effective interest rate 4.6% in 2007 and 4.0% in 2006... 12 14
------ ------
1,334 1,363
Less -- current maturities................................ 6 6
------ ------
Total long-term debt...................................... $1,328 $1,357
====== ======
The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 2007, are $6 million, $21 million, $54
million, $67 million, and $18 million for 2008, 2009, 2010, 2011, and 2012,
respectively.
Short-Term Debt
Our short-term debt includes the current portion of long-term obligations
and borrowing by foreign subsidiaries. Information regarding our short-term debt
as of and for the years ended December 31, 2007 and 2006 is as follows:
2007 2006
---- ----
(MILLIONS)
Current maturities on long-term debt......................... $ 6 $ 6
Notes payable................................................ 40 22
--- ---
Total short-term debt........................................ $46 $28
=== ===
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2007 2006
---------------- ----------------
NOTES PAYABLE(A) NOTES PAYABLE(A)
---------------- ----------------
(DOLLARS IN MILLIONS)
Outstanding borrowings at end of year............ $ 40 $ 22
Weighted average interest rate on outstanding
borrowings at end of year(b)................... 4.0% 3.7%
Approximate maximum month-end outstanding
borrowings during year......................... $ 40 $175
Approximate average month-end outstanding
borrowings during year......................... $ 28 $ 97
Weighted average interest rate on approximate
average month-end outstanding borrowings during
year(b)........................................ 4.5% 6.6%
--------
(a) Includes borrowings under both committed credit facilities and
uncommitted lines of credit and similar arrangements.
(b) This calculation does not include the commitment fees to be paid on the
unused revolving credit facilities balances which are recorded as
interest expense for accounting purposes.
Financing Arrangements
COMMITTED CREDIT FACILITIES(A) AS OF DECEMBER 31, 2007
-----------------------------------------------------------
LETTERS OF
TERM COMMITMENTS BORROWINGS CREDIT(B) AVAILABLE
------- ----------- ---------- ---------- ---------
(MILLIONS)
Tenneco Inc. revolving credit
agreement..................... 2012 $550 $100 $31 $419
Tenneco Inc. tranche B letter of
credit/revolving loan
agreement..................... 2014 130 69 -- 61
Subsidiaries' credit
agreements.................... Various 40 40 -- --
---- ---- --- ----
$720 $209 $31 $480
==== ==== === ====
--------
(a) We generally are required to pay commitment fees on the unused portion of
the total commitment.
(b) Letters of credit reduce the available borrowings under the tranche B
letter of credit/revolving loan agreement.
Overview and Recent Transactions. Our financing arrangements are primarily
provided by a committed senior secured financing arrangement with a syndicate of
banks and other financial institutions. The arrangement is secured by
substantially all our domestic assets and pledges of 66 percent of the stock of
certain first-tier foreign subsidiaries, as well as guarantees by our material
domestic subsidiaries.
On November 20, 2007, we issued $250 million of 8 1/8 percent Senior Notes
due November 15, 2015 through a private placement offering. The offering and
related transactions were designed to (1) reduce our interest expense and extend
the maturity of a portion of our debt (by using the proceeds of the offering to
tender for $230 million of our outstanding $475 million 10 1/4 percent senior
secured notes due 2013), (2) facilitate the realignment of the ownership
structure of some of our foreign subsidiaries and (3) otherwise amend certain of
the covenants in the indenture for the senior secured notes to be consistent
with those contained in our 8 5/8 percent senior subordinated notes, including
conforming the limitation on incurrence of indebtedness and the absence of a
limitation on issuances or transfers of restricted subsidiary stock, and make
other minor modifications.
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ownership structure realignment is designed to more effectively align
our domestic and foreign assets and revenues with expenses in the appropriate
local currencies. Some of the desired results of the realignment will be to
allow us to more rapidly use our U.S. net operating losses and reduce our cash
tax payments. At present, the ownership structure realignment involves a new
European holding company which will own some of our foreign entities. We may
alter the components of the realignment from time to time. If market conditions
permit in 2008, we may offer debt issued by the new European holding company.
The proceeds of that debt would be used to repay any outstanding intercompany
debt and, in turn, to fund the redemption of any remaining senior secured notes.
This realignment involves utilizing part of our U.S. net operating tax losses.
Consequently, we recorded a non-cash charge of $66 million in the fourth quarter
of 2007.
The offering of new notes and related repurchase of our senior secured
notes will reduce our annual interest expense by approximately $3 million for
2008 and increased our total debt outstanding to third-parties by approximately
$20 million. In connection with the offering and the related repurchase of our
senior secured notes, we also recorded non-recurring pre-tax charges related to
the tender premium and fees, the write-off of deferred debt issuance costs, and
the write-off of previously recognized issuance premium totaling $21 million in
the fourth quarter of 2007.
In March 2007, we refinanced our $831 million senior credit facility. This
transaction reduced the interest rates we pay on all portions of the facility.
While the total amount of the new senior credit facility is $830 million,
approximately the same as the previous facility, we changed the components of
the facility to enhance our financial flexibility. We increased the amount of
commitments under our revolving loan facility from $320 million to $550 million,
reduced the amount of commitments under our tranche B-1 letter of
credit/revolving loan facility from $155 million to $130 million and replaced
the $356 million term loan B with a $150 million term loan A. As of December 31,
2007, the senior credit facility consisted of a five-year, $150 million term
loan A maturing in March 2012, a five-year, $550 million revolving credit
facility maturing in March 2012, and a seven-year $130 million tranche B-1
letter of credit/revolving loan facility maturing in March 2014.
The refinancing of the prior facility allowed us to: (i) amend the
consolidated net debt to EBITDA ratio, (ii) eliminate the fixed charge coverage
ratio, (iii) eliminate the restriction on capital expenditures, (iv) increase
the amount of acquisitions permitted to $250 million, (v) improve the
flexibility to repurchase and retire higher cost junior debt, (vi) increase our
ability to enter into capital leases, (vii) increase the ability of our foreign
subsidiaries to incur debt, (viii) increase our ability to pay dividends and
repurchase common stock, (ix) increase our ability to invest in joint ventures,
(x) allow for the increase in the existing tranche B-1 facility and/or the term
loan A or the addition of a new term loan of up to $275 million in order to
reduce our 10.25 percentage senior secured notes, and (xi) make other
modifications.
Following the refinancing, the term loan A facility is payable in twelve
consecutive quarterly installments, commencing June 30, 2009 as follows: $6
million due each of June 30, September 30, December 31, 2009 and March 31, 2010,
$15 million due each of June 30, September 30, December 31, 2010 and March 31,
2011, and $17 million due each of June 30, September 30, December 31, 2011 and
March 16, 2012. The revolving credit facility requires that any amounts drawn,
be repaid by March 2012. Prior to that date, funds may be borrowed, repaid and
reborrowed under the revolving credit facility without premium or penalty.
Letters of credit may be issued under the revolving credit facility.
The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by March 2014. We can borrow revolving loans and issue letters of
credit under the $130 million tranche B-1 letter of credit/revolving loan
facility. The tranche B-1 letter of credit/revolving loan facility lenders have
deposited $130 million with the administrative agent, who has invested that
amount in time deposits. We do not have an interest in any of the funds on
deposit. When we draw revolving loans under this facility, the loans are funded
from the $130 million on deposit with the administrative agent. When we make
repayments, the repayments are redeposited with the administrative agent.
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tranche B-1 letter of credit/revolving loan facility is reflected as
debt on our balance sheet only if we borrow money under this facility or if we
use the facility to make payments for letters of credit. We will not be liable
for any losses to or misappropriation of any (i) return due to the
administrative agent's failure to achieve the return described above or to pay
all or any portion of such return to any lender under such facility or (ii)
funds on deposit in such account by such lender (other than the obligation to
repay funds released from such accounts and provided to us as revolving loans
under such facility).
Senior Credit Facility -- Interest Rates and Fees. Prior to the March 2007
refinancing, borrowings under the term loan B facility and the tranche B-1
letter of credit/revolving loan facility bore interest at an annual rate equal
to, at our option, either (i) the London Interbank Offering Rate plus a margin
of 200 basis points; or (ii) a rate consisting of the greater of the JP Morgan
Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin
of 100 basis points. As of December 31, 2007 borrowings under the term loan A
facility and the tranche B-1 letter of credit/revolving loan facility bore
interest at an annual rate equal to, at our option, either (i) the London
Interbank Offering Rate plus a margin of 150 basis points; or (ii) a rate
consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds
rate plus 50 basis points, plus a margin of 50 basis points. The interest margin
for borrowings under the term loan A are subject to adjustment based on the
consolidated net leverage ratio (consolidated indebtedness net of cash divided
by consolidated EBITDA as defined in the senior credit facility agreement). The
margin we pay on the term loan A and the tranche B-1 facility is reduced by 25
basis points following each fiscal quarter for which the consolidated net
leverage ratio is less than 2.5 beginning in March 2007, and would increase by
25 basis points following each fiscal quarter for which the consolidated net
leverage ratio exceeds 3.5. There is no cost to us for issuing letters of credit
under the tranche B-1 letter of credit/revolving loan facility, however
outstanding letters of credit reduce our availability to borrow revolving loans
under this portion of the facility. If a letter of credit issued under this
facility is subsequently paid and we do not reimburse the amount paid in full,
then a ratable portion of each lender's deposit would be used to fund the letter
of credit. We pay the tranche B-1 lenders a fee which is equal to LIBOR plus 150
basis points. This fee is offset by the return on the funds deposited with the
administrative agent which earn interest at a per annum rate approximately equal
to LIBOR. Outstanding revolving loans reduce the funds on deposit with the
administrative agent which in turn reduce the earnings of those deposits and
effectively increases our interest expense at a per annum rate equal to LIBOR.
Prior to the March 2007 refinancing, borrowings under the revolving credit
facility bore interest at an annual rate equal to, at our option, either (i) the
London Interbank Offering Rate plus a margin of 275 basis points; or (ii) a rate
consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds
rate plus 37.5 basis points, plus a margin of 175 basis points. As of December
31, 2007 borrowings under the revolving credit facility bore interest at an
annual rate equal to, at our option, either (i) the London Interbank Offering
Rate plus a margin of 150 basis points; or (ii) a rate consisting of the greater
of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis
points, plus a margin of 50 basis points. Letters of credit issued under the
revolving credit facility accrue a letter of credit fee at a per annum rate of
150 basis points for the pro rata account of the lenders under such facility and
a fronting fee for the ratable account of the issuers thereof at a per annum
rate in an amount to be agreed upon payable quarterly in arrears. We also pay a
commitment fee of 35 basis points on the unused portion of the revolving credit
facility. The interest margins for borrowings and letters of credit issued under
the revolving credit facility are subject to adjustment based on the
consolidated net leverage ratio (consolidated indebtedness net of cash divided
by consolidated EBITDA as defined in the senior credit facility agreement)
measured at the end of each quarter. The margin we pay on the revolving credit
facility is reduced by 25 basis points and the commitment fee we pay on the
revolving credit facility is reduced by 5 basis points following each fiscal
quarter for which the consolidated net leverage ratio is less than 2.5 beginning
in March 2007. The margin and the commitment fee would increase by 25 basis
points and 2.5 basis points, respectively, following each fiscal quarter for
which the consolidated net leverage ratio exceeds 3.5.
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Credit Facility -- Other Terms and Conditions. As described above,
we are highly leveraged. Our refinanced senior credit facility requires that we
maintain financial ratios equal to or better than the following consolidated net
leverage ratio (consolidated indebtedness net of cash divided by consolidated
EBITDA, as defined in the senior credit facility agreement), and consolidated
interest coverage ratio (consolidated EBITDA divided by consolidated interest
expense, as defined under the senior credit facility agreement) at the end of
each period indicated. Failure to maintain these ratios will result in a default
under our senior credit facility which could result in all amounts due
immediately, as well as most of our other debt, being declared immediately due
and payable. The financial ratios required under the amended and restated senior
credit facility and, the actual ratios we achieved for the four quarters of
2007, are shown in the following tables:
QUARTER ENDED
-------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2007 2007 2007 2007
----------- ----------- ------------- -------------
REQ. ACT. REQ. ACT. REQ. ACT. REQ. ACT.
---- ---- ---- ---- ---- ---- ---- ----
Leverage Ratio (maximum).............. 4.25 3.27 4.25 2.99 4.25 2.97 4.25 2.53
Interest Coverage Ratio (minimum)..... 2.10 3.09 2.10 3.21 2.10 3.35 2.10 3.61
2008 2009 2010 2011 2012
REQ. REQ. REQ. REQ. REQ.
---- ---- ---- ---- ----
Leverage Ratio (maximum)............................ 4.00 3.75 3.50 3.50 3.50
Interest Coverage Ratio (minimum)................... 2.10 2.25 2.40 2.55 2.75
The senior credit facility agreement provides the ability to refinance our
senior subordinated notes and/or our senior secured notes in an amount equal to
the sum of (i) the net cash proceeds of equity issued after the closing date
plus (ii) the portion of annual excess cash flow (as defined in the senior
credit facility agreement) that is not required to be applied to the payment of
the credit facilities and which is not used for other purposes, provided that
the amount of the subordinated notes and the aggregate amount of the senior
secured notes and the subordinated notes that may be refinanced is capped based
upon the pro forma consolidated leverage ratio after giving effect to such
refinancing as shown in the following table:
AGGREGATE SENIOR AND
PROFORMA CONSOLIDATED SUBORDINATED NOTES SUBORDINATE NOTES
LEVERAGE RATIO MAXIMUM AMOUNT MAXIMUM AMOUNT
--------------------- ------------------ --------------------
Greater than or equal to 3.0x...................... $ 50 million $150 million
Greater than or equal to 2.5x...................... $100 million $300 million
Less than 2.5x..................................... $125 million $375 million
In addition, the senior secured notes may be refinanced with (i) the net
cash proceeds of incremental facilities and permitted refinancing indebtedness
(as defined in the senior credit facility agreement), (ii) the net cash proceeds
of any new senior or subordinated unsecured indebtedness, (iii) proceeds of
revolving credit loans (as defined in the senior credit facility agreement),
(iv) up to E200 million of unsecured indebtedness of the company's foreign
subsidiaries and (v) cash generated by the company's operations.
The refinanced senior credit facility agreement also contains restrictions
on our operations that are customary for similar facilities, including
limitations on: (i) incurring additional liens; (ii) sale and leaseback
transactions (except for the permitted transactions as described in the amended
and restated agreement); (iii) liquidations and dissolutions; (iv) incurring
additional indebtedness or guarantees; (v) investments and acquisitions; (vi)
dividends and share repurchases; (vii) mergers and consolidations; and (viii)
refinancing of subordinated and 10.25 percent senior secured notes. Compliance
with these requirements and restrictions is a condition for any incremental
borrowings under the senior credit facility agreement and failure to meet these
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TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requirements enables the lenders to require repayment of any outstanding loans.
As of December 31, 2007, we were in compliance with all the financial covenants
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, Senior and Subordinated Notes. Our outstanding debt also
includes $245 million of 10.25 percent senior secured notes due July 15, 2013,
$250 million of 8 1/8 percent senior notes due November 15, 2015, and $500
million of 8 5/8 percent senior subordinated notes due November 15, 2014. We can
redeem some or all of the notes at any time after July 15, 2008 in the case of
the senior secured notes, November 15, 2009 in the case of the senior
subordinated notes and November 15, 2011 in the case of the senior 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 notes with the proceeds of certain equity offerings
completed before November 15, 2010.
Our senior secured, senior 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, be greater than 2.00. We have not incurred any of the types of
indebtedness not otherwise permitted by the indentures. The indentures also
contain restrictions on our operations, including limitations on: (i) incurring
additional indebtedness or liens; (ii) dividends; (iii) distributions and stock
repurchases; (iv) investments; (v) asset sales and (vi) mergers and
consolidations. Subject to limited exceptions, all of our existing and future
material domestic wholly owned subsidiaries fully and unconditionally guarantee
these notes on a joint and several basis. In addition, the senior secured notes
and related guarantees are secured by second priority liens, subject to
specified exceptions, on all of our and our subsidiary guarantors' assets that
secure obligations under our senior credit facility, except that only a portion
of the capital stock of our subsidiary guarantor's domestic subsidiaries is
provided as collateral and no assets or capital stock of our direct or indirect
foreign subsidiaries secure the notes or guarantees. There are no significant
restrictions on the ability of the subsidiaries that have guaranteed these notes
to make distributions to us. The senior subordinated notes rank junior in right
of payment to our senior credit facility and any future senior debt incurred. As
of December 31, 2007, we were in compliance with the covenants and restrictions
of these indentures.
Accounts Receivable Securitization. In addition to our senior credit
facility, senior secured notes, senior 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 $100 million and $85 million as of December 31,
2007 and 2006, respectively. This program is subject to cancellation prior to
its maturity date if we (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 2008, this program was renewed for 364 days
to January 26, 2009 at a facility size of $120 million. We also sell some
receivables in our European operations to regional banks in Europe. As of
December 31, 2007, we sold $57 million of accounts receivable in Europe up from
$48 million at December 31, 2006. The arrangements to sell receivables in Europe
are not committed and can be cancelled at any time. If we were not able to sell
receivables under either the North American or European securitization programs,
our borrowings under our revolving credit agreements may increase. These
accounts receivable securitization programs provide us with access to cash at
costs that are generally favorable to alternative sources of financing, and
allow us to reduce borrowings under our revolving credit agreements.
92
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. FINANCIAL INSTRUMENTS
The carrying and estimated fair values of our financial instruments by
class at December 31, 2007 and 2006 were as follows:
2007 2006
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(MILLIONS)
ASSETS (LIABILITIES)
Long-term debt (including current
maturities)............................... $1,334 $1,324 $1,363 $1,420
Instruments with off-balance sheet risk:
Foreign currency contracts................ -- (2) -- 1
Financial guarantees...................... -- -- -- --
Asset and Liability Instruments -- The fair value of cash and cash
equivalents, short and long-term receivables, accounts payable, and short-term
debt was considered to be the same as or was not determined to be materially
different from the carrying amount.
Long-term Debt -- The fair value of fixed rate long-term debt was based on
the market value of debt with similar maturities and interest rates.
Instruments With Off-Balance Sheet Risk
Foreign Currency Contracts -- Note 1 of the consolidated financial
statements of Tenneco Inc. and Consolidated Subsidiaries, "Summary of Accounting
Policies -- Risk Management Activities" describes our use of and accounting for
foreign currency exchange contracts. The following table summarizes by major
currency the contractual amounts of foreign currency contracts we utilize:
NOTIONAL AMOUNT
---------------------------------
DECEMBER 31, DECEMBER 31,
2007 2006
--------------- ---------------
PURCHASE SELL PURCHASE SELL
-------- ---- -------- ----
(MILLIONS)
Foreign currency contracts (in U.S.$):
Australian dollars.......................... $ 11 $ 2 $ 2 $ 7
British pounds.............................. 8 2 158 119
Canadian dollars............................ -- -- 13 --
Czech Republic koruna....................... -- -- 7 9
Danish kroner............................... -- -- 29 4
European euro............................... 1 143 162 3
Polish zloty................................ -- -- 25 17
South Africa rand........................... 60 13 -- --
Swedish krona............................... -- -- 44 --
U.S. dollars................................ 136 62 -- 282
Other....................................... 4 -- 3 1
---- ---- ---- ----
$220 $222 $443 $442
==== ==== ==== ====
We manage our foreign currency risk by entering into derivative financial
instruments with major financial institutions that can be expected to fully
perform under the terms of such agreements. Based on exchange rates at December
31, 2007 and 2006, the cost of replacing these contracts in the event of
93
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
non-performance by the counterparties would not have been material. The face
value of these instruments is recorded in other current liabilities.
Financial Guarantees -- We occasionally provide guarantees that could
require us to make future payments in the event that the third party primary
obligor does not make its required payments. We have not recorded a liability
for any of these guarantees.
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, our senior 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 $245 million senior secured
notes is also secured by second-priority liens on substantially all our domestic
assets, excluding some of the stock of our domestic subsidiaries. No assets or
capital stock of our direct or indirect foreign subsidiaries secure these notes.
You should also read Note 13 of the consolidated financial statements of Tenneco
Inc. and Consolidated Subsidiaries, 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. As of December 31, 2007, we have guaranteed $18
million in letters of credit to support some of our subsidiaries' insurance
arrangements. In addition, we have issued $13 million in guarantees through
letters of credit to guarantee other obligations of subsidiaries primarily
related to foreign employee benefit program, environmental remediation
activities, and cash management requirements.
Interest Rate Swaps -- In April 2004, we entered into fixed-to-floating
interest rate swaps covering $150 million of our fixed interest rate debt. The
change in market value of these swaps is recorded as part of interest expense
and other long-term liabilities. The cost of replacing these contracts in the
event of non-performance by the counterparties would not be material. You should
also see Notes 4 and 5 of the consolidated financial statements of Tenneco Inc.
and Consolidated Subsidiaries.
Negotiable Financial Instruments -- One of our European subsidiaries
receives payment from one of its OE customers whereby the account receivables
are satisfied through the delivery of negotiable financial instruments. These
financial instruments are then sold at a discount to a European bank. The sales
of these financial instruments are not included in the account receivables sold.
Any of these financial instruments which were not sold as of December 31, 2007
and 2006 are classified as other current assets and are excluded from our
definition of cash equivalents. We had sold approximately $15 million of these
instruments at December 31, 2007 and $26 million at December 31, 2006.
In certain instances several of our Chinese subsidiaries receive payment
from OE customers and satisfy vendor payments through the receipt and delivery
of negotiable financial instruments. Financial instruments used to satisfy
vendor payables and not redeemed totaled $23 million and $12 million at December
31, 2007 and 2006, respectively, and were classified as notes payable. Financial
instruments received from OE customers and not redeemed totaled $8 million and
$9 million at December 31, 2007 and 2006, respectively and were classified as
other current assets. One of our Chinese subsidiaries is required to maintain a
cash balance at a financial institution issuing the financial instruments which
are used to satisfy vendor payments. No financial instruments were outstanding
at that Chinese subsidiary as of December 31, 2007. As of December 31, 2006 the
required cash balance was less than $1 million and was classified as cash and
cash equivalents.
94
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The domestic and foreign components of our income before income taxes and
minority interest are as follows:
YEAR ENDED
DECEMBER 31,
------------------
2007 2006 2005
---- ---- ----
(MILLIONS)
U.S. loss before income taxes........................... $(99) $(66) $(5)
Foreign income before income taxes...................... 187 126 89
---- ---- ---
Income before income taxes and minority interest........ $ 88 $ 60 $84
==== ==== ===
Following is a comparative analysis of the components of income tax
expense:
YEAR ENDED
DECEMBER 31,
------------------
2007 2006 2005
---- ---- ----
(MILLIONS)
Current --
U.S......................................................... $ -- $ -- $ --
State and local............................................. -- -- 2
Foreign..................................................... 58 46 23
---- ---- ----
58 46 25
---- ---- ----
Deferred --
U.S......................................................... 38 (28) (15)
State and local............................................. 5 (1) 4
Foreign..................................................... (18) (12) 12
---- ---- ----
25 (41) 1
---- ---- ----
Income tax expense............................................ $ 83 $ 5 $ 26
==== ==== ====
95
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a reconciliation of income taxes computed at the statutory
U.S. federal income tax rate (35 percent for all years presented) to the income
tax expense reflected in the statements of income (loss):
YEAR ENDED DECEMBER
31,
----------------------
2007 2006 2005
---- ---- ----
(MILLIONS)
Income tax expense computed at the statutory U.S. federal
income tax rate............................................ $31 $ 21 $29
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates and foreign losses
with no tax benefit..................................... (3) (4) 1
Taxes on repatriation of dividends......................... 1 2 1
State and local taxes on income, net of U.S. federal income
tax benefit............................................. (1) (1) 1
Changes in valuation allowance for tax loss carryforwards
and credits............................................. 6 3 2
Amortization of tax goodwill............................... (2) (2) (2)
Income exempt from tax due to tax holidays................. (5) (3) (2)
Investment tax credit earned............................... (1) (8) --
European ownership structure realignment................... 66 -- --
Foreign earnings subject to U.S. federal income tax........ 4 3 1
Adjustment of prior years taxes............................ (9) 3 2
Impact of foreign rate reduction........................... (7) (1) (1)
Tax contingencies.......................................... 6 (10) (9)
Other...................................................... (3) 2 3
--- ---- ---
Income tax expense........................................... $83 $ 5 $26
=== ==== ===
96
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of our net deferred tax asset were as follows:
DECEMBER
31,
-----------
2007 2006
---- ----
(MILLIONS)
Deferred tax assets --
Tax loss carryforwards:
U.S.......................................................... $181 $209
State........................................................ 57 35
Foreign...................................................... 61 59
Investment tax credit benefits.................................. 54 52
Postretirement benefits other than pensions..................... 56 58
Pensions........................................................ 45 55
Bad debts....................................................... 1 1
Sales allowances................................................ 5 7
Other........................................................... 87 115
Valuation allowance............................................. (89) (81)
---- ----
Net deferred tax asset.................................. 458 510
---- ----
Deferred tax liabilities --
Tax over book depreciation...................................... 101 129
Other........................................................... 70 57
---- ----
Total deferred tax liability............................... 171 186
---- ----
Net deferred tax asset............................................ $287 $324
==== ====
Following is a reconciliation of deferred taxes to the deferred taxes shown
in the balance sheet:
DECEMBER 31,
-------------
2007 2006
----- -----
(MILLIONS)
Balance Sheet:
Current portion -- deferred tax asset.......................... $ 36 $ 51
Non-current portion -- deferred tax asset...................... 370 397
Current portion -- deferred tax liability shown in other
current liabilities......................................... (5) (17)
Non-current portion -- deferred tax liability.................. (114) (107)
----- -----
Net Deferred Tax Assets.......................................... $ 287 $ 324
===== =====
As shown by the valuation allowance in the table above, we had potential
tax benefits of $89 million and $81 million at December 31, 2007 and 2006,
respectively, that we did not recognize in the statements of income when they
were generated. These unrecognized tax benefits resulted primarily from foreign
tax loss carryforwards, foreign investment tax credits and U.S. state net
operating losses that are available to reduce future U.S. state and foreign tax
liabilities.
We have a U.S. Federal tax net operating loss carryforward ("NOL") at
December 31, 2007, of $518 million, which will expire in varying amounts from
2020 to 2027. The federal tax effect of that NOL is recorded as a deferred tax
asset on our balance sheet for $181 million and $209 million at December 31,
2007 and 2006, respectively. We also have state NOL carryforwards at December
31, 2007 of $767 million, which will expire in various years through 2027. The
tax effect of the state NOL, net of a valuation allowance, is
97
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded as a deferred tax asset on our balance sheet for $40 million and $29
million at December 31, 2007 and 2006, respectively. We estimate, based on
available evidence both positive and negative, that it is more likely than not
that we will utilize these NOLs within the prescribed carryforward period. That
estimate is based upon our expectations regarding future taxable income of our
U.S. operations and the implementation of available tax planning strategies that
accelerate usage of the NOL. Circumstances that could change that estimate
include future U.S. earnings at lower than expected levels or a majority
ownership change as defined in the rules of the U.S. tax law. If that estimate
changed, we would be required to cease recognizing an income tax benefit for any
new NOL and could be required to record a reserve for some or all of the asset
currently recorded on our balance sheet.
As of December 31, 2007, for foreign income tax purposes, we have $61
million of foreign tax NOLs. Of the $61 million of foreign tax NOLs, $54 million
does not expire and the remainder will expire in varying amounts from 2008 to
2022.
We do not provide for U.S. income taxes on unremitted earnings of foreign
subsidiaries, except for the earnings of certain of our China operations, as our
present intention is to reinvest the unremitted earnings in our foreign
operations. Unremitted earnings of foreign subsidiaries are approximately $594
million at December 31, 2007. We estimated that the amount of U.S. and foreign
income taxes that would be accrued or paid upon remittance of the assets that
represent those unremitted earnings is $215 million.
We have tax sharing agreements with our former affiliates that allocate tax
liabilities for prior periods and establish indemnity rights on certain tax
issues.
In July 2006, the FASB issued Financial Interpretation No. 48 (FIN 48),
"Accounting for Uncertainty in Income Taxes," which clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes." FIN 48 provides that a tax
benefit from an uncertain tax position may be recognized when it is more likely
than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, based on the
technical merits. Income tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. This interprepation also provides guidance
on measurement, derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006.
We adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation, the Company recognized approximately a $1 million decrease in
the liability for unrecognized tax benefits, which was accounted for as an
increase to the January 1, 2007, balance of retained earnings.
2007
----
Uncertain tax positions --
Balance upon adoption (January 1, 2007).......................... $42
Gross increases in tax positions in current period............... 3
Gross increases in tax positions in prior period................. 6
Gross decreases in tax positions in prior period................. (5)
Gross decreases -- settlements................................... (1)
Gross decreases -- statute of limitations expired................ (1)
---
Ending balance................................................... $44
===
Included in the balance of unrecognized tax benefits at December 31, 2007
are $41 million of tax benefits that, if recognized, would affect the effective
tax rate. We recognize accrued interest and penalties related to unrecognized
tax benefits as income tax expense. Related to the uncertain tax benefits noted
above, we
98
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accrued penalties of $1 million and interest of $3 million during 2007 and in
total, as of December 31, 2007, we have recognized a liability for penalties of
$2 million and interest of $5 million.
Our unrecognized tax benefits include foreign exposures relating to the
disallowance of deductions, global transfer pricing and various other issues. We
believe it is reasonably possible that a decrease of up to $7 million in
unrecognized tax benefits related to the expiration of foreign statute of
limitations and the conclusion of foreign income tax examinations may occur
within the coming year.
We are subject to taxation in the U.S. and various state and foreign
jurisdictions. Our tax years open to examination in primary jurisdictions are as
follows:
OPEN TO TAX
YEAR
------------
United States -- due to NOL.................................. 1998
Germany...................................................... 2002
Belgium...................................................... 2005
Canada....................................................... 2002
UK........................................................... 2005
Spain........................................................ 2003
8. COMMON STOCK
We have authorized 135 million shares ($0.01 par value) of common stock, of
which 47,892,532 shares and 47,085,274 shares were issued at December 31, 2007
and 2006, respectively. We held 1,294,692 shares of treasury stock at both
December 31, 2007 and 2006.
Equity Plans -- In December 1996, we adopted the 1996 Stock Ownership Plan,
which permitted the granting of a variety of awards, including common stock,
restricted stock, performance units, stock equivalent units, stock appreciation
rights ("SARs"), and stock options to our directors, officers, employees and
consultants. The 1996 plan, which terminated as to new awards on December 31,
2001, was renamed the "Stock Ownership Plan." In December 1999, we adopted the
Supplemental Stock Ownership Plan, which permitted the granting of a variety of
similar awards to our directors, officers, employees and consultants. We were
authorized to deliver up to about 1.1 million treasury shares of common stock
under the Supplemental Stock Ownership Plan, which also terminated as to new
awards on December 31, 2001. In March 2002, we adopted the 2002 Long-Term
Incentive Plan which permitted the granting of a variety of similar awards to
our officers, directors, employees and consultants. Up to 4 million shares of
our common stock were authorized for delivery under the 2002 Long-Term Incentive
Plan. In March 2006, we adopted the 2006 Long-Term Incentive Plan which replaced
the 2002 Long-Term Incentive Plan and permits the granting of a variety of
similar awards to directors, officers, employees and consultants. As of December
31, 2007, up to 1,884,216 shares of our common stock remain authorized for
delivery under the 2006 Long-Term Incentive Plan. Our nonqualified stock options
have 7 to 20 year terms and vest equally over a three year service period from
the date of the grant.
We have granted restricted common stock to our directors and certain key
employees. These awards generally require, among other things, that the award
holder remains in service to our company during the restriction period. We have
also granted stock equivalent units and long-term performance units to certain
key employees that have been payable in cash. For 2007, the awards contain an
annual stub-year grant payable in the first quarter of 2008 and a three year
grant payable in the first quarter of 2010. Payment is based on the attainment
of specified performance goals. The grant value is indexed to the stock price.
In addition, we have granted SARs to certain key employees in our Asian
operations that are payable in cash after a three year service period. The grant
value is indexed to the stock price.
99
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Standards ("SFAS") No. 123(R), "Share-Based Payment," using the modified
prospective application method. Under this transition method, compensation cost
recognized for the twelve months ended December 31, 2007, includes the
applicable amounts of: (1) compensation cost of all unvested stock-based awards
granted prior to January 1, 2006, based upon the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123 and previously
presented in pro-forma footnote disclosures, and (2) compensation cost for all
stock-based awards granted on or after January 1, 2006, based upon the grant
date fair value estimated in accordance with the new provisions of SFAS No.
123(R).
The table below illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of SFAS No. 123 prior to
January 1, 2006:
YEAR ENDED
DECEMBER 31, 2005
-----------------
(MILLIONS EXCEPT
PER
SHARE AMOUNTS)
Net income................................................ $ 56
Add: Stock-based employee compensation expense included in
net income, net of income tax........................... 6
Deduct: Stock-based employee compensation expense
determined under fair value based method for all awards,
net of income tax....................................... (8)
-----
Pro forma net income...................................... $ 54
=====
Earnings per share:
Basic..................................................... $1.30
Basic -- pro forma for stock-based compensation expense... $1.25
Diluted................................................... $1.24
Diluted -- pro forma for stock-based compensation
expense................................................. $1.19
The impact of recognizing compensation expense related to nonqualified
stock options under the fair value recognition provisions of SFAS No. 123(R)
is contained in the table below.
YEAR ENDED
DECEMBER 31,
---------------
2007 2006
------ ------
(MILLIONS)
Selling, general and administrative....................... $ 4 $ 4
------ ------
Loss before interest expense, income taxes and minority
interest................................................ (4) (4)
Income tax benefit........................................ (1) (1)
------ ------
Net loss.................................................. $ (3) (3)
====== ======
Decrease in basic earnings per share...................... $(0.06) $(0.06)
Decrease in diluted earnings per share.................... $(0.06) $(0.06)
100
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For stock options awarded to retirement eligible employees prior to the
adoption of SFAS No. 123(R) we immediately accelerate the recognition of any
outstanding compensation cost when employees become retiree eligible before the
end of the explicit vesting period.
As of December 31, 2007, there was approximately $4 million, net of tax, of
total unrecognized compensation costs related to these stock-based awards that
we expect to recognize over a weighted average period of 0.8 years.
SFAS No. 109, "Accounting for Income Taxes," discusses the deductibility of
transactions. We are allowed a tax deduction for compensation cost which is
calculated as the difference between the value of the stock at the date of grant
and the price upon exercise of a stock option. Under SFAS No. 123(R), excess tax
benefits, which are tax benefits we may realize upon the exercise of stock
options that are greater than the tax benefit recognized on the compensation
cost recorded in our income statement, are recognized as an addition to paid-in
capital. We would present cash retained as a result of excess tax benefits as
financing cash flows. Any write-offs of deferred tax assets related to
unrealized tax benefits associated with the recognized compensation cost would
be reported as income tax expense.
Compensation expense for restricted stock, stock equivalent units, long-
term performance units and SARs net of tax, was $5 million for the year ended
December 31, 2007 and $9 million for the year ended December 31, 2006 and was
recorded in selling, general, and administrative expense on the statement of
income.
Cash received from option exercises for the year ended December 31, 2007,
was approximately $4 million. Stock option exercises during the year ended
December 31, 2007 generated an excess tax benefit of approximately $5 million.
Pursuant to footnote 82 of SFAS No. 123(R), this benefit was not recorded as we
have federal and state net operating losses which are not currently being
utilized. As a result, the excess tax benefit had no impact on our financial
position or statement of cash flows.
Assumptions -- We calculated the fair values of the awards using the Black-
Scholes option pricing model with the weighted average assumptions listed below.
Determining the fair value of share-based awards requires judgment in estimating
employee and market behavior. If actual results differ significantly from these
estimates, stock-based compensation expense and our results of operations could
be materially impacted.
YEAR ENDED DECEMBER 31,
-----------------------
2007 2006 2005
----- ----- -----
Stock Options
Weighted average grant date fair value, per share..... $9.93 $9.27 $8.14
Weighted average assumptions used:
Expected volatility................................... 38.4% 42.6% 43.0%
Expected lives........................................ 4.1 5.1 7.0
Risk-free interest rates.............................. 4.7% 4.2% 4.0%
Dividend yields....................................... 0.0% 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.
101
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 10, 2001, we announced that our Board of Directors eliminated
the quarterly dividend on our common stock. As a result, there is no dividend
yield.
Stock Options -- The following table reflects the status and activity for
all options to purchase common stock for the period indicated:
YEAR ENDED DECEMBER 31, 2007
------------------------------------------------
WEIGHTED WEIGHTED AVG.
SHARES AVG. REMAINING AGGREGATE
UNDER EXERCISE LIFE IN INTRINSIC
OPTION PRICES YEARS VALUE
--------- -------- ------------- ---------
(MILLIONS)
Outstanding Stock Options
Outstanding, January 1, 2007................ 3,074,173 $10.13 5.5 $40
Granted................................... 589,681 26.68
Canceled.................................. -- --
Forfeited................................. (54,730) 23.67
Exercised................................. (192,563) 7.31 $ 3
---------
Outstanding, March 31, 2007................. 3,416,561 12.93 5.2 42
Granted................................... 33,039 13.86
Canceled.................................. (159,800) 24.07
Forfeited................................. (31,317) 23.27
Exercised................................. (191,097) 6.58 5
---------
Outstanding, June 30, 2007.................. 3,067,386 12.65 5.2 55
Granted................................... 5,884 32.08
Canceled.................................. -- --
Forfeited................................. (6,419) 20.30
Exercised................................. (108,310) 8.72 3
---------
Outstanding, September 30, 2007............. 2,958,541 12.82 4.9 61
Granted................................... -- --
Canceled.................................. (10,000) 13.17
Forfeited................................. (21,922) 23.65
Exercised................................. (105,730) 6.02 2
---------
Outstanding, December 31, 2007.............. 2,820,889 $13.10 4.6 $46
=========
Vested or Expected to Vest, December 31,
2007...................................... 2,761,658 $12.83 4.6 $46
=========
Exercisable, December 31, 2007.............. 1,919,624 $ 8.14 4.1 $41
=========
As previously disclosed, in certain years our administrative procedures for
determining the final allocation of the options granted to middle management
under our 2002 Long-Term Incentive Plan (the predecessor to our current equity
incentive Plan) were not finalized until after the Board approved the grants and
set the exercise price. At the time the administrative procedures were
completed, the market values of some of the options were greater than the grant
prices. While these option-grant practices were not intended to avoid
regulations or gain unfair financial advantage, they did result in monetary
gains that current law (recently enacted Section 409A of the Internal Revenue
Code) would subject to additional taxes and penalties.
To mitigate this financial impact of the new tax rules for affected
employees, we offered to amend the affected outstanding stock options so the
exercise prices match the higher prices on the date they were actually
102
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted (we also offered to make up the difference between the revised exercise
prices and the lower, original exercise prices with a special cash payment
during the first pay period of 2008). Amended options are not liable for
additional Section 409A tax liabilities. We also offered to "make whole"
employees who were already subject to the additional Section 409A liabilities
because of prior exercises or vesting of affected options.
We completed the offer in November 2007 and accepted for amendment options
to purchase 98,375 shares of our common stock.
Restricted Stock -- The following table reflects the status for all
nonvested restricted shares for the period indicated:
YEAR ENDED
DECEMBER 31, 2007
------------------------
WEIGHTED AVG.
GRANT DATE
SHARES FAIR VALUE
-------- -------------
Nonvested Restricted Shares
Nonvested balance at January 1, 2007....................... 386,507 $17.10
Granted.................................................. 364,018 26.73
Vested................................................... (222,040) 15.39
Forfeited................................................ (35,972) 22.49
--------
Nonvested balance at March 31, 2007........................ 492,513 $24.60
Granted.................................................. 6,527 30.22
Vested................................................... (833) 13.28
Forfeited................................................ (17,199) 22.35
--------
Nonvested balance at June 30, 2007......................... 481,008 $24.77
Granted.................................................. 3,054 32.46
Vested................................................... (612) 16.59
Forfeited................................................ -- --
--------
Nonvested balance at September 30, 2007.................... 483,450 $24.83
Granted.................................................. 747 31.23
Vested................................................... (90) 13.97
Forfeited................................................ (14,713) 22.81
--------
Nonvested balance at December 31, 2007..................... 469,394 $24.91
========
The fair value of restricted stock grants is equal to the average market
price of our stock at the date of grant. As of December 31, 2007, $7 million of
total unrecognized compensation costs related to compensation for restricted
stock awards is expected to be recognized over a weighted-average period of 1.8
years.
Long-term Performance Units and SARs -- Long-term performance units and
SARs are paid in cash and recognized as a liability based upon their fair value.
As of December 31, 2007, $2 million of total unrecognized compensation cost is
expected to be recognized over a weighted average period of approximately 2
years.
Rights Plan
On September 9, 1998, we adopted a Rights Plan and established an
independent Board committee to review it every three years. The Rights Plan was
adopted to deter coercive takeover tactics and to prevent a
103
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
potential acquirer from gaining control of us in a transaction that is not in
the best interests of our shareholders. Generally, under the Rights Plan, as it
has been amended to date, if a person becomes the beneficial owner of 15 percent
or more of our outstanding common stock, each right will entitle its holder to
purchase, at the right's exercise price, a number of shares of our common stock
or, under certain circumstances, of the acquiring person's common stock, having
a market value of twice the right's exercise price. Rights held by the 15
percent or more holders will become void and will not be exercisable.
In March 2000, we amended the Rights Plan to (i) reduce from 20 percent to
15 percent the level of beneficial ownership at which the rights became
exercisable, as described above, and (ii) eliminate the "qualified offer" terms
of the plan. These terms provided that the rights would not become exercisable
in connection with a "qualified offer," which was defined as an all-cash tender
offer for all outstanding common stock that was fully financed, remained open
for a period of at least 60 business days, resulted in the offeror owning at
least 85 percent of our common stock after consummation of the offer, assured a
prompt second-step acquisition of shares not purchased in the initial offer, at
the same price as the initial offer, and met certain other requirements.
In connection with the adoption of the Rights Plan, our Board of Directors
also adopted a three-year independent director evaluation ("TIDE") mechanism.
Under the TIDE mechanism, an independent Board committee (the "Tide Committee")
will review, on an ongoing basis, the Rights Plan and developments in rights
plans generally, and, if it deems appropriate, recommend modification or
termination of the Rights Plan. The independent committee will report to our
Board at least every three years as to whether the Rights Plan continues to be
in the best interests of our shareholders.
In 2005, the Tide Committee met and reviewed, among other things,
developments in rights plans and academic studies of rights plans and contests
for corporate control since the last meeting of the Tide Committee. Based upon
this review, the Tide Committee determined that the Rights Agreement continues
to be in the best interests of our shareholders. The Tide Committee recommended
to our Board of Directors that the Board should not take any action with respect
to the Rights Plan.
104
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings (Loss) Per Share
Earnings (loss) per share of common stock outstanding were computed as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2007 2006 2005
----------- ----------- -----------
(MILLIONS EXCEPT SHARE AND PER SHARE
AMOUNTS)
Basic earnings (loss) per share --
Net income (loss)............................. $ (5) $ 49 $ 56
=========== =========== ===========
Average shares of common stock outstanding.... 45,809,730 44,625,220 43,088,588
=========== =========== ===========
Earnings (loss) per average share of common
stock...................................... $ (0.11) $ 1.11 $ 1.30
=========== =========== ===========
Diluted earnings (loss) per share --
Net income (loss)............................. $ (5) $ 49 $ 56
=========== =========== ===========
Average shares of common stock outstanding.... 45,809,730 44,625,220 43,088,588
Effect of dilutive securities:
Restricted stock.............................. -- 400,954 380,656
Stock options................................. -- 1,729,399 1,852,011
----------- ----------- -----------
Average shares of common stock outstanding
including dilutive securities................. 45,809,730 46,755,573 45,321,225
=========== =========== ===========
Earnings (loss) per average share of common
stock......................................... $ (0.11) $ 1.05 $ 1.24
=========== =========== ===========
As a result of the net loss in 2007, the calculation of diluted earnings
per share does not include the dilutive effect of 206,960 shares of restricted
stock and 1,509,462 stock options. In addition, options to purchase 517,012,
564,749 and 716,441, shares of common stock were outstanding at December 31,
2007, 2006 and 2005, respectively, but were not included in the computation of
diluted EPS because the options were anti-dilutive for the years ended December
31, 2007, 2006 and 2005, respectively.
9. PREFERRED STOCK
We had 50 million shares of preferred stock ($0.01 par value) authorized at
December 31, 2007 and 2006. No shares of preferred stock were outstanding at
those dates. We have designated and reserved 2 million shares of the preferred
stock as junior preferred stock for the Rights Plan.
10. PENSION PLANS, POSTRETIREMENT AND OTHER EMPLOYEE BENEFITS
We have various defined benefit pension plans that cover substantially all
of our employees. For 2007 we have adopted the measurement date provisions of
SFAS No. 158, "Accounting for Defined Benefit Pension and Other Postretirement
Plans." Therefore, the measurement date used to determine measurement of our
pension plan assets and benefit obligations is December 31st for both our
domestic and foreign plans. Benefits are based on years of service and, for most
salaried employees, on final average compensation. Our funding policy is to
contribute to the plans amounts necessary to satisfy the funding requirement of
applicable federal or foreign laws and regulations. Of our $678 million benefit
obligation at December 31, 2007, approximately $612 million required funding
under applicable federal and foreign laws. At December 31, 2007, we had
approximately $531 million in assets to fund that obligation. The balance of our
benefit obligation, $66 million,
105
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
did not require funding under applicable federal or foreign laws and
regulations. Pension plan assets were invested in the following classes of
securities:
PERCENTAGE OF FAIR MARKET
VALUE
-----------------------------
DECEMBER 31, SEPTEMBER 30,
2007 2006
------------- -------------
US FOREIGN US FOREIGN
--- ------- --- -------
Equity Securities.................................. 69% 61% 70% 60%
Debt Securities.................................... 31% 34% 28% 36%
Real Estate........................................ -- 1% -- --
Other.............................................. -- 4% 2% 4%
Our investment policy for both our domestic and foreign plans is to invest
more heavily in equity securities than debt securities. Targeted pension plan
allocations are 70 percent in equity securities and 30 percent in debt
securities, with acceptable tolerance levels of plus or minus five percent
within each category for our domestic plans. Our foreign plans are individually
managed to different target levels depending on the investing environment in
each country.
Our approach to determining expected return on plan asset assumptions
evaluates both historical returns as well as estimates of future returns, and
adjusts for any expected changes in the long-term outlook for the equity and
fixed income markets for both our domestic and foreign plans.
106
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the change in benefit obligation, the change in plan assets,
the development of net amount recognized, and the amounts recognized in the
balance sheets for the pension plans and postretirement benefit plans follows:
POSTRETIRE-
PENSION MENT
------------------------------- -------------
2007 2006 2007 2006
-------------- -------------- ----- -----
US FOREIGN US FOREIGN US US
---- ------- ---- ------- ----- -----
(MILLIONS)
Change in benefit obligation:
Benefit obligation at December 31 and
September 30 of the previous year,
respectively........................... $325 $348 $332 $ 304 $ 158 $ 146
Currency rate conversion.................. -- 23 -- 29 -- --
Settlement................................ -- -- -- (2) -- --
Curtailment............................... -- -- (30) -- -- --
Service cost.............................. 1 5 15 6 2 2
Interest cost............................. 19 19 19 16 9 8
Plan amendments........................... -- 1 -- 6 -- --
Actuarial loss............................ (15) (25) 1 (4) (3) 11
Benefits paid............................. (18) (14) (12) (9) (9) (9)
Participants' contributions............... -- 4 -- 2 -- --
Impact of change in measurement data...... 1 3 -- -- (5) --
---- ---- ---- ----- ----- -----
Benefit obligation at December 31 and
September 30, respectively............. $313 $364 $325 $ 348 $ 152 $ 158
==== ==== ==== ===== ===== =====
Change in plan assets:
Fair value at December 31 and September
30, of the previous year,
respectively........................... $229 $231 $196 $ 194 $ -- $ --
Currency rate conversion.................. -- 17 -- 18 -- --
Settlement................................ -- -- -- (2) -- --
Actual return on plan assets.............. 13 9 18 16 -- --
Employer contributions.................... 16 20 27 12 10 9
Participants' contributions............... -- 4 -- 2 -- --
Benefits paid............................. (18) (14) (12) (9) (10) (9)
Impact of change in measurement date...... 9 15 -- -- -- --
---- ---- ---- ----- ----- -----
Fair value at December 31 and September
30, respectively....................... $249 $282 $229 $ 231 $ -- $ --
==== ==== ==== ===== ===== =====
Development of net amount recognized:
Funded status at December 31 and September
30 of the previous year, respectively.. $(64) $(82) $(97) $(117) $(152) $(158)
Post measurement date contributions....... -- -- 1 5 -- 3
Unrecognized cost:
Actuarial loss......................... 81 101 102 123 87 102
Prior service cost..................... 3 14 4 14 (42) (48)
---- ---- ---- ----- ----- -----
Net amount recognized at December 31... $ 20 $ 33 $ 10 $ 25 $(107) $(101)
==== ==== ==== ===== ===== =====
Amounts recognized in the balance sheets as
of December 31
Noncurrent assets......................... $ -- $ 3 $ -- $ 1 $ -- $ --
Current liabilities....................... (5) (2) (5) (1) (10) (9)
Noncurrent liabilities.................... (59) (83) (92) (111) (142) (147)
---- ---- ---- ----- ----- -----
Net amount recognized..................... $(64) $(82) $(97) $(111) $(152) $(156)
==== ==== ==== ===== ===== =====
107
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid (accrued) pension cost has been recorded based upon
certain actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
As a result of our adoption of the measurement date provisions of SFAS No. 158,
the measurement date for our plans changed from September 30 in 2006 to December
31 in 2007.
Net periodic pension costs (income) for the years 2007, 2006, and 2005,
consist of the following components:
2007 2006 2005
-------------- -------------- --------------
US FOREIGN US FOREIGN US FOREIGN
---- ------- ---- ------- ---- -------
(MILLIONS)
Service cost -- benefits earned during
the year............................. $ 1 $ 5 $ 15 $ 6 $ 15 $ 6
Interest on prior year's projected
benefit obligation................... 19 19 19 16 18 14
Expected return on plan assets......... (21) (20) (19) (16) (16) (15)
Curtailment gain....................... -- -- (25) -- -- --
Recognition of:
Actuarial loss....................... 2 6 21 1 4 4
Prior service cost................... 1 2 6 6 3 1
---- ---- ---- ---- ---- ----
Net pension costs...................... $ 2 $ 12 $ 17 $ 13 $ 24 $ 10
==== ==== ==== ==== ==== ====
Other comprehensive loss............... $ -- $ -- $ -- $ -- $ 10 $ 5
==== ==== ==== ==== ==== ====
As a result of the adoption of the recognition provisions of SFAS No. 158,
"Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans," other changes in plan assets and benefit obligations recognized in other
comprehensive income consisted of the following components:
2007
--------------
US FOREIGN
---- -------
Net actuarial gain......................................... $(18) $(23)
Recognized actuarial loss.................................. (2) (6)
Currency translation adjustment............................ -- 9
Recognition of prior service cost.......................... (1) (2)
---- ----
Total recognized in other comprehensive income before tax
effects.................................................. $(21) $(22)
==== ====
Amounts recognized in accumulated other comprehensive income consist of:
2007
-------------
US FOREIGN
--- -------
Net actuarial loss.......................................... $81 $101
Prior service cost.......................................... 3 14
--- ----
$84 $115
=== ====
108
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2008, we expect to recognize the following amounts, which are currently
reflected in accumulated other comprehensive income, as components of net
periodic benefit cost:
2008
-------------
US FOREIGN
--- -------
Net actuarial loss........................................... $2 $4
Prior service cost........................................... 1 2
-- --
$3 $6
== ==
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for all pension plans with accumulated benefit obligations
in excess of plan assets at December 31, 2007 and September 30, 2006 were as
follows:
DECEMBER 31, SEPTEMBER 30,
2007 2006
-------------- --------------
US FOREIGN US FOREIGN
---- ------- ---- -------
(MILLIONS)
Projected Benefit Obligation.................... $314 $273 $325 $335
Accumulated Benefit Obligation.................. 314 260 325 321
Fair Value of Plan Assets....................... 249 188 229 217
The following estimated benefit payments are payable from the pension plans
to participants:
PENSION
YEAR BENEFITS
---- ----------
(MILLIONS)
2008........................................................... $ 34
2009........................................................... 35
2010........................................................... 38
2011........................................................... 49
2012........................................................... 47
2013-2017...................................................... 253
The following assumptions were used in the accounting for the pension plans
for the years of 2007, 2006, and 2005:
2007 2006
------------- -------------
US FOREIGN US FOREIGN
--- ------- --- -------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE
BENEFIT OBLIGATIONS
Discount rate..................................... 6.2% 5.6% 5.9% 5.0%
Rate of compensation increase..................... 3.0% 4.4% 3.0% 4.1%
2007 2006 2005
------------- ------------- -------------
US FOREIGN US FOREIGN US FOREIGN
--- ------- --- ------- --- -------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO
DETERMINE NET PERIODIC BENEFIT COST
Discount rate.......................... 6.0% 5.0% 5.8% 5.0% 6.3% 5.7%
Expected long-term return on plan
assets............................... 8.8% 7.6% 8.8% 7.6% 8.8% 7.7%
Rate of compensation increase.......... N/A 4.3% 3.2% 4.3% 4.5% 4.4%
109
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 2007, we froze our defined benefit plans and replaced
them with additional contributions under defined contribution plans for nearly
all U.S.-based salaried and non-union hourly employees.
Effective January 1, 2007, Tenneco elected to early-adopt the measurement
date provisions of SFAS No. 158. As a result, during the first quarter of 2007,
the following adjustments were made to retained earnings (accumulated deficit)
and other comprehensive income (both net of tax effects) for our defined benefit
pension plans:
US FOREIGN
--- -------
Retained earnings (accumulated deficit), net of tax......... $(3) $(2)
Accumulated other comprehensive income, net of tax.......... 8 6
We made contributions of $36 million to these pension plans during 2007.
Based on current actuarial estimates, we believe we will be required to make
contributions of $29 million to those plans during 2008. Pension contributions
beyond 2008 will be required, but those amounts will vary based upon many
factors, including the performance of our pension fund investments during 2008.
Effective December 31, 2006, we froze future accruals under our defined
benefit plans for substantially all U.S. salaried and non-union hourly employees
and replaced these benefits with additional contributions under defined
contribution plans. These changes saved approximately $11 million in earnings
before taxes in 2007. Additionally, we realized a one-time benefit of $7 million
in the fourth quarter 2006 related to curtailing the defined benefit pension
plans.
We have life insurance plans which cover a majority of our domestic
employees. We also have postretirement plans for our domestic employees hired
before January 1, 2001. The plans cover salaried employees retiring on or after
attaining age 55 who have at least 10 years of service with us after attaining
age 45. For hourly employees, the postretirement benefit plans generally cover
employees who retire according to one of our hourly employee retirement plans.
All of these benefits may be subject to deductibles, co-payment provisions and
other limitations, and we have reserved the right to change these benefits. For
those employees hired after January 1, 2001, we do not provide any
postretirement benefits. Our postretirement healthcare and life insurance plans
are not funded. The measurement date used to determine postretirement benefit
obligations is December 31st.
On September 1, 2003, we changed our retiree medical benefits program to
provide participating retirees with continued access to group health coverage
while reducing our subsidization of the program. This negative plan amendment is
being amortized over the average remaining service life to retirement
eligibility of active plan participants as a reduction of service cost beginning
September 1, 2003.
In July 2004, we entered into a settlement with a group of the retirees
which were a part of the September 2003 change mentioned above. This settlement
provided the group with increased coverage, and as a result, a portion of the
negative plan amendment was reversed and a positive plan amendment put in place.
The effect of the settlement increased our 2004 postretirement benefit expense
by approximately $1 million and increased our accumulated postretirement benefit
obligation by approximately $13 million.
110
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic postretirement benefit cost for the years 2007, 2006, and
2005, consists of the following components:
2007 2006 2005
---- ---- ----
(MILLIONS)
Service cost -- benefits earned during the year.......... $ 2 $ 2 $ 3
Interest on accumulated postretirement benefit
obligation............................................. 9 9 8
Recognition of:
Actuarial loss......................................... 6 6 6
Prior service cost..................................... (5) (6) (6)
--- --- ---
Net periodic pension cost................................ $12 $11 $11
=== === ===
In 2008, we expect to recognize the following amounts, which are currently
reflected in accumulated other comprehensive income, as components of net
periodic benefit cost:
2008
----
Net actuarial loss................................................ $ 5
Prior service cost................................................ (5)
---
$--
===
Effective January 1, 2007, Tenneco elected to early-adopt the measurement
date provisions of SFAS No. 158. As a result, during the first quarter of 2007,
the following adjustments were made to retained earnings (accumulated deficit)
and other comprehensive income (both net of tax effects) for our postretirement
plans:
US
--
Retained earnings (accumulated deficit), net of tax................ $3
Accumulated other comprehensive income, net of tax................. --
The following estimated postretirement benefit payments are payable from
the plans to participants:
POSTRETIREMENT
YEAR BENEFITS
---- --------------
(MILLIONS)
2008......................................................... $10
2009......................................................... 10
2010......................................................... 10
2011......................................................... 11
2012......................................................... 11
2013-2017.................................................... 53
The weighted average assumed health care cost trend rate used in
determining the 2007 accumulated postretirement benefit obligation was 10
percent, declining to 5 percent by 2012. The healthcare cost trend rate was 10
percent and 9 percent for 2006 and 2005, respectively, in each case trading down
to 5 percent over succeeding periods.
111
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following assumptions were used in the accounting for postretirement
cost for the years of 2007, 2006 and 2005:
2007 2006
---- ----
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT
OBLIGATIONS
Discount rate................................................ 6.2% 5.9%
Rate of compensation increase................................ 4.0% 4.0%
2007 2006 2005
---- ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET
PERIODIC BENEFIT COST
Discount rate............................................ 6.0% 5.8% 6.3%
Rate of compensation increase............................ 4.0% 4.5% 4.5%
The effect of a one-percentage-point increase or decrease in the 2007
assumed health care cost trend rates on total service cost and interest and the
postretirement benefit obligation are as follows:
ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(MILLIONS)
Effect on total of service cost and interest
cost............................................ $ 1 $ 1
Effect on postretirement benefit obligation....... 14 12
Based on current actuarial estimates, we believe we will be required to
make postretirement contributions of approximately $10 million during 2008.
In September 2006, the FASB issued Statement of Accounting Standards No.
158, "Accounting for Defined Benefit Pension and Other Postretirement Plans"
which amended certain provisions of FASB Statements 87, 88, 106 and 132(R). As a
result of implementing the recognition provisions of this Statement on our
pension and postretirement plans, the incremental effect on individual line
items in the consolidated financial statements as of December 31, 2006, is as
follows:
BEFORE APPLICATION AFTER APPLICATION
OF STATEMENT 158 ADJUSTMENTS OF STATEMENT 158
------------------ ----------- -----------------
Deferred Income Tax Assets............. $ 417 $ 31 $ 448
Total Assets........................... 3,243 31 3,274
Liability for Pension Benefits......... 274 90 364
Total Liabilities...................... 2,958 90 3,048
Accumulated Other Comprehensive loss... (193) (59) (252)
Total Stockholders' Equity............. 285 (59) 226
Employee Stock Ownership Plans (401(k) Plans) -- We have established
Employee Stock Ownership Plans for the benefit of our employees. Under the
plans, subject to limitations in the Internal Revenue Code, participants may
elect to defer up to 75 percent of their salary through contributions to the
plan, which are invested in selected mutual funds or used to buy our common
stock. We currently match in cash 50 percent of each employee's contribution up
to eight percent of the employee's salary. In connection with freezing the
defined benefit pension plans for nearly all U.S. based salaried and hourly
employees effective December 31, 2006, and the related replacement of those
defined benefit plans with defined contribution plans, we are making additional
contributions to the Employee Stock Ownership Plans. We recorded expense for
these matching contributions of approximately $17 million for December 31, 2007
and $7 million for each of the years ended December 31, 2006 and 2005. All
contributions vest immediately.
112
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SEGMENT AND GEOGRAPHIC AREA INFORMATION
In October 2004 and July 2005, we announced changes in the structure of our
organization which changed the components of our reportable segments. The
European segment now includes South American and Indian operations. The Asia
Pacific segment includes our other Asian and Australian operations. While this
had no impact on our consolidated results, it changed our segment results.
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
113
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transferred between segments and geographic areas on a basis intended to reflect
as nearly as possible the "market value" of the products. Segment results for
2007, 2006, and 2005 are as follows:
SEGMENT
-----------------------------------------------------
NORTH ASIA RECLASS &
AMERICA EUROPE PACIFIC ELIMS CONSOLIDATED
------- ------ ------- --------- ------------
(MILLIONS)
AT DECEMBER 31, 2007, AND FOR THE YEAR
THEN ENDED
Revenues from external customers.......... $2,901 $2,737 $546 $ -- $6,184
Intersegment revenues..................... 9 398 14 (421) --
Interest income........................... -- 12 -- -- 12
Depreciation and amortization of other
intangibles............................. 103 86 16 -- 205
Income before interest expense, income
taxes, and minority interest............ 120 99 33 -- 252
Total assets.............................. 1,555 1,605 368 62 3,590
Investment in affiliated companies........ -- 10 -- -- 10
Expenditures for plant, property and
equipment............................... 106 74 18 -- 198
Noncash items other than depreciation and
amortization............................ (18) (1) 1 -- (18)
AT DECEMBER 31, 2006, AND FOR THE YEAR
THEN ENDED
Revenues from external customers.......... $1,956 $2,305 $421 $ -- $4,682
Intersegment revenues..................... 7 82 15 (104) --
Interest income........................... -- 7 -- -- 7
Depreciation and amortization of other
intangibles............................. 92 79 13 -- 184
Income before interest expense, income
taxes, and minority interest............ 103 81 12 -- 196
Total assets.............................. 1,460 1,422 301 91 3,274
Investment in affiliated companies........ -- 9 -- -- 9
Expenditures for plant, property and
equipment............................... 100 51 19 -- 170
Noncash items other than depreciation and
amortization............................ (14) 4 (1) -- (11)
AT DECEMBER 31, 2005, AND FOR THE YEAR
THEN ENDED
Revenues from external customers.......... $2,027 $2,053 $360 $ -- $4,440
Intersegment revenues..................... 6 57 11 (74) --
Interest income........................... 1 3 -- -- 4
Depreciation and amortization of other
intangibles............................. 90 76 11 -- 177
Income before interest expense, income
taxes, and minority interest............ 148 53 16 -- 217
Total assets.............................. 1,352 1,288 251 54 2,945
Investment in affiliated companies........ -- 6 -- -- 6
Expenditures for plant, property and
equipment............................... 74 54 16 -- 144
Noncash items other than depreciation and
amortization............................ (8) 8 -- -- --
114
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows information relating to our external customer
revenues for each product or each group of similar products:
NET SALES
YEAR ENDED DECEMBER 31,
------------------------
2007 2006 2005
------ ------ ------
(MILLIONS)
EMISSION CONTROL SYSTEMS & PRODUCTS
Aftermarket....................................... $ 370 $ 384 $ 368
Original Equipment market
OE Value-add................................... 2,288 1,665 1,709
OE Substrate................................... 1,673 927 681
------ ------ ------
3,961 2,592 2,390
------ ------ ------
4,331 2,976 2,758
------ ------ ------
RIDE CONTROL SYSTEMS & PRODUCTS
Aftermarket....................................... 734 690 653
OE market......................................... 1,119 1,016 1,029
------ ------ ------
1,853 1,706 1,682
------ ------ ------
Total Revenues................................. $6,184 $4,682 $4,440
====== ====== ======
During 2007, sales to four major customers comprised approximately 20
percent, 14 percent, 9 percent and 8 percent of consolidated net sales and
operating revenues. During 2006, sales to four major customers comprised
approximately 14 percent, 11 percent, 11 percent and 11 percent of consolidated
net sales and operating revenues. During 2005, sales to the same four major
customers comprised approximately 17 percent, 12 percent, 9 percent and 9
percent of consolidated net sales and operating revenues.
GEOGRAPHIC AREA
-----------------------------------------------------------------
UNITED OTHER RECLASS &
STATES GERMANY CANADA FOREIGN(A) ELIMS CONSOLIDATED
------ ------- ------ ---------- --------- ------------
(MILLIONS)
AT DECEMBER 31, 2007, AND FOR THE
YEAR THEN ENDED
Revenues from external
customers(b)................... $2,121 $1,036 $590 $2,437 $ -- $6,184
Long-lived assets(c)............. 410 151 89 695 -- 1,345
Total assets..................... 1,476 477 150 1,621 (134) 3,590
AT DECEMBER 31, 2006, AND FOR THE
YEAR THEN ENDED
Revenues from external
customers(b)................... $1,538 $ 842 $248 $2,054 $ -- $4,682
Long-lived assets(c)............. 402 139 73 637 -- 1,251
Total assets..................... 1,365 329 122 1,553 (95) 3,274
AT DECEMBER 31, 2005, AND FOR THE
YEAR THEN ENDED
Revenues from external
customers(b)................... $1,625 $ 633 $260 $1,922 $ -- $4,440
Long-lived assets(c)............. 406 136 77 586 -- 1,205
Total assets..................... 1,265 296 116 1,371 (103) 2,945
115
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
--------
Notes: (a) Revenues from external customers and long-lived assets for
individual foreign countries other than Germany and Canada are not
material.
(b) Revenues are attributed to countries based on location of the
shipper.
(c) Long-lived assets include all long-term assets except goodwill,
intangibles and deferred tax assets.
12. COMMITMENTS AND CONTINGENCIES
Capital Commitments
We estimate that expenditures aggregating approximately $48 million will be
required after December 31, 2007 to complete facilities and projects authorized
at such date, and we have made substantial commitments in connection with these
facilities and projects.
Lease Commitments
We have long-term leases for certain facilities, equipment and other
assets. The minimum lease payments under non-cancelable leases with lease terms
in excess of one year are:
SUBSEQUENT
2008 2009 2010 2011 2012 YEARS
---- ---- ---- ---- ---- ----------
(MILLIONS)
Operating Leases........................ $17 $14 $11 $ 9 $ 5 $ 2
Capital Leases.......................... $ 3 $ 3 $ 3 $-- $-- $--
Total rental expense for the year 2007, 2006, and 2005 was $40 million, $37
million and $35 million respectively.
Litigation
We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, and other product liability related matters), taxes,
employment matters, and commercial or contractual disputes, sometimes related to
acquisitions or divestitures. 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 are resolved on unfavorable terms.
However, although the ultimate outcome of any legal matter cannot be predicted
with certainty, based on present information, including our assessment of the
merits of the particular claim, we do not expect that these legal proceedings or
claims will have any material adverse impact on our future consolidated
financial position or results of operations.
In addition, we are subject to a number of lawsuits initiated by a
significant number of claimants alleging health problems as a result of exposure
to asbestos. A small percentage of claims have been asserted by railroad workers
alleging exposure to asbestos products in railroad cars manufactured by The
Pullman Company, one of our subsidiaries. Nearly all of the claims are related
to alleged exposure to asbestos in our automotive emission control products.
Only a small percentage of these claimants allege that they were automobile
mechanics and a significant number appear to involve workers in other industries
or otherwise do not include sufficient information to determine whether there is
any basis for a claim against us. We believe, based on scientific and other
evidence, it is unlikely that mechanics were exposed to asbestos by our former
muffler products and that, in any event, they would not be at increased risk of
asbestos-related disease based on their work with these products. Further, many
of these cases involve numerous defendants, with the number
116
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 are resolved unfavorably to us. To date, with respect to
claims that have proceeded sufficiently through the judicial process, we have
regularly achieved favorable resolution. Accordingly, we presently believe that
these asbestos-related claims will not have a material adverse impact on our
future financial condition or results of operations.
Product Warranties
We provide warranties on some of our products. The warranty terms vary but
range from one year up to limited lifetime warranties on some of our premium
aftermarket products. Provisions for estimated expenses related to product
warranty are made at the time products are sold or when specific warranty issues
are identified on OE products. These estimates are established using historical
information about the nature, frequency and average cost of warranty claims. We
actively study trends of warranty claims and take action to improve product
quality and minimize warranty claims. We believe that the warranty reserve is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve. The reserve is included in both
current and long-term liabilities on the balance sheet.
Below is a table that shows the activity in the warranty accrual accounts:
YEAR ENDED
DECEMBER
31,
-----------
2007 2006
---- ----
(MILLIONS)
Beginning Balance............................................ $ 25 $ 22
Accruals related to product warranties....................... 12 17
Reductions for payments made................................. (12) (14)
---- ----
Ending Balance............................................... $ 25 $ 25
==== ====
Environmental Matters
We are subject to a variety of environmental and pollution control laws and
regulations in all jurisdictions in which we operate. We expense or capitalize,
as appropriate, expenditures for ongoing compliance with environmental
regulations that relate to current operations. We expense 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 consolidated financial statements.
As of December 31, 2007, we are designated as a potentially responsible
party in one Superfund site. Including the Superfund site, we may have the
obligation to remediate current or former facilities, and we
117
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimate our share of environmental remediation costs at these facilities to be
approximately $11 million. For the Superfund site and the current and former
facilities, we have established reserves that we believe are adequate for these
costs. Although we believe our estimates of remediation costs are reasonable and
are based on the latest available information, the cleanup costs are estimates
and are subject to revision as more information becomes available about the
extent of remediation required. At some sites, we expect that other parties will
contribute to the remediation costs. In addition, at the Superfund site, the
Comprehensive Environmental Response, Compensation and Liability Act provides
that our liability could be joint and several, meaning that we could be required
to pay in excess of our share of remediation costs. Our understanding of the
financial strength of other potentially responsible parties at the Superfund
site, and of other liable parties at our current and former facilities, has been
considered, where appropriate, in our determination of our estimated liability.
We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund site, or as a liable party at our
current or former facilities, will not be material to our results of operations
or consolidated financial position.
13. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Basis of Presentation
Subject to limited exceptions, all of our existing and future material
domestic 100% owned subsidiaries (which are referred to as the Guarantor
Subsidiaries) fully and unconditionally guarantee our senior subordinated notes
due in 2014, our senior notes due in 2015 and our senior secured notes due 2013
on a joint and several basis. You should also read Note 6 of the consolidated
financial statements of Tenneco Inc. and Consolidated Subsidiaries, "Financial
Instruments" for further discussion of the notes and related guarantee. We have
not presented separate financial statements and other disclosures concerning
each of the Guarantor Subsidiaries because management has determined that such
information is not material to the holders of the notes. Therefore, the
Guarantor Subsidiaries are combined in the presentation below.
These condensed consolidating financial statements are presented on the
equity method. Under this method, our investments are recorded at cost and
adjusted for our ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
You should read the condensed consolidating financial information 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.
118
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2007
-------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues --
External...................... $2,827 $3,357 $ -- $ -- $6,184
Affiliated companies.......... 95 895 -- (990) --
------ ------ ----- ----- ------
2,922 4,252 -- (990) 6,184
------ ------ ----- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)..... 2,619 3,582 (1) (990) 5,210
Engineering, research, and
development................... 55 59 -- -- 114
Selling, general, and
administrative................ 145 249 4 1 399
Depreciation and amortization of
other intangibles............. 80 125 -- -- 205
------ ------ ----- ----- ------
2,899 4,015 3 (989) 5,928
------ ------ ----- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables...... -- (10) -- -- (10)
Other income (expense)........... 13 3 -- (10) 6
------ ------ ----- ----- ------
13 (7) -- (10) (4)
------ ------ ----- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES........................ 36 230 (3) (11) 252
Interest expense --
External (net of interest
capitalized)............. (2) 2 164 -- 164
Affiliated companies (net of
interest income)......... 185 (16) (169) -- --
Income tax expense (benefit).. (42) 78 57 (10) 83
Minority interest............. -- 10 -- -- 10
------ ------ ----- ----- ------
(105) 156 (55) (1) (5)
Equity in net income (loss)
from affiliated companies... 135 -- 50 (185) --
------ ------ ----- ----- ------
NET INCOME (LOSS).................. $ 30 $ 156 $ (5) $(186) $ (5)
====== ====== ===== ===== ======
119
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2006
-------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues --
External...................... $1,892 $2,790 $ -- $ -- $4,682
Affiliated companies.......... 88 483 -- (571) --
------ ------ ----- ----- ------
1,980 3,273 -- (571) 4,682
------ ------ ----- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)..... 1,614 2,793 -- (571) 3,836
Engineering, research, and
development................... 45 43 -- -- 88
Selling, general, and
administrative................ 131 238 4 -- 373
Depreciation and amortization of
other intangibles............. 71 113 -- -- 184
------ ------ ----- ----- ------
1,861 3,187 4 (571) 4,481
------ ------ ----- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables...... -- (9) -- -- (9)
Other income (expense)........... -- 6 (3) 1 4
------ ------ ----- ----- ------
-- (3) (3) 1 (5)
------ ------ ----- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES........................ 119 83 (7) 1 196
Interest expense --
External (net of interest
capitalized)............. (4) 3 137 -- 136
Affiliated companies (net of
interest income)......... 165 (11) (154) -- --
Income tax expense (benefit).. (33) 41 (4) 1 5
Minority interest............. -- 6 -- -- 6
------ ------ ----- ----- ------
(9) 44 14 -- 49
Equity in net income (loss)
from affiliated companies... 24 3 35 (62) --
------ ------ ----- ----- ------
NET INCOME (LOSS).................. $ 15 $ 47 $ 49 $ (62) $ 49
====== ====== ===== ===== ======
120
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2005
-------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
REVENUES
Net sales and operating
revenues --
External...................... $2,026 $2,414 $ -- $ -- $4,440
Affiliated companies.......... 73 508 -- (581) --
------ ------ ----- ----- ------
2,099 2,922 -- (581) 4,440
------ ------ ----- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)..... 1,697 2,462 -- (581) 3,578
Engineering, research, and
development................... 41 42 -- -- 83
Selling, general, and
administrative................ 165 219 -- -- 384
Depreciation and amortization of
other intangibles............. 71 106 -- -- 177
------ ------ ----- ----- ------
1,974 2,829 -- (581) 4,222
------ ------ ----- ----- ------
OTHER INCOME (EXPENSE)
Loss on sale of receivables...... -- (6) -- -- (6)
Other income (expense)........... 43 (30) 2 (10) 5
------ ------ ----- ----- ------
43 (36) 2 (10) (1)
------ ------ ----- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET
INCOME FROM AFFILIATED
COMPANIES........................ 168 57 2 (10) 217
Interest expense --
External (net of interest
capitalized)............. (2) 3 132 -- 133
Affiliated companies (net of
interest income)......... 122 (8) (114) -- --
Income tax expense (benefit).. (76) 26 69 7 26
Minority interest............. -- 2 -- -- 2
------ ------ ----- ----- ------
124 34 (85) (17) 56
Equity in net income (loss)
from affiliated companies... 57 -- 141 (198) --
------ ------ ----- ----- ------
NET INCOME (LOSS).................. $ 181 $ 34 $ 56 $(215) $ 56
====== ====== ===== ===== ======
121
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
DECEMBER 31, 2007
--------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ -------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 6 $ 182 $ -- $ -- $ 188
Receivables, net................... 385 1,090 148 (866) 757
Inventories........................ 198 341 -- -- 539
Deferred income taxes.............. 53 0 3 (20) 36
Prepayments and other.............. 18 103 -- -- 121
------ ------- ------ -------- -------
660 1,716 151 (886) 1,641
------ ------- ------ -------- -------
Other assets:
Investment in affiliated
companies....................... 628 -- 1,083 (1,711) --
Notes and advances receivable from
affiliates...................... 3,607 232 5,383 (9,222) --
Long-term notes receivable, net.... -- 19 -- -- 19
Goodwill........................... 136 72 -- -- 208
Intangibles, net................... 17 9 -- -- 26
Deferred income taxes.............. 310 60 180 (180) 370
Other.............................. 40 76 25 -- 141
------ ------- ------ -------- -------
4,738 468 6,671 (11,113) 764
------ ------- ------ -------- -------
Plant, property, and equipment, at
cost............................... 994 1,984 -- -- 2,978
Less -- Accumulated depreciation
and amortization................ (658) (1,135) -- -- (1,793)
------ ------- ------ -------- -------
336 849 -- -- 1,185
------ ------- ------ -------- -------
$5,734 $ 3,033 $6,822 $(11,999) $ 3,590
====== ======= ====== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current
maturities of long-term debt)
Short-term debt -- non-
affiliated.................... $ -- $ 44 $ 2 $ -- $ 46
Short-term debt -- affiliated... 274 439 10 (723) --
Trade payables..................... 350 774 -- (137) 987
Accrued taxes...................... 27 16 -- (2) 41
Other.............................. 118 169 21 (24) 284
------ ------- ------ -------- -------
769 1,442 33 (886) 1,358
Long-term debt-non-affiliated........ -- 7 1,321 -- 1,328
Long-term debt-affiliated............ 4,100 54 5,068 (9,222) --
Deferred income taxes................ 213 81 -- (180) 114
Postretirement benefits and other
liabilities........................ 264 89 -- 6 359
Commitments and contingencies
Minority interest.................... -- 31 -- -- 31
Shareholders' equity................. 388 1,329 400 (1,717) 400
------ ------- ------ -------- -------
$5,734 $ 3,033 $6,822 $(11,999) $ 3,590
====== ======= ====== ======== =======
122
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
DECEMBER 31, 2006
--------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ -------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 57 $ 146 $ (1) $ -- $ 202
Receivables, net................... 333 828 23 (589) 595
Inventories........................ 138 303 -- -- 441
Deferred income taxes.............. 34 12 7 (2) 51
Prepayments and other.............. 24 102 -- -- 126
------ ------ ------ -------- -------
586 1,391 29 (591) 1,415
------ ------ ------ -------- -------
Other assets:
Investment in affiliated
companies....................... 587 -- 1,108 (1,695) --
Notes and advances receivable from
affiliates...................... 3,442 215 5,012 (8,669) --
Long-term notes receivable, net.... 2 27 (3) -- 26
Goodwill........................... 135 68 -- -- 203
Intangibles, net................... -- 9 (1) -- 8
Deferred income taxes.............. 327 67 200 (197) 397
Other.............................. 34 70 28 -- 132
------ ------ ------ -------- -------
4,527 456 6,344 (10,561) 766
------ ------ ------ -------- -------
Plant, property, and equipment, at
cost............................... 949 1,694 -- -- 2,643
Less -- Accumulated depreciation
and amortization................ (621) (929) -- -- (1,550)
------ ------ ------ -------- -------
328 765 -- -- 1,093
------ ------ ------ -------- -------
$5,441 $2,612 $6,373 $(11,152) $ 3,274
====== ====== ====== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current
maturities of long-term debt)
Short-term debt -- non-
affiliated.................... $ -- $ 26 $ 2 $ -- $ 28
Short-term debt -- affiliated... 211 281 10 (502) --
Trade payables.................. 248 618 (1) (84) 781
Accrued taxes...................... 16 33 1 (1) 49
Other.............................. 119 114 32 (4) 261
------ ------ ------ -------- -------
594 1,072 44 (591) 1,119
Long-term debt-non-affiliated........ -- 10 1,347 -- 1,357
Long-term debt-affiliated............ 3,872 49 4,748 (8,669) --
Deferred income taxes................ 212 92 -- (197) 107
Postretirement benefits and other
liabilities........................ 311 111 8 7 437
Commitments and contingencies
Minority interest.................... -- 28 -- -- 28
Shareholders' equity................. 452 1,250 226 (1,702) 226
------ ------ ------ -------- -------
$5,441 $2,612 $6,373 $(11,152) $ 3,274
====== ====== ====== ======== =======
123
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2007
---------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by operating
activities........................... $ 380 $ 309 $(524) $ $ 165
INVESTING ACTIVITIES
Net proceeds from the sale of assets... 1 9 -- -- 10
Cash payments for plant, property, and
equipment............................ (59) (118) -- -- (177)
Cash payments for software related
intangible assets.................... (13) (6) -- -- (19)
Cash payment for net assets purchased.. (16) -- -- -- (16)
Investments and other.................. -- (250) 250 -- --
----- ----- ----- --- -----
Net cash used by investing activities.. (87) (365) 250 -- (202)
----- ----- ----- --- -----
FINANCING ACTIVITIES
Issuance of common shares.............. -- -- 8 -- 8
Issuance of Subsidiary Equity.......... 41 (41) -- -- --
Issuance of long-term debt............. -- -- 400 -- 400
Retirement of long-term debt........... -- (3) (588) -- (591)
Debt issuance cost of long-term debt... -- -- (11) -- (11)
Net increase (decrease) in revolver
borrowings and short-term debt
excluding current maturities of long-
term debt............................ -- 16 167 -- 183
Intercompany dividends and net increase
(decrease) in intercompany
obligations.......................... (384) 86 298 -- --
Distribution to minority interest
partners............................. -- (6) -- -- (6)
----- ----- ----- --- -----
Net cash provided (used) by financing
activities........................... (343) 52 274 -- (17)
----- ----- ----- --- -----
Effect of foreign exchange rate changes
on cash and cash equivalents......... -- 40 -- -- 40
----- ----- ----- --- -----
Increase (decrease) in cash and cash
equivalents.......................... (50) 36 -- -- (14)
Cash and cash equivalents, January 1... 56 146 -- -- 202
----- ----- ----- --- -----
Cash and cash equivalents, December 31
(Note)............................... $ 6 $ 182 $ -- $-- $ 188
===== ===== ===== === =====
--------
Note: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
124
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2006
-------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities............. $ 242 $ 249 $(288) $-- $ 203
INVESTING ACTIVITIES
Net proceeds from the sale of
assets........................... 10 7 -- -- 17
Cash payment for plant, property,
and equipment.................... (78) (99) -- -- (177)
Cash payment for software related
intangible assets................ (6) (7) -- -- (13)
Investments and other.............. -- 1 -- -- 1
----- ----- ----- --- -----
Net cash used by investing
activities....................... (74) (98) -- -- (172)
----- ----- ----- --- -----
FINANCING ACTIVITIES
Issuance of common shares.......... -- -- 17 -- 17
Retirement of long-term debt....... -- (3) (1) -- (4)
Net increase (decrease) in revolver
borrowings and short-term debt
excluding current maturities of
long-term debt................... -- 3 -- -- 3
Intercompany dividends and net
increase (decrease) in
intercompany obligations......... (142) (129) 271 -- --
Distribution to minority interest
partners......................... -- (4) -- -- (4)
----- ----- ----- --- -----
Net cash provided (used) by
financing activities............. (142) (133) 287 -- 12
----- ----- ----- --- -----
Effect of foreign exchange rate
changes on cash and cash
equivalents...................... -- 18 -- -- 18
----- ----- ----- --- -----
Increase (decrease) in cash and
cash equivalents................. 26 36 (1) -- 61
Cash and cash equivalents, January
1................................ 31 110 -- -- 141
----- ----- ----- --- -----
Cash and cash equivalents, December
31 (Note)........................ $ 57 $ 146 $ (1) $-- $ 202
===== ===== ===== === =====
--------
Note: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
125
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005
-------------------------------------------------------------------
TENNECO INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ------------ ------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities............. $ 202 $ 159 $(238) $-- $ 123
INVESTING ACTIVITIES
Net proceeds from the sale of
assets........................... 3 1 -- -- 4
Cash payments for plant, property,
and equipment.................... (47) (93) -- -- (140)
Cash payments for software related
intangible assets................ (6) (8) -- -- (14)
Acquisition of business............ -- (14) -- -- (14)
Investments and other.............. 2 (2) -- -- --
----- ----- ----- --- -----
Net cash used by investing
activities....................... (48) (116) -- -- (164)
----- ----- ----- --- -----
FINANCING ACTIVITIES
Issuance of common shares.......... -- -- 7 -- 7
Issuance of long-term debt......... -- 1 -- -- 1
Retirement of long-term debt....... -- (3) (42) -- (45)
Net increase (decrease) in revolver
borrowings and short-term debt
excluding current maturities of
long-term debt................... -- 9 -- -- 9
Intercompany dividends and net
increase (decrease) in
intercompany obligations......... (264) (9) 273 -- --
Distribution to minority interest
partners......................... -- -- -- -- --
----- ----- ----- --- -----
Net cash provided (used) by
financing activities............. (264) (2) 238 -- (28)
----- ----- ----- --- -----
Effect of foreign exchange rate
changes on cash and cash
equivalents...................... -- (4) -- -- (4)
----- ----- ----- --- -----
Increase (decrease) in cash and
cash equivalents................. (110) 37 -- -- (73)
Cash and cash equivalents, January
1................................ 140 74 -- -- 214
----- ----- ----- --- -----
Cash and cash equivalents, December
31 (Note)........................ $ 30 $ 111 $ -- $-- $ 141
===== ===== ===== === =====
--------
Note: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.
126
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
INCOME BEFORE
NET SALES COST OF SALES INTEREST EXPENSE,
AND (EXCLUDING INCOME TAXES
OPERATING DEPRECIATION AND AND MINORITY NET
QUARTER REVENUES AMORTIZATION) INTEREST INCOME (LOSS)
------- --------- ---------------- ----------------- -------------
(MILLIONS)
2007
1st................................. $1,400 $1,179 $ 49 $ 5
2nd................................. 1,663 1,377 103 41
3rd................................. 1,556 1,313 57 21
4th................................. 1,565 1,341 43 (72)
------ ------ ---- ----
$6,184 $5,210 $252 $ (5)
====== ====== ==== ====
The net loss of $72 million in the fourth quarter of 2007 was primarily driven by $66 million in non-
cash tax expense to realign the European ownership structure, a net tax benefit of $4 million for prior
year income tax returns, a charge of $14 million, after tax, for refinancing a portion of the company's
debt and after tax restructuring and restructuring related expenses of $11 million.
2006
1st................................. $1,131 $ 921 $ 41 $ 3
2nd................................. 1,221 971 73 24
3rd................................. 1,121 925 43 7
4th................................. 1,209 1,019 39 15
------ ------ ---- ----
$4,682 $3,836 $196 $ 49
====== ====== ==== ====
BASIC DILUTED
EARNINGS EARNINGS
PER SHARE OF PER SHARE OF
QUARTER COMMON STOCK COMMON STOCK
------- ------------ ------------
2007
1st................................................... $ 0.11 $ 0.11
2nd................................................... 0.89 0.85
3rd................................................... 0.47 0.45
4th................................................... (1.57) (1.57)
Full Year............................................. (0.11) (0.11)
2006
1st................................................... $ 0.07 $ 0.07
2nd................................................... 0.55 0.51
3rd................................................... 0.16 0.16
4th................................................... 0.32 0.31
Full Year............................................. 1.11 1.05
--------
Note: The sum of the quarters may not equal the total of the respective year's
earnings per share on either a basic or diluted basis due to changes in
the weighted average shares outstanding throughout the year.
(The preceding notes are an integral part of the foregoing consolidated
financial statements.)
127
SCHEDULE II
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Column C
--------------------
Column B ADDITIONS
--------- -------------------- Column E
BALANCE CHARGED CHARGED --------
Column A AT TO TO Column D BALANCE
-------- BEGINNING COSTS AND OTHER ---------- AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- --------- --------- -------- ---------- --------
(Millions)
Allowance for Doubtful Accounts and
Notes Deducted from Assets to Which it
Applies:
Year Ended December 31, 2007.......... $23 $3 $2 $3 $25
=== == == == ===
Year Ended December 31, 2006.......... $26 $4 $1 $8 $23
=== == == == ===
Year Ended December 31, 2005.......... $26 $5 $1 $6 $26
=== == == == ===
128
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the year covered by this report. As
described below under Management's Report on Internal Control Over Financial
Reporting, we have identified a material weakness in our internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)).
Our Chief Executive Officer and Chief Financial Officer have concluded that as a
result of this material weakness in accounting for income taxes, as of the end
of the period covered by this Annual Report on Form 10-K, our disclosure
controls and procedures were not effective. See Item 8, "Financial Statements
and Supplementary Data" for management's report on internal control over
financial reporting and the report of our independent registered public
accounting firm thereon.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except as described in management's report on internal control over
financial reporting under Item 8, "Financial Statements and Supplementary Data",
there have been no changes in our internal control over financial reporting
during the quarter ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION.
None.
129
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The sections entitled "Election of Directors" and "Corporate Governance" in
our definitive Proxy Statement for the Annual Meeting of Stockholders to be held
May 6, 2008 are incorporated herein by reference. In addition, Item 4.1 of this
Annual Report on Form 10-K, which appears at the end of Part I, is incorporated
herein by reference.
A copy of our Code of Ethical Conduct for Financial Managers, which applies
to our Chief Executive Officer, Chief Financial Officer, Controller and other
key financial managers, is filed as Exhibit 14 to this Form 10-K. We have posted
a copy of the Code of Ethical Conduct for Financial Managers on our Internet
website at www.tenneco.com. We will make a copy of this code available to any
person, without charge, upon written request to Tenneco Inc., 500 North Field
Drive, Lake Forest, Illinois 60045, Attn: General Counsel. We intend to satisfy
the disclosure requirement under Item 5.05 of Form 8-K and applicable NYSE rules
regarding amendments to or waivers of our Code of Ethical Conduct by posting
this information on our Internet website at www.tenneco.com.
ITEM 11. EXECUTIVE COMPENSATION.
The section entitled "Executive Compensation" in our definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 6, 2008 is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The section entitled "Ownership of Common Stock" in our definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 6, 2008 is
incorporated herein by reference.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table shows, as of December 31, 2007, information regarding
outstanding awards available under our compensation plans (including individual
compensation arrangements) under which our equity securities may be delivered:
(A) (C)
NUMBER OF (B) NUMBER OF
SECURITIES TO BE WEIGHTED- SECURITIES
ISSUED UPON AVERAGE EXERCISE AVAILABLE FOR
EXERCISE OF PRICE OF FUTURE
OUTSTANDING OUTSTANDING ISSUANCE
OPTIONS, OPTIONS, (EXCLUDING
WARRANTS AND WARRANTS AND SHARES IN
PLAN CATEGORY RIGHTS(1) RIGHTS COLUMN (A))(1)
----------------------------------------------- ---------------- ---------------- --------------
EQUITY COMPENSATION PLANS APPROVED BY SECURITY
HOLDERS:
Stock Ownership Plan(2)...................... 774,114 $ 6.01 --
2002 Long-Term Incentive Plan (as
amended)(3)(4)............................ 1,259,730 $12.44 --
2006 Long-Term Incentive Plan(5)............. 541,814 $26.82 1,884,216
EQUITY COMPENSATION PLANS NOT APPROVED BY
SECURITY HOLDERS:
Supplemental Stock Ownership Plan(6)......... 245,231 $ 8.56 --
--------
(1) Reflects the number of shares of the Company's common stock. Does not
include 203,001 shares that may be issued in settlement of common stock
equivalent units that were credited to outside directors as payment for
their retainer and other fees. In general, these units are settled in
cash. At the option of the Company, however, the units may be settled in
shares of the Company's common stock.
(2) This plan terminated as to new awards on December 31, 2001 (except awards
pursuant to commitments outstanding at that date).
130
(3) This plan terminated as to new awards upon adoption of our 2006 Long-term
Incentive Plan (except awards pursuant to commitments outstanding on that
date).
(4) Does not include 145,797 shares subject to outstanding restricted stock
(vest over time) as of December 31, 2007 that were issued at a weighted-
average issue price of $19.24 per share.
(5) Under this plan, as of December 31, 2007, a maximum of 463,236 shares
remained available for delivery under full value awards (i.e., bonus
stock, stock equivalent units, performance units, restricted stock and
restricted stock units).
(6) The plan described in the table above as not having been approved by
security holders is the Tenneco Inc. Supplemental Stock Ownership Plan.
This plan, which terminated on December 31, 2001 as to new awards (except
awards pursuant to commitments outstanding at that date), originally
covered the delivery of up to 1.5 million shares of common stock held in
the Company's treasury. This plan was and continues to be administered by
the Compensation/Nominating/Governance Committee. The Company's
directors, officers and other employees were eligible to receive awards
under this plan, although awards under the plan were limited to the
Company's non-executive employees. Awards under the plan could take the
form of non-statutory stock options, stock appreciation rights,
restricted stock, stock equivalent units or performance units. All awards
made under this plan were discretionary. The committee determined which
eligible persons received awards and determined all terms and conditions
(including form, amount and timing) of each award.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The subsections entitled "The Board of Directors and its
Committees -- General" and "Transactions with Related Persons" under the section
entitled "Corporate Governance" in our definitive Proxy Statement for the annual
meeting of Stockholders to be held on May 6, 2008 are incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The sections entitled "Ratify Appointment of Independent Public
Accountants -- Audit, Audit-Related, Tax and Other Fees" and "Ratify Appointment
of Independent Public Accountants -- Pre-Approval Policy" in our definitive
Proxy Statement for the Annual Meeting of Stockholders to be held May 6, 2008
are incorporated herein by reference.
131
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8
See "Index to Financial Statements of Tenneco Inc. and Consolidated
Subsidiaries" set forth in Item 8, "Financial Statements and Supplementary Data"
for a list of financial statements filed as part of this Report.
INDEX TO SCHEDULE INCLUDED IN ITEM 8
PAGE
----
Schedule of Tenneco Inc. and Consolidated Subsidiaries -- Schedule II
-- Valuation and qualifying accounts -- three years ended December 31,
2007.................................................................. 128
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE
Schedule I -- Condensed financial information of registrant
Schedule III -- Real estate and accumulated depreciation
Schedule IV -- Mortgage loans on real estate
Schedule V -- Supplemental information concerning property -- casualty insurance
operations
132
EXHIBITS
The following exhibits are filed with this Annual Report on Form 10-K for
the fiscal year ended December 31, 2007, or incorporated herein by reference
(exhibits designated by an asterisk are filed with the report; all other
exhibits are incorporated by reference):
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2 -- None
3.1(a) Restated Certificate of Incorporation of the registrant dated
December 11, 1996 (incorporated herein by reference from Exhibit
3.1(a) of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1997, File No. 1-12387).
3.1(b) -- Certificate of Amendment, dated December 11, 1996 (incorporated
herein by reference from Exhibit 3.1(c) of the registrant's Annual
Report on Form 10-K for the year ended December 31, 1997, File No.
1-12387).
3.1(c) -- Certificate of Ownership and Merger, dated July 8, 1997
(incorporated herein by reference from Exhibit 3.1(d) of the
registrant's Annual Report on Form 10-K for the year ended December
31, 1997, File No. 1-12387).
3.1(d) -- Certificate of Designation of Series B Junior Participating
Preferred Stock dated September 9, 1998 (incorporated herein by
reference from Exhibit 3.1(d) of the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998, File No. 1-
12387).
3.1(e) -- Certificate of Elimination of the Series A Participating Junior
Preferred Stock of the registrant dated September 11, 1998
(incorporated herein by reference from Exhibit 3.1(e) of the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, File No. 1-12387).
3.1(f) -- Certificate of Amendment to Restated Certificate of Incorporation
of the registrant dated November 5, 1999 (incorporated herein by
reference from Exhibit 3.1(f) of the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999, File No. 1-
12387).
3.1(g) -- Certificate of Amendment to Restated Certificate of Incorporation
of the registrant dated November 5, 1999 (incorporated herein by
reference from Exhibit 3.1(g) of the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999, File No. 1-
12387).
3.1(h) -- Certificate of Ownership and Merger merging Tenneco Automotive
Merger Sub Inc. with and into the registrant, dated November 5,
1999 (incorporated herein by reference from Exhibit 3.1(h) of the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-12387).
3.1(i) -- Certificate of Amendment to Restated Certificate of Incorporation
of the registrant dated May 9, 2000 (incorporated herein by
reference from Exhibit 3.1(i) of the registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000, File No. 1-
12387).
3.1(j) -- Certificate of Ownership and Merger merging Tenneco Inc. with and
into the registrant, dated October 27, 2005 (incorporated herein by
reference from Exhibit 99.1 of the registrant's Current Report on
Form 8-K dated October 28, 2005, File No. 1-12387).
3.2 -- By-laws of the registrant, as amended July 10, 2006 (incorporated
herein by reference from Exhibit 99.1 of the registrant's Current
Report on Form 8-K dated July 10, 2006, File No. 1-12387).
3.3 -- Certificate of Incorporation of Tenneco Global Holdings Inc.
("Global"), as amended (incorporated herein by reference to Exhibit
3.3 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
3.4 -- By-laws of Global (incorporated herein by reference to Exhibit 3.4
to the registrant's Registration Statement on Form S-4, Reg. No.
333-93757).
3.5 -- Certificate of Incorporation of TMC Texas Inc. ("TMC")
(incorporated herein by reference to Exhibit 3.5 to the
registrant's Registration Statement on Form S-4, Reg. No. 333-
93757).
3.6 -- By-laws of TMC (incorporated herein by reference to Exhibit 3.6 to
the registrant's Registration Statement on Form S-4, Reg. No. 333-
93757).
133
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.7 -- Amended and Restated Certificate of Incorporation of Tenneco
International Holding Corp. ("TIHC") (incorporated herein by
reference to Exhibit 3.7 to the registrant's Registration Statement
on Form S-4, Reg. No. 333-93757).
3.8 -- Amended and Restated By-laws of TIHC (incorporated herein by
reference to Exhibit 3.8 to the registrant's Registration Statement
on Form S-4, Reg. No. 333-93757).
3.9 -- Certificate of Incorporation of Clevite Industries Inc.
("Clevite"), as amended (incorporated herein by reference to
Exhibit 3.9 to the registrant's Registration Statement on Form S-4,
Reg. No. 333-93757).
3.10 -- By-laws of Clevite (incorporated herein by reference to Exhibit
3.10 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
3.11 -- Amended and Restated Certificate of Incorporation of the Pullman
Company ("Pullman") (incorporated herein by reference to Exhibit
3.11 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
3.12 -- By-laws of Pullman (incorporated herein by reference to Exhibit
3.12 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
3.13 -- Certificate of Incorporation of Tenneco Automotive Operating
Company Inc. ("Operating") (incorporated herein by reference to
Exhibit 3.13 to the registrant's Registration Statement on Form S-
4, Reg. No. 333-93757).
3.14 -- By-laws of Operating (incorporated herein by reference to Exhibit
3.14 to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
4.1(a) -- Rights Agreement dated as of September 8, 1998, by and between the
registrant and First Chicago Trust Company of New York, as Rights
Agent (incorporated herein by reference from Exhibit 4.1 of the
registrant's Current Report on Form 8-K dated September 24, 1998,
File No. 1-12387).
4.1(b) -- Amendment No. 1 to Rights Agreement, dated March 14, 2000, by and
between the registrant and First Chicago Trust Company of New York,
as Rights Agent (incorporated herein by reference from Exhibit
4.4(b) of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1999, File No. 1-12387).
4.1(c) -- Amendment No. 2 to Rights Agreement, dated February 5, 2001, by and
between the registrant and First Union National Bank, as Rights
Agent (incorporated herein by reference from Exhibit 4.4(b) of the
registrant's Post-Effective Amendment No. 3, dated February 26,
2001, to its Registration Statement on Form 8-A dated September 17,
1998).
4.1(d) -- Amendment No. 3 to Rights Agreement, dated November 13, 2006, by
and between the registrant and Wells Fargo Bank, N.A., as Rights
Agent (incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated November 13, 2006,
File No. 1-12387.
4.2(a) -- Indenture, dated as of November 1, 1996, between the registrant and
The Chase Manhattan Bank, as Trustee (incorporated herein by
reference from Exhibit 4.1 of the registrant's Registration
Statement on Form S-4, Registration No. 333-14003).
4.2(b) -- First Supplemental Indenture dated as of December 11, 1996 to
Indenture dated as of November 1, 1996 between the registrant and
The Chase Manhattan Bank, as Trustee (incorporated herein by
reference from Exhibit 4.3(b) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
4.2(c) -- Third Supplemental Indenture dated as of December 11, 1996 to
Indenture dated as of November 1, 1996 between the registrant and
The Chase Manhattan Bank, as Trustee (incorporated herein by
reference from Exhibit 4.3(d) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
4.2(d) -- Fourth Supplemental Indenture dated as of December 11, 1996 to
Indenture dated as of November 1, 1996 between the registrant and
The Chase Manhattan Bank, as Trustee (incorporated herein by
reference from Exhibit 4.3(e) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
4.2(e) -- Eleventh Supplemental Indenture, dated October 21, 1999, to
Indenture dated November 1, 1996 between The Chase Manhattan Bank,
as Trustee, and the registrant (incorporated herein by reference
from Exhibit 4.2(l) of the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, File No. 1-12387).
134
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.3 -- Specimen stock certificate for Tenneco Inc. common stock
(incorporated herein by reference from Exhibit 4.3 of the
registrant's Annual Report on Form 10-K for the year ended December
31, 2006, File No. 1-12387).
4.4(a) -- Indenture dated October 14, 1999 by and between the registrant and
The Bank of New York, as trustee (incorporated herein by reference
from Exhibit 4.4(a) of the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, File No. 1-12387).
4.4(b) -- Supplemental Indenture dated November 4, 1999 among Tenneco
Automotive Operating Company Inc., Tenneco International Holding
Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite
Industries Inc. and TMC Texas Inc. in favor of The Bank of New
York, as trustee (incorporated herein by reference from Exhibit
4.4(b) of the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-12387).
4.4(c) -- Subsidiary Guarantee dated as of October 14, 1999 from Tenneco
Automotive Operating Company Inc., Tenneco International Holding
Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite
Industries Inc. and TMC Texas Inc. in favor of The Bank of New
York, as trustee (incorporated herein by reference to Exhibit
4.4(c) to the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
4.5(a) -- Second Amended and Restated Credit Agreement, dated as of March 16,
2007, among Tenneco Inc., JPMorgan Chase Bank, N.A., as
administrative agent, and the other lenders party thereto
(incorporated herein by reference from Exhibit 99.1 of the
registrant's Current Report on Form 8-K dated March 16, 2007).
4.5(b) -- Guarantee and Collateral Agreement, dated as of March 16, 2007
(amending and restating the Guarantee and Collateral Agreement
dated as of November 4, 1999, as previously amended and amended and
restated), among Tenneco Inc., various of its subsidiaries and
JPMorgan Chase Bank, N.A., as administrative agent (incorporated
herein by reference from Exhibit 99.2 of the registrant's Current
Report on Form 8-K dated March 16, 2007).
*4.5(c) -- Waiver, dated July 23, 2007, to Second Amended and Restated Credit
Agreement, dated as March 16, 2007, by and among the registrant,
JPMorgan Chase Bank, N.A., as administrative agent, and the other
lenders party thereto.
*4.5(d) -- Second Amendment, dated November 26, 2007, to Second Amended and
Restated Credit Agreement, dated as March 16, 2007, by and among
the registrant, JPMorgan Chase Bank, N.A., as administrative agent,
and the other lenders party thereto.
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).
135
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.6(g) -- Third Supplemental Indenture, dated as of November 14, 2007, by and
among the registrant, the subsidiary guarantors party thereto and
U.S. Bank National Association, as trustee (incorporated herein by
reference from Exhibit 4.1 to the Company's Current Report on Form
8-K, dated November 14, 2007).
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).
*4.9(a) -- Indenture, dated as of November 19, 2007, by and among the
registrant, the subsidiary guarantors party thereto and Wells Fargo
Bank, N.A., as trustee.
*4.9(b) -- Registration Rights Agreement, dated November 19, 2007, by and
among the registrant, the subsidiary guarantors party thereto and
the initial purchasers party thereto.
9 -- None.
10.1 Distribution Agreement, dated November 1, 1996, by and among El
Paso Tennessee Pipeline Co., the registrant, and Newport News
Shipbuilding Inc. (incorporated herein by reference from Exhibit 2
of the registrant's Form 10, File No. 1-12387).
10.2 -- Amendment No. 1 to Distribution Agreement, dated as of December 11,
1996, by and among El Paso Tennessee Pipeline Co., the registrant,
and Newport News Shipbuilding Inc. (incorporated herein by
reference from Exhibit 10.2 of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
10.3 -- Debt and Cash Allocation Agreement, dated December 11, 1996, by and
among El Paso Tennessee Pipeline Co. , the registrant, and Newport
News Shipbuilding Inc. (incorporated herein by reference from
Exhibit 10.3 of the registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, File No. 1-12387).
10.4 -- Benefits Agreement, dated December 11, 1996, by and among El Paso
Tennessee Pipeline Co., the registrant, and Newport News
Shipbuilding Inc. (incorporated herein by reference from Exhibit
10.4 of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, File No. 1-12387).
10.5 -- Insurance Agreement, dated December 11, 1996, by and among El Paso
Tennessee Pipeline Co., the registrant, and Newport News
Shipbuilding Inc. (incorporated herein by reference from Exhibit
10.5 of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, File No. 1-12387).
10.6 -- Tax Sharing Agreement, dated December 11, 1996, by and among El
Paso Tennessee Pipeline Co., Newport News Shipbuilding Inc., the
registrant, and El Paso Natural Gas Company (incorporated herein by
reference from Exhibit 10.6 of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, File No. 1-12387).
10.7 -- First Amendment to Tax Sharing Agreement, dated as of December 11,
1996, among El Paso Tennessee Pipeline Co., 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).
136
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+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).
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 -- Omitted.
+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 -- Letter Agreement dated July 27, 2000 between the registrant and
Timothy E. Jackson (incorporated herein by reference from Exhibit
10.27 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 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).
137
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+10.28 -- Form of Stock Equivalent Unit Award Agreement under the 2002 Long-
Term Incentive Plan, as amended (incorporated herein by reference
from Exhibit 99.1 of the registrant's Current Report on Form 8-K
dated January 13, 2005, File No. 1-12387).
+10.29 -- Form of Stock Option Agreement for employees under the 2002 Long-
Term Incentive Plan, as amended (providing for a ten year option
term) (incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated January 13, 2005,
File No. 1-12387).
+10.30 -- Form of Stock Option Agreement for non-employee directors under the
2002 Long-Term Incentive Plan, as amended (providing for a ten year
option term) (incorporated herein by reference from Exhibit 99.3 of
the registrant's Current Report on Form 8-K dated January 13, 2005,
File No. 1-12387).
+10.31 -- Form of Restricted Stock Award Agreement for employees under the
2002 Long-Term Incentive Plan, as amended (three year cliff
vesting) (incorporated herein by reference from Exhibit 99.4 of the
registrant's Current Report on Form 8-K dated January 13, 2005,
File No. 1-12387).
+10.32 -- Form of Restricted Stock Award Agreement for non-employee directors
under the 2002 Long-Term Incentive Plan, as amended (incorporated
herein by reference from Exhibit 99.5 of the registrant's Current
Report on Form 8-K dated January 13, 2005, File No. 1-12387).
+10.33 -- Form of Restricted Stock Award Agreement for employees under the
2002 Long-Term Incentive Plan, as amended (vesting 1/3 annually)
(incorporated herein by reference from Exhibit 99.1 of the
registrant's Current Report on Form 8-K dated January 17, 2005,
File No. 1-12387).
+10.34 -- Form of Stock Option Agreement for employees under the 2002 Long-
Term Incentive Plan, as amended (providing for a seven year option
term) (incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated January 17, 2005,
File No. 1-12387).
+10.35 -- Form of Stock Option Agreement for non-employee directors under the
2002 Long-Term Incentive Plan, as amended (providing for a seven
year option term) (incorporated herein by reference from Exhibit
99.3 of the registrant's Current Report on Form 8-K dated January
17, 2005, File No. 1-12387).
+10.36 -- Form of Performance Share Agreement for non-employee directors
under the 2002 Long-Term Incentive Plan, as amended (incorporated
herein by reference from Exhibit 10.37 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 2008 Outside Directors' Compensation.
*+10.38 -- Summary of 2008 Named Executive Officer Compensation.
+10.39 -- Amendment No. 1 to the Key Executive Pension Plan (incorporated
herein by reference from Exhibit 10.39 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005,
File No. 1-12387).
+10.40 -- Amendment No. 1 to the Supplemental Executive Retirement Plan
(incorporated herein by reference from Exhibit 10.40 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005, File No. 1-12387).
+10.41 -- Second Amendment to the Key Executive Pension Plan (incorporated
herein by reference from Exhibit 10.41 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005,
File No. 1-12387).
+10.42 -- Amendment No. 2 to the Deferred Compensation Plan (incorporated
herein by reference from Exhibit 10.42 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005,
File No. 1-12387).
+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).
138
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+10.48 -- Form of Restricted Stock Award Agreement for non-employee directors
under the 2002 Long-Term Incentive Plan, as amended (providing for
one year cliff vesting) (incorporated herein by reference from
Exhibit 10.48 to the registrant's Annual Report on Form 10-K for
the year ended December 31, 2005, file No. 1-12387).
+10.49 -- Form of Stock Equivalent Unit Award Agreement, as amended, under
the 2002 Long-Term Incentive Plan, as amended (incorporated herein
by reference from Exhibit 10.49 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006, File No.
1-12387).
+10.50 -- Summary of Amendments to Deferred Compensation Plan and Incentive
Deferral Plan (incorporated herein by reference from Exhibit 10.50
to the registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006, File No. 1-12387).
+10.51 -- Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated by
reference to Exhibit 99.1 to the registrant's Current Report on
Form 8-K, dated May 9, 2006).
+10.52 -- Form of Restricted Stock Award Agreement for non-employee directors
under the Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated
by reference to Exhibit 99.2 to the registrant's Current Report on
Form 8-K, dated May 9, 2006).
+10.53 -- Form of Stock Option Agreement for employees under the Tenneco Inc.
2006 Long-Term Incentive Plan (incorporated by reference to Exhibit
99.3 to the registrant's Current Report on Form 8-K, dated May 9,
2006).
+10.54 -- Form of Restricted Stock Award Agreement for employees under the
Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated by
reference to Exhibit 99.4 to the registrant's Current Report on
Form 8-K, dated May 9, 2006).
+10.55 -- Summary of Amendments to the Company's excess defined benefit
plans, the terms of a new excess defined contribution plan and
Amendments to certain executives' employment agreements
(incorporated herein by reference from Exhibit 10.55 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006, File No. 1-12387).
+10.56 -- Form of First Amendment to the Tenneco Inc. Supplemental Pension
Plan for Management (incorporated herein by reference from Exhibit
10.56 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 2006. File No. 1-12387).
+10.57 -- Form of First Amendment to the Tenneco Inc. Supplemental Retirement
Plan (incorporated herein by reference from Exhibit 10.57 to the
registrant's Annual Report on Form 10-K for the year ended December
31, 2006. File No. 1-12387).
+10.58 -- Form of Stock Equivalent Unit Award Agreement, as amended, under
the 2002 Long-Term Incentive Plan, as amended (incorporated herein
by reference from Exhibit 99.1 of the registrant's Current Report
on Form 8-K dated as of December 6, 2006, File No. 1-12387).
+10.59 -- Letter Agreement dated December 4, 2006 between the registrant and
Timothy R. Donovan (incorporated herein by reference from Exhibit
10.59 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 2006. File No. 1-12387).
+10.60 -- Letter Agreement dated January 5, 2007 between the registrant and
Hari N. Nair (incorporated herein by reference from Exhibit 10.60
to the registrant's Annual Report on Form 10-K for the year ended
December 31, 2006. File No. 1-12387).
+10.61 -- Letter Agreement between Tenneco Inc. and Gregg Sherrill
(incorporated herein by reference from Exhibit 99.2 of the
registrant's Current Report on Form 8-K dated as of January 5,
2007, File No. 1-12387).
+10.62 -- Letter Agreement between Tenneco Inc. and Gregg Sherrill, dated as
of January 15, 2007 (incorporated herein by reference from Exhibit
99.1 of the registrant's Current Report on Form 8-K dated as of
January 15, 2007, File No. 1-12387).
+10.63 -- Form of Restricted Stock Agreement between Tenneco Inc. and Gregg
Sherrill (incorporated by reference to Exhibit 10.63 to the
registrant's Annual Report on Form 10-K for the year ended December
31, 2006, File No. 1-12387).
+10.64 -- Form of Long Term Performance Unit Award Under the 2006 Long-Term
Incentive Plan (stub period award for 2007) (incorporated herein by
reference from Exhibit 10.64 to the registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007, File No. 1-
12387).
139
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+10.65 -- Form of Long Term Performance Unit Award Under the 2006 Long-Term
Incentive Plan (three year award for 2007-2009 period)
(incorporated herein by reference from Exhibit 10.65 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007, File No. 1-12387).
+10.66 -- Tenneco Inc. Change in Control Severance Benefit Plan for Key
Executives, as Amended and Restated effective December 12, 2007
(incorporated herein by reference from Exhibit 10.1 to the
Company's Current Report on Form 8-K, dated December 18, 2007).
+*10.67 -- Form of Long Term Performance Unit Award Under the 2006 Long-Term
Incentive Plan (stub period award for 2008).
+*10.68 -- Form of Long Term Performance Unit Award Under the 2006 Long-Term
Incentive Plan (three-year award for periods commencing with 2008).
+*10.69 -- Letter Agreement dated January 5, 2007 between the registrant and
Timothy E. Jackson.
11 -- None.
*12 -- Computation of Ratio of Earnings to Fixed Charges.
13 -- None.
14 -- Tenneco Inc. Code of Ethical Conduct for Financial Managers
(incorporated herein by reference from Exhibit 99.3 to the
registrant's Annual Report on Form 10-K for the year ended December
31, 2002, File No. 1-12387).
16 -- None.
18 -- None.
*21 -- List of Subsidiaries of Tenneco Inc.
22 -- None.
*23 -- Consent of Independent Registered Public Accounting Firm.
*24 -- Powers of Attorney.
*31.1 -- Certification of Gregg Sherrill under Section 302 of the Sarbanes-
Oxley Act of 2002.
*31.2 -- Certification of Kenneth R. Trammell under Section 302 of the
Sarbanes-Oxley Act of 2002.
*32.1 -- Certification of Gregg Sherrill and Kenneth R. Trammell under
Section 906 of the
Sarbanes-Oxley Act of 2002.
33 -- None.
34 -- None.
35 -- None.
99 -- None.
100 -- None.
--------
* Filed herewith.
+ Indicates a management contract or compensatory plan or arrangement.
140
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TENNECO INC.
By *
-------------------------------------
Gregg Sherrill
Chairman and Chief Executive Officer
Date: February 29, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons in the capacities indicated on
February 29, 2008.
SIGNATURE TITLE
--------- -----
* Chairman, President and Chief
Executive Officer and Director
------------------------------------- (principal executive officer)
Gregg Sherrill
/s/ KENNETH R. TRAMMELL Executive Vice President and Chief
Financial Officer (principal financial
------------------------------------- officer)
Kenneth R. Trammell
* Vice President and Controller
(principal accounting officer)
-------------------------------------
Paul D. Novas
* Director
-------------------------------------
Charles W. Cramb
* Director
-------------------------------------
Dennis J. Letham
* Director
-------------------------------------
Frank E. Macher
* Director
-------------------------------------
Roger B. Porter
* Director
-------------------------------------
David B. Price, Jr.
* Director
-------------------------------------
Paul T. Stecko
* Director
-------------------------------------
Mitsunobi Takeuchi
* Director
-------------------------------------
Jane L. Warner
By: /s/ KENNETH R. TRAMMELL
-------------------------------
Kenneth R. Trammell
Attorney in fact
141