- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
(Mark One)
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</Table>
Commission File Number 1-12387
TENNECO AUTOMOTIVE INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 76-0515284
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
500 NORTH FIELD DRIVE, LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices) (Zip Code)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, par value $.01 per share: 39,088,702 shares as of October 31,
2001.
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Tenneco Automotive Inc. and Consolidated Subsidiaries--
Report of Independent Public Accountants............. 4
Statements of Income (Loss).......................... 5
Balance Sheets....................................... 6
Statements of Cash Flows............................. 7
Statements of Changes in Shareholders' Equity........ 8
Statements of Comprehensive Income (Loss)............ 9
Notes to Financial Statements........................ 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 38
PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................. *
Item 2. Changes in Securities and Use of Proceeds......... *
Item 3. Defaults Upon Senior Securities................... *
Item 4. Submission of Matters to a Vote of Security
Holders................................................ *
Item 5. Other Information................................. *
Item 6. Exhibits and Reports on Form 8-K.................. 39
</Table>
- ---------------
* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements
regarding, among other things, our prospects and business strategies. The words
"will," "believes," "should," "plans," "expects," "anticipate," and "estimates,"
and similar expressions (and variations thereof), identify these forward-looking
statements. Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, these
expectations may not prove to be correct. Because these forward-looking
statements are also subject to risks and uncertainties, actual results may
differ materially from the expectations expressed in the forward-looking
statements. Important factors that could cause actual results to differ
materially from the expectations reflected in the forward-looking statements
include:
- general economic, business and market conditions;
- the impact of consolidation among automotive parts suppliers and
customers on our ability to compete;
- operating hazards associated with our business;
- changes in consumer demand and preferences for automobiles and automotive
parts, as well as changes in automobile manufacturers' actual and
forecasted requirements for our products;
- changes in distribution channels or competitive conditions in the markets
and countries where we operate, including the impact of changes in
distribution channels for aftermarket products on our ability to increase
or maintain aftermarket sales;
- cyclicality of automotive production and sales;
- material substitution;
- labor disruptions at our facilities or at any of our significant
customers or suppliers;
2
- economic, exchange rate and political conditions in the foreign countries
where we operate or sell our products;
- customer acceptance of new products;
- new technologies that reduce the demand for certain of our products or
otherwise render them obsolete;
- our ability to realize our business strategy of improving operating
performance;
- capital availability or costs, including changes in interest rates,
market perceptions of the industries in which we operate or ratings of
securities;
- changes by the Financial Accounting Standards Board or the Securities and
Exchange Commission of authoritative generally accepted accounting
principles or policies;
- the impact of changes in and compliance with laws and regulations,
including environmental laws and regulations, and environmental
liabilities in excess of the amount reserved;
- terrorism, acts of war and similar events, and their resultant impact on
economic and political conditions, and
- the occurrence or non-occurrence of other circumstances beyond our
control.
3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO TENNECO AUTOMOTIVE INC.:
We have reviewed the consolidated balance sheet of Tenneco Automotive Inc.
and consolidated subsidiaries as of September 30, 2001, and the related
consolidated statements of income and cash flows for the three and nine-month
periods ended September 30, 2001. These financial statements are the
responsibility of Tenneco Automotive Inc.'s management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 22, 2001
4
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
REVENUES
Net sales and operating revenues........ $ 817 $ 865 $ 2,606 $ 2,685
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation
shown below)......................... 638 678 2,076 2,062
Engineering, research, and
development.......................... 11 14 36 44
Selling, general, and administrative.... 91 84 287 301
Depreciation and amortization........... 39 40 115 116
----------- ----------- ----------- -----------
779 816 2,514 2,523
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE).................... (1) (2) (2) --
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME
TAXES, AND MINORITY INTEREST............ 37 47 90 162
Interest expense (net of interest
capitalized)......................... 42 46 132 139
Income tax expense (benefit)............ (3) (5) (12) (1)
Minority interest....................... -- -- 1 2
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS......... (2) 6 (31) 22
----------- ----------- ----------- -----------
Extraordinary loss, net of income tax..... -- (1) -- (1)
----------- ----------- ----------- -----------
NET INCOME (LOSS)......................... $ (2) $ 5 $ (31) $ 21
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE
Average shares of common stock
outstanding--
Basic................................... 38,065,590 35,054,961 37,343,303 34,392,126
Diluted................................. 38,247,202 35,217,995 37,503,759 34,584,516
Basic earnings (loss) per share of common
stock--
Continuing operations................... $ (.06) $ .17 $ (.83) $ .62
Extraordinary loss...................... -- (.01) -- (.01)
----------- ----------- ----------- -----------
$ (.06) $ .16 $ (.83) $ .61
=========== =========== =========== ===========
Diluted earnings (loss) per share of
common stock--
Continuing operations................... $ (.06) $ .16 $ (.83) $ .61
Extraordinary loss...................... -- (.01) -- (.01)
----------- ----------- ----------- -----------
$ (.06) $ .15 $ (.83) $ .60
=========== =========== =========== ===========
Cash dividends per share of common
stock................................... $ -- $ .05 $ -- $ .15
=========== =========== =========== ===========
</Table>
The accompanying notes to financial statements are an integral part of
these statements of income (loss).
5
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and temporary cash investments....................... $ 92 $ 35
Receivables--
Customer notes and accounts, net....................... 439 457
Other.................................................. 22 30
Inventories--
Finished goods......................................... 163 197
Work in process........................................ 88 83
Raw materials.......................................... 65 103
Materials and supplies................................. 38 39
Deferred income taxes..................................... 76 76
Prepayments and other..................................... 92 89
------- -------
1,075 1,109
Other assets:
Long-term notes receivable, net........................... 27 24
Goodwill and intangibles, net............................. 443 463
Deferred income taxes..................................... 114 94
Pension assets............................................ 50 41
Other..................................................... 141 150
------- -------
775 772
------- -------
Plant, property, and equipment, at cost..................... 1,818 1,852
Less--Reserves for depreciation and amortization.......... 869 847
------- -------
949 1,005
------- -------
$ 2,799 $ 2,886
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term
debt).................................................. $ 142 $ 92
Trade payables............................................ 464 464
Accrued taxes............................................. 16 16
Accrued interest.......................................... 44 35
Accrued liabilities....................................... 148 134
Other..................................................... 72 68
------- -------
886 809
------- -------
Long-term debt.............................................. 1,359 1,435
------- -------
Deferred income taxes....................................... 136 144
------- -------
Postretirement benefits..................................... 131 128
------- -------
Deferred credits and other liabilities...................... 30 26
------- -------
Commitments and contingencies
Minority interest........................................... 15 14
------- -------
Shareholders' equity:
Common stock.............................................. -- --
Premium on common stock and other capital surplus......... 2,745 2,738
Accumulated other comprehensive income (loss)............. (303) (239)
Retained earnings (accumulated deficit)................... (1,960) (1,929)
------- -------
482 570
Less--Shares held as treasury stock, at cost.............. 240 240
------- -------
242 330
------- -------
$ 2,799 $ 2,886
======= =======
</Table>
The accompanying notes to financial statements are an integral part of these
balance sheets.
6
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
2001 2000
---- ----
(MILLIONS)
OPERATING ACTIVITIES
Net income (loss)........................................... $(31) $ 22
Adjustments to reconcile income to cash provided (used) by
operating activities Depreciation and amortization........ 115 116
Deferred income taxes..................................... (28) (15)
(Gain) loss on sale of assets, net........................ 4 1
Changes in components of working capital--
(Increase) decrease in receivables..................... 5 (44)
(Increase) decrease in inventories..................... 52 (11)
(Increase) decrease in prepayments and other current
assets................................................ (9) (15)
Increase (decrease) in payables........................ 7 123
Increase (decrease) in accrued taxes................... 2 7
Increase (decrease) in accrued interest................ 10 20
Increase (decrease) in other current liabilities....... 6 (5)
Other..................................................... 16 4
---- -----
Net cash provided (used) by operating activities............ 149 203
---- -----
INVESTING ACTIVITIES
Net proceeds from sale of assets............................ 3 7
Expenditures for plant, property, and equipment............. (74) (108)
Acquisitions of businesses.................................. -- (5)
Investments and other....................................... (10) (15)
---- -----
Net cash provided (used) by investing activities............ (81) (121)
---- -----
NET CASH PROVIDED (USED) BEFORE FINANCING ACTIVITIES........ 68 82
FINANCING ACTIVITIES
Issuance of common and treasury stock....................... 8 13
Proceeds from subsidiary equity issued...................... -- 1
Issuance of long-term debt.................................. -- 1
Retirement of long-term debt................................ (8) (67)
Net increase (decrease) in short-term debt excluding current
maturities of long-term debt.............................. (13) (25)
Dividends (common).......................................... -- (5)
Other....................................................... -- (11)
---- -----
Net cash provided (used) by financing activities............ (13) (93)
---- -----
Effect of foreign exchange rate changes on cash and
temporary cash investments................................ 2 (5)
---- -----
Increase (decrease) in cash and temporary cash
investments............................................... 57 (16)
Cash and temporary cash investments, January 1.............. 35 84
---- -----
Cash and temporary cash investments, September 30 (Note).... $ 92 $ 68
==== =====
Cash paid during the period for interest.................... $121 $ 125
Cash paid during the period for income taxes (net of
refunds).................................................. $ 10 $ 8
</Table>
NOTE: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
The accompanying notes to financial statements are an integral part of these
statements of cash flows.
7
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
2001 2000
--------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ------
(MILLIONS EXCEPT SHARE AMOUNTS)
COMMON STOCK
Balance January 1................................. 37,797,256 $ -- 34,970,485 $ --
Issued pursuant to benefit plans................ 2,167,417 -- 1,987,641 --
---------- -----------
Balance September 30.............................. 39,964,673 -- 36,958,126 --
========== ===========
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance January 1................................. 2,738 2,721
Premium on common stock issued pursuant to
benefit plans.............................. 7 13
------- -------
Balance September 30.............................. 2,745 2,734
------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance January 1................................. (239) (179)
Other comprehensive income (loss)............... (64) (88)
------- -------
Balance September 30.............................. (303) (267)
------- -------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1................................. (1,929) (1,880)
Net income (loss)............................... (31) 21
Dividends on common stock....................... -- (5)
------- -------
Balance September 30.............................. (1,960) (1,864)
------- -------
LESS--COMMON STOCK HELD AS TREASURY STOCK, AT COST
Balance January 1................................. 1,298,498 240 1,298,373 240
Shares issued................................... 3,806 -- --
Shares acquired................................. -- -- 125 --
---------- ------- ----------- -------
Balance September 30.............................. 1,294,692 240 1,298,498 240
========== ------- =========== -------
Total...................................... $ 242 $ 363
======= =======
</Table>
The accompanying notes to financial statements are an integral part of these
statements of changes in shareholders' equity.
8
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2001 2000
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
------------- ------------- ------------- -------------
(MILLIONS)
NET INCOME (LOSS)............................. $(2) $ 5
--- ----
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance July 1.............................. $(300) $(218)
Translation of foreign currency
statements............................. 17 17 (46) (46)
----- -----
Balance September 30........................ (283) (264)
----- -----
FAIR VALUE OF INTEREST RATE SWAPS
Balance July 1.............................. $ (13) $ --
Translation of foreign currency
statements............................. (5) (5) -- --
----- -----
Balance September 30........................ (18) --
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance July 1 and September 30............. (2) (3)
----- -----
Balance September 30.......................... $(303) $(267)
===== --- =====
Other comprehensive income (loss)............. 12 (46)
--- ----
COMPREHENSIVE INCOME (LOSS)................... $10 $(41)
=== ====
</Table>
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2001 2000
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
------------- ------------- ------------- -------------
(MILLIONS)
NET INCOME (LOSS)............................. $ (31) $ 21
------- ----
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance January 1........................... $(237) $(176)
Translation of foreign currency
statements............................. (46) (46) (88) (88)
----- -----
Balance September 30........................ (283) (264)
----- -----
FAIR VALUE OF INTEREST RATE SWAPS
Balance January 1........................... $ -- $ --
Translation of foreign currency
statements............................. (18) (18) -- --
----- -----
Balance September 30........................ (18) --
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance January 1 and September 30.......... (2) (3)
----- -----
Balance September 30.......................... $(303) $(267)
===== ------- =====
Other comprehensive income (loss)............. (64) (88)
------- ----
COMPREHENSIVE INCOME (LOSS)................... $ (95) $(67)
======= ====
</Table>
The accompanying notes to financial statements are an integral part
of these statements of comprehensive income (loss).
9
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) In our opinion, the accompanying unaudited financial statements contain
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly Tenneco's financial position, results of operations, cash flows,
changes in shareholders' equity, and comprehensive income for the periods
indicated. The unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles.
Our consolidated financial statements include all majority-owned
subsidiaries. We carry investments in 20 percent to 50 percent owned companies
at cost plus equity in undistributed earnings and cumulative translation
adjustments from date of acquisition since we have the ability to exert
significant influence over operating and financial policies.
We have reclassified prior year's financial statements where appropriate to
conform to 2001 presentations.
(2) 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. Charges to income related to these plans are recorded
in the period in which the plans are finalized and approved, while actions
necessary to affect these restructuring plans occur over future periods in
accordance with established plans.
We have substantially completed the restructuring actions related to the
1999 plan. The 1999 plan involved closing a ride control manufacturing facility
and an exhaust plant in Europe, closing or downsizing four European aftermarket
distribution centers, closing a North American exhaust manufacturing facility
plus employee reductions of approximately 780. Over 750 employees have been
terminated under the 1999 plan with the remainder of the planned reductions
achieved through normal activities. The timing of closing one European
aftermarket distribution location has changed as a result of customer
requirements. Actions necessary to complete closing this location are in
process, and we expect to complete those actions and close the location in 2002.
In the fourth quarter of 2000, our Board of Directors approved a
restructuring plan to further reduce administrative and operational overhead
costs. We recorded a pre-tax charge related to the plan of $46 million, $32
million after tax, or $.92 per diluted common share. Within the statement of
income, $13 million of the pre-tax charge is reflected in cost of sales, while
$33 million is included in selling, general, and administrative expenses. The
charge is comprised of $24 million of severance and related costs for salaried
employment reductions worldwide and $22 million for the reduction of
manufacturing and distribution capacity in response to long-term market trends.
The 2000 plan involved closing a North American aftermarket exhaust distribution
facility and ride control manufacturing plant in our Asian market, as well as
the consolidation of some exhaust manufacturing facilities in Europe. In
addition, the plan involves the elimination of up to 700 positions, including
temporary employees. We wrote down the assets at the locations to be closed to
their fair value, less costs to sell. We estimated the market value of buildings
using external real estate appraisals. As a result of the single purpose nature
of the machinery and equipment to be disposed of, fair value was estimated to be
scrap value less costs to dispose in most cases. We do not expect that cash
proceeds on the sale of these assets will be significant. As of September 30,
2001, approximately 550 employees have been terminated under the 2000 plan
primarily in North America and Europe. Additionally, 57 temporary employees have
been terminated. All restructuring actions are being completed in accordance
with our established plan. We expect to complete all restructuring activities
related to this plan by the end of the first quarter of 2002.
Also in the fourth quarter of 2000, we recorded other charges of $15
million, $10 million after tax, or $.29 per diluted common share. These charges
relate to a strategic decision to reduce some of the aftermarket parts we offer
and to relocation expenses incurred associated with the restructuring plans. The
aftermarket parts were written down to their estimated scrap value less costs to
sell.
10
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In the first quarter of 2001, our Board of Directors approved a
restructuring plan in response to increasingly difficult industry conditions. On
January 31, 2001, we announced plans to eliminate up to 405 salaried positions
worldwide. We recorded pre-tax charges related to the restructuring of $11
million, $8 million after tax, or $.21 per diluted common share. Within the
statement of income, $2 million of the pre-tax charge is reflected in cost of
sales, while $9 million is included in selling, general, and administrative
expenses. These charges are comprised of $8 million for severance and related
costs for salaried employment reductions worldwide and $3 million for costs
related to closing a testing facility in North America. As of September 30,
2001, we have eliminated about 290 positions in connection with this plan. We
also incurred $4 million for other restructuring related costs and expenses such
as relocation and moving costs that could not be accrued as part of the
restructuring reserve. We estimate that we will complete these restructuring
activities no later than the first quarter 2002. All workforce reductions are
being done in compliance with all legal and contractual requirements including
obligations to consult with worker committees, union representatives and others.
In the second quarter of 2001, our Board of Directors approved a separate
restructuring plan related to closing a North American ride control production
line. We recorded pre-tax charges related to the plan of $8 million, $6 million
after tax, or $.16 per diluted common share. Within the statement of income, the
$8 million charge is included in cost of sales and relates primarily to
impairing the assets related to the production line to their fair value, less
costs to sell. As a result of the single purpose nature of the machinery and
equipment to be disposed of, fair value was estimated to be scrap value less
costs to dispose in most cases. We do not expect that cash proceeds on the sale
of these assets will be significant. We expect to complete all restructuring
activities related to this plan by the end of 2001.
Amounts related to activities that are part of the restructuring plans are
as follows:
<Table>
<Caption>
DECEMBER 31, 2000 2001 2001 CHARGED TO IMPACT OF SEPTEMBER 30, 2001
RESTRUCTURING RESTRUCTURING CASH ASSET EXCHANGE RESTRUCTURING
RESERVE CHARGES PAYMENTS ACCOUNTS RATES RESERVE
----------------- ------------- -------- ---------- --------- ------------------
Severance............ $23 $ 8 $(18) $ -- $ (1) $12
Asset Impairment..... -- 9 -- (9) -- --
Facility exit
costs.............. 3 2 (1) -- (1) 3
--- --- ---- ---- ---- ---
$26 $19 $(19) $ (9) $ (2) $15
=== === ==== ==== ==== ===
</Table>
In addition to the actions taken through the end of the third quarter, we
are evaluating additional opportunities to initiate actions that will reduce our
costs through implementing the most appropriate and efficient logistics,
distribution, and manufacturing footprint for the future. Any actions that we
take will require the approval of our Board of Directors and any workforce
reductions that result will be done in compliance with all legal and contractual
requirements including obligations to consult with worker committees, union
representatives, and others. While the actions we expect to initiate in the
fourth quarter of 2001 are still being developed, we expect to record a
significant restructuring charge in the fourth quarter that could range up to
$32 million. Also, we currently estimate that we will incur about $2 million of
expense during the remainder of 2001 with respect to restructuring-related costs
and expenses for actions that have already been announced that could not be
accrued as part of the restructuring reserve.
(3) We are party to various legal proceedings arising from our operations.
We believe that the outcome of these proceedings, individually and in the
aggregate, will have no material adverse effect on our financial position or
results of operations.
An OE customer has cancelled a platform for which we had a contract to
supply a ride control system. We are currently working with the customer to
recover our investment in development costs and related equipment for this
platform, as well as other related claims. We are currently negotiating with our
customer
11
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
for reimbursement of all our costs. Although no assurances can be given, we
believe the resolution of this issue will not have a material adverse effect on
our financial position or results of operations.
(4) We and some of our subsidiaries and affiliates are parties to
environmental proceedings. We expense or capitalize, as appropriate,
expenditures for ongoing compliance with environmental regulations that relate
to current operations. We expense expenditures that relate to an existing
condition caused by past operations and that do not contribute to current or
future revenue generation. We record liabilities when environmental assessments
indicate that remedial efforts are probable and the costs can be reasonably
estimated. Estimates of the liability are based upon currently available facts,
existing technology, and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. We consider all available evidence including prior experience in
remediation of contaminated sites, other companies' cleanup experience and data
released by the United States Environmental Protection Agency or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new information. Where future cash flows are
fixed or reliably determinable, we have discounted the liabilities. All other
environmental liabilities are recorded at their undiscounted amounts. We
evaluate recoveries separately from the liability and, when they are assured,
recoveries are recorded and reported separately from the associated liability in
our financial statements.
As of September 30, 2001, we continue to be designated as a potentially
responsible party in three Superfund sites. We have estimated our share of the
remediation costs for these sites to be approximately $1 million in the
aggregate. In addition to the Superfund sites, we may be obligated to remediate
current or former facilities, and we estimate our share of remediation costs at
these facilities to be approximately $24 million. For both the Superfund sites
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 sites, 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 has been considered, where appropriate, in our
determination of our estimated liability.
As we previously disclosed, we undertook a third-party evaluation of
estimated environmental remediation costs at one of our facilities beginning in
2000. The evaluation was initiated as a result of testing that indicated the
potential underground migration of some contaminants beyond our facility
property. We have completed and analyzed the results of our evaluation of
off-site contamination migration from that facility and as a result we have
increased the environmental remediation reserve we had for this facility by $5
million through a charge to income in the first quarter 2001. We also increased
our estimate of environmental remediation reserves for three other locations by
a total of $1 million in the first quarter of 2001. Additionally, in the first
quarter of 2001, we reached an agreement with a third party to assume
responsibility for remediation of a location at which we previously shared
responsibility. In exchange, we received cash and a note for a total of $4
million, the estimate of the third party's share of the total remediation
liability. We increased our environmental liability estimate for this location
by $4 million as a result. These amounts are reflected in our estimation of
remediation costs described above. We believe that these potential costs, as
well as the costs associated with our current status as a potentially
responsible party in the Superfund sites, or as a liable party at our current or
former facilities, will not be material to our consolidated financial position
or results of operations.
(5) In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities."
12
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
This statement establishes new accounting and reporting standards requiring that
all derivative instruments, including derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at their fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting treatment. This statement cannot be applied retroactively and is
effective for all fiscal years beginning after June 15, 2000. We adopted this
statement effective January 1, 2001, and it did not have a significant impact on
our financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101,"Revenue Recognition." This SAB
provides guidance on the recognition, presentation, and disclosure of revenue in
the financial statements and is effective no later than the fourth quarter of
fiscal years beginning after December 15, 1999. The SAB draws on the existing
accounting rules and defines the basic criteria that must be met before we can
record revenue. The impact of adopting SAB 101 did not have a significant effect
on our results of operations or financial position.
In May 2000, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-14, Accounting for Certain Sales Incentives. This
issue addresses the recognition, measurement, and income statement
classification of various types of sales incentives, including discounts,
coupons, rebates, and free products. Consequently, beginning January 1, 2001, we
classified some incentives that were previously shown in selling, general, and
administrative expense as a reduction in revenues. As a result of the change,
revenue was $12 million lower for the first nine months of 2001, with an
offsetting decline in selling, general, and administrative expenses. We have
restated prior year results for comparability, resulting in a reduction in net
sales of $15 million for the nine months ended September 30, 2000, with an
offsetting reduction in selling, general, and administrative expense.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 142 changes the accounting for purchased goodwill
from an amortization method to an impairment-only approach. Therefore
amortization of all purchased goodwill, including amortization of goodwill
recorded in past business combinations, will cease upon adoption of SFAS No.
142. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. Early adoption of the SFAS No. 142 is not permitted nor is retroactive
application to prior period (interim or annual) financial statements. At the end
of the third quarter, the balance of unamortized goodwill was $439 million.
Goodwill is being amortized at the rate of $4 million each quarter. We are
currently evaluating the effect that this statement may have on our financial
position and results of operations.
In April 2001, the EITF reached a consensus on Issue No. 00-25, Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products. This consensus requires that consideration
provided by a vendor to a purchaser of the vendor's products be recognized as a
reduction of sales, except in those instances where an identifiable and
measurable benefit is or will be received by the vendor from the purchaser.
Issue No. 00-25 requires effective with the fourth quarter of 2001 that certain
expenses that historically have been included in selling, general, and
administrative costs be reclassified as deductions from sales. We do not believe
adopting this statement will have a significant impact on our financial position
or results of operations.
(6) We entered into an agreement during the third quarter of 2000 to sell
an interest in some of our trade accounts receivable to a third party. As of
September 2001, we had sold accounts receivable of $144 million. In 2001, we
recognized a loss of $4 million in the first nine months on these sales of trade
accounts, representing the discount from book values at which these receivables
were sold to the third party. The
13
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
discount rate varies based on funding cost incurred by the third party. The
average rate for the nine months ended September 30, 2001, was 6 percent. We
retained ownership of the remaining interest in the pool of receivables not sold
to the third party. We valued this retained interest based on the recoverable
value of the receivable pool, which approximated book value.
(7) Earnings (loss) per share of common stock outstanding were computed as
follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2001
---- ---- ---- ----
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
Basic Earnings Per Share--
Net income (loss) from continuing
operations........................... $ (2) $ 6 $ (31) $ 22
=========== =========== =========== ===========
Average shares of common stock
outstanding.......................... 38,065,590 35,054,961 37,343,303 34,392,126
=========== =========== =========== ===========
Earnings from continuing operations per
average share of common stock........ $ (.06) $ .17 $ (.83) $ .62
=========== =========== =========== ===========
Diluted Earnings Per Share--
Net income (loss) from continuing
operations........................... $ (2) $ 6 $ (31) $ 22
=========== =========== =========== ===========
Average shares of common stock
outstanding.......................... 38,065,590 35,054,961 37,343,303 34,392,126
Effect of dilutive securities:
Restricted stock................... -- 4,862 -- 35,053
Stock options...................... 20,020 140 474 143
Performance shares................. 161,592 158,032 159,982 157,194
----------- ----------- ----------- -----------
Average shares of common stock
outstanding including dilutive
securities........................... 38,247,202 35,217,995 37,503,759 34,584,516
=========== =========== =========== ===========
Earnings (loss) from continuing
operations per average share of
common stock......................... $ (.06) $ .16 $ (.83) $ .61
=========== =========== =========== ===========
</Table>
(8) We are a global manufacturer with two geographic reportable segments:
North America and Europe. Each segment manufactures and distributes ride control
and emission control products primarily for the automotive industry. We have not
aggregated individual operating segments within these reportable segments. We
evaluate segment performance based primarily on income before interest expense,
income taxes, and minority interest. Products are transferred between segments
and geographic areas on a basis intended to reflect as nearly as possible the
"market value" of the products.
14
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table summarizes certain Tenneco segment information:
<Table>
<Caption>
SEGMENT
-------------------------------------------------------
RECLASS
NORTH AMERICA EUROPE OTHER & ELIMS CONSOLIDATED
------------- ------ ----- ------- ------------
(MILLIONS)
FOR THE THREE MONTHS THEN ENDED SEPTEMBER 30, 2001
Revenues from external customers................... $ 440 $302 $ 75 $ -- $ 817
Intersegment revenues.............................. 2 9 2 (13) --
Income before interest, income taxes,
and minority interest............................ 23 9 5 -- 37
FOR THE THREE MONTHS THEN ENDED SEPTEMBER 30, 2000
Revenues from external customers................... $ 464 $311 $ 90 $ -- $ 865
Intersegment revenues.............................. 3 14 4 (21) --
Income before interest, income taxes,
and minority interest............................ 29 14 4 -- 47
AT SEPTEMBER 30, 2001, AND FOR THE NINE MONTHS THEN
ENDED
Revenues from external customers................... $1,368 $998 $240 $ -- $2,606
Intersegment revenues.............................. 7 32 6 (45) --
Income before interest, income taxes,
and minority interest............................ 40 39 11 -- 90
Total Assets................................ 1,108 951 684 56 2,799
AT SEPTEMBER 30, 2000, AND FOR THE NINE MONTHS THEN
ENDED
Revenues from external customers................... $1,507 $927 $251 $ -- $2,685
Intersegment revenues.............................. 8 33 10 (51) --
Income before interest, income taxes,
and minority interest............................ 103 48 11 -- 162
Total Assets................................ 1,449 922 561 (20) 2,912
</Table>
(9) Supplemental guarantor condensed financial statements are presented
below:
Basis of Presentation
We issued senior subordinated notes due 2009 as a component of a plan to
realign our debt in connection with the 1999 spin-off of our packaging business.
All of our existing and future material domestic wholly-owned subsidiaries (the
"Guarantor Subsidiaries") fully and unconditionally guarantee the notes on a
joint and several basis. We have not presented separate financial statements and
other disclosures concerning each of the Guarantor Subsidiaries because
management has determined that such information is not material to the holders
of the notes. Therefore, the Guarantor Subsidiaries are combined in the
presentation below.
These condensed consolidating financial statements are presented on the
equity method. Under this method our investments are recorded at cost and
adjusted for our ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
You should read the condensed consolidating financial statements of the
Guarantor Subsidiaries in connection with our consolidated financial statements
and related notes of which this note is an integral part.
Distributions
There are no significant restrictions on the ability of the Guarantor
Subsidiaries to make distributions to us.
15
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------------------------------------------
TENNECO
AUTOMOTIVE, INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ---------------- ------- ------------
(MILLIONS)
REVENUES
Net sales and operating revenues--
External....................... $359 $458 $ -- $ -- $817
Affiliated companies........... 11 16 -- (27) --
---- ---- ---- ---- ----
370 474 -- (27) 817
---- ---- ---- ---- ----
COSTS AND EXPENSES--
Cost of sales (exclusive of
depreciation shown below)...... 277 388 -- (27) 638
Engineering, research, and
development.................... 4 7 -- -- 11
Selling, general, and
administrative................. 50 41 -- -- 91
Depreciation and amortization..... 21 18 -- -- 39
---- ---- ---- ---- ----
352 454 -- (27) 779
---- ---- ---- ---- ----
OTHER INCOME (EXPENSE).............. 5 (6) -- -- (1)
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET INCOME
OF AFFILIATED COMPANIES........... 23 14 -- -- 37
Interest expense--
External (net of interest
capitalized)................. 1 2 39 -- 42
Affiliated companies (net of
interest income)............. 25 (1) (24) -- --
Income tax expense (benefit)...... (2) 4 (12) 7 (3)
Minority interest................. -- -- -- -- --
---- ---- ---- ---- ----
(1) 9 (3) (7) (2)
Equity in net income (loss) of
affiliated companies........... 4 -- 1 (5) --
---- ---- ---- ---- ----
INCOME (LOSS) FROM CONTINUING
OPERATIONS........................ 3 9 (2) (12) (2)
Extraordinary loss, net of income
tax............................... -- -- -- -- --
---- ---- ---- ---- ----
NET INCOME (LOSS)................... $ 3 $ 9 $ (2) $(12) $ (2)
==== ==== ==== ==== ====
</Table>
16
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------------------------------------------
TENNECO
AUTOMOTIVE, INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ---------------- ------- ------------
(MILLIONS)
REVENUES
Net sales and operating revenues--
External....................... $378 $487 $ -- $ -- $865
Affiliated companies........... 19 18 -- (37) --
---- ---- ---- ---- ----
397 505 -- (37) 865
---- ---- ---- ---- ----
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)...... 314 401 -- (37) 678
Engineering, research, and
development.................... 7 7 -- -- 14
Selling, general, and
administrative................. 44 40 -- -- 84
Depreciation and amortization..... 22 18 -- -- 40
---- ---- ---- ---- ----
387 466 -- (37) 816
---- ---- ---- ---- ----
OTHER INCOME (EXPENSE).............. 3 (5) -- -- (2)
---- ---- ---- ---- ----
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN NET INCOME
OF AFFILIATED COMPANIES........... 13 34 -- -- 47
Interest expense--
External (net of interest
capitalized)................. -- 2 44 -- 46
Affiliated companies (net of
interest income)............. 28 2 (30) -- --
Income tax expense (benefit)...... (14) 5 1 3 (5)
Minority interest................. -- -- -- -- --
---- ---- ---- ---- ----
(1) 25 (15) (3) 6
Equity in net income (loss) of
affiliated companies........... 26 -- 21 (47) --
---- ---- ---- ---- ----
INCOME (LOSS) FROM CONTINUING
OPERATIONS........................ 25 25 6 (50) 6
Extraordinary loss, net of income
tax............................... -- -- (1) -- (1)
---- ---- ---- ---- ----
NET INCOME (LOSS)................... $ 25 $ 25 $ 5 $(50) $ 5
==== ==== ==== ==== ====
</Table>
17
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
<Table>
<Caption>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
----------------------------------------------------------------------
TENNECO
AUTOMOTIVE,
INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ----------- ------- ------------
(MILLIONS)
REVENUES
Net sales and operating revenues--
External.......................... $1,073 $1,533 $ -- $ -- $2,606
Affiliated companies.............. 44 44 -- (88) --
------ ------ ---- ---- ------
1,117 1,577 -- (88) 2,606
------ ------ ---- ---- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)......... 886 1,278 -- (88) 2,076
Engineering, research, and
development....................... 16 20 -- -- 36
Selling, general, and
administrative.................... 159 128 -- -- 287
Depreciation and amortization........ 62 53 -- -- 115
------ ------ ---- ---- ------
1,123 1,479 -- (88) 2,514
------ ------ ---- ---- ------
OTHER INCOME (EXPENSE)................. 25 (27) -- -- (2)
------ ------ ---- ---- ------
INCOME (LOSS) BEFORE INTEREST EXPENSE,
INCOME TAXES, MINORITY INTEREST, AND
EQUITY IN NET INCOME OF AFFILIATED
COMPANIES............................ 19 71 -- -- 90
Interest expense--
External (net of interest
capitalized).................... -- 7 125 -- 132
Affiliated companies (net of
interest income)................ 84 1 (85) -- --
Income tax expense (benefit)......... (23) 25 (14) -- (12)
Minority interest.................... -- 1 -- -- 1
------ ------ ---- ---- ------
(42) 37 (26) -- (31)
Equity in net income (loss) of
affiliated companies.............. 27 -- (5) (22) --
------ ------ ---- ---- ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS........................... (15) 37 (31) (22) (31)
Extraordinary loss, net of income
tax.................................. -- -- -- -- --
------ ------ ---- ---- ------
NET INCOME (LOSS)...................... $ (15) $ 37 $(31) $(22) $ (31)
====== ====== ==== ==== ======
</Table>
18
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
STATEMENT OF INCOME (LOSS)
<Table>
<Caption>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------------------------------------------
TENNECO
AUTOMOTIVE, INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ---------------- ------- ------------
(MILLIONS)
REVENUES
Net sales and operating revenues--
External....................... $1,230 $1,455 $ -- $ -- $2,685
Affiliated companies........... 57 55 -- (112) --
------ ------ ---- ----- ------
1,287 1,510 -- (112) 2,685
------ ------ ---- ----- ------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)...... 996 1,178 -- (112) 2,062
Engineering, research, and
development.................... 21 23 -- -- 44
Selling, general, and
administrative................. 164 137 -- -- 301
Depreciation and amortization..... 61 55 -- -- 116
------ ------ ---- ----- ------
1,242 1,393 -- (112) 2,523
------ ------ ---- ----- ------
OTHER INCOME (EXPENSE).............. 3 (3) -- -- --
------ ------ ---- ----- ------
INCOME (LOSS) BEFORE INTEREST
EXPENSE, INCOMETAXES, MINORITY
INTEREST, AND EQUITY IN NETINCOME
OF AFFILIATED COMPANIES........... 48 114 -- -- 162
Interest expense--
External (net of interest
capitalized)................. -- 8 131 -- 139
Affiliated companies (net of
interest income)............. 78 8 (86) -- --
Income tax expense (benefit)...... (13) 26 (12) (2) (1)
Minority interest................. -- 2 -- -- 2
------ ------ ---- ----- ------
(17) 70 (33) 2 22
Equity in net income (loss) of
affiliated companies........... 54 -- 55 (109) --
------ ------ ---- ----- ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS........................ 37 70 22 (107) 22
Extraordinary loss, net of income
tax............................... -- -- (1) -- (1)
------ ------ ---- ----- ------
NET INCOME (LOSS)................... $ 37 $ 70 $ 21 $(107) $ 21
====== ====== ==== ===== ======
</Table>
19
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
BALANCE SHEET
<Table>
<Caption>
SEPTEMBER 30, 2001
-----------------------------------------------------------------------
TENNECO
AUTOMOTIVE, INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ---------------- ------- ------------
(MILLIONS)
ASSETS
Current assets:
Cash and temporary cash
investments..................... $ 27 $ 65 $ 0 $ -- $ 92
Receivables........................ 194 414 19 (166) 461
Inventories........................ 125 229 -- -- 354
Deferred income taxes.............. 73 2 106 (105) 76
Prepayments and other.............. 40 52 -- -- 92
------ ------ ------ ------- ------
459 762 125 (271) 1,075
------ ------ ------ ------- ------
Other assets:
Investment in affiliated
companies....................... 329 0 2,222 (2,551) --
Notes and advances receivable from
affiliates...................... 2,469 41 3,299 (5,809) --
Long-term notes receivable, net.... 15 12 -- -- 27
Goodwill and intangibles, net...... 313 130 -- -- 443
Deferred income taxes.............. 106 8 -- -- 114
Pension assets..................... 30 20 -- -- 50
Other.............................. 57 57 27 -- 141
------ ------ ------ ------- ------
3,319 268 5,548 (8,360) 775
------ ------ ------ ------- ------
Plant, property, and equipment, at
cost............................... 838 980 -- -- 1,818
Less--Reserves for depreciation and
amortization.................... 439 430 -- -- 869
------ ------ ------ ------- ------
399 550 -- -- 949
------ ------ ------ ------- ------
$4,177 $1,580 $5,673 $(8,631) $2,799
====== ====== ====== ======= ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current
maturities of long-term debt):
Short-term
debt--non-affiliated....... $ -- $ 23 $ 119 $ -- $ 142
Short-term debt--affiliated... 80 1 10 (91) --
Trade payables..................... 146 374 -- (56) 464
Accrued taxes...................... 52 22 -- (58) 16
Other.............................. 120 95 61 (12) 264
------ ------ ------ ------- ------
398 515 190 (217) 886
Long-term debt--non-affiliated....... -- 16 1,343 -- 1,359
Long-term debt--affiliated........... 1,865 7 3,937 (5,809) --
Deferred income taxes................ 164 58 (39) (47) 136
Postretirement benefits and other
liabilities........................ 131 31 -- (1) 161
Commitments and contingencies........ -- -- -- -- --
Minority interest.................... -- 15 -- -- 15
Shareholders' equity................. 1,619 938 242 (2,557) 242
------ ------ ------ ------- ------
$4,177 $1,580 $5,673 $(8,631) $2,799
====== ====== ====== ======= ======
</Table>
20
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
BALANCE SHEET
<Table>
<Caption>
DECEMBER 31, 2000
----------------------------------------------------------------------
TENNECO
AUTOMOTIVE,
INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ----------- ------- ------------
ASSETS
Current assets:
Cash and temporary cash
investments....................... $ 8 $ 27 $ -- $ -- $ 35
Receivables.......................... 199 379 21 (112) 487
Inventories.......................... 158 264 -- -- 422
Deferred income taxes................ 73 3 -- -- 76
Prepayments and other................ 36 53 -- -- 89
------ ------ ------ ------- ------
474 726 21 (112) 1,109
------ ------ ------ ------- ------
Other assets:
Investment in affiliated companies... 324 -- 2,306 (2,630) --
Notes and advances receivable from
affiliates........................ 2,343 14 3,469 (5,826) --
Long-term notes receivable, net...... 11 13 -- -- 24
Goodwill and intangibles, net........ 321 142 -- -- 463
Deferred income taxes................ 75 18 22 (21) 94
Pension assets....................... 22 19 -- -- 41
Other................................ 65 60 25 -- 150
------ ------ ------ ------- ------
3,161 266 5,822 (8,477) 772
------ ------ ------ ------- ------
Plant, property, and equipment, at
cost................................. 854 998 -- -- 1,852
Less--Reserves for depreciation and
amortization...................... 423 424 -- -- 847
------ ------ ------ ------- ------
431 574 -- -- 1,005
------ ------ ------ ------- ------
$4,066 $1,566 $5,843 $(8,589) $2,886
====== ====== ====== ======= ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (including current
maturities of long-term debt):
Short-term
debt--non-affiliated......... $ -- $ 28 $ 64 $ -- 92
Short-term debt--affiliated..... -- 1 10 (11) --
Trade payables....................... 179 369 1 (85) 464
Accrued taxes........................ 26 12 -- (22) 16
Other................................ 109 104 33 (9) 237
------ ------ ------ ------- ------
314 514 108 (127) 809
Long-term debt--non-affiliated......... -- 20 1,415 -- 1,435
Long-term debt--affiliated............. 1,753 4 4,069 (5,826) --
Deferred income taxes.................. 159 63 (78) -- 144
Postretirement benefits and other
liabilities.......................... 126 30 (1) (1) 154
Commitments and contingencies Minority
interest............................. -- 14 -- -- 14
Shareholders' equity................... 1,714 921 330 (2,635) 330
------ ------ ------ ------- ------
$4,066 $1,566 $5,843 $(8,589) $2,886
====== ====== ====== ======= ======
</Table>
21
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001
--------------------------------------------------------------------------
TENNECO
AUTOMOTIVE,
INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ --------------- ------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by
operating activities.............. $ (2) $143 $ 8 $-- $149
---- ---- ---- -- ----
INVESTING ACTIVITIES
Net proceeds from sale of assets.... 2 1 -- -- 3
Expenditures for plant, property,
and equipment..................... (21) (53) -- -- (74)
Investments and other............... (6) (4) -- -- (10)
---- ---- ---- -- ----
Net cash provided (used) by
investing activities.............. (25) (56) -- -- (81)
---- ---- ---- -- ----
FINANCING ACTIVITIES
Issuance of common and treasury
stock............................. -- -- 8 -- 8
Retirement of long-term debt........ -- (3) (5) -- (8)
Net increase (decrease) in
short-term debt excluding current
maturities of long-term debt...... -- -- (13) -- (13)
Intercompany dividends and net
increase (decrease) in
intercompany obligations.......... 46 (48) 2 -- --
Dividends (common).................. -- -- -- -- --
---- ---- ---- -- ----
Net cash provided (used) by
financing activities.............. 46 (51) (8) -- (13)
---- ---- ---- -- ----
Effect of foreign exchange rate
changes on cash and temporary cash
investments....................... -- 2 -- -- 2
---- ---- ---- -- ----
Increase (decrease) in cash and
temporary cash investments........ 19 38 -- -- 57
Cash and temporary cash investments,
January 1......................... 8 27 -- -- 35
---- ---- ---- -- ----
Cash and temporary cash investments,
September 30 (Note)............... $ 27 $ 65 $ -- $-- $ 92
==== ==== ==== == ====
</Table>
NOTE: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
22
TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------------------------------------------
TENNECO
AUTOMOTIVE, INC.
GUARANTOR NONGUARANTOR (PARENT RECLASS
SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED
------------ ------------ ---------------- ------- ------------
(MILLIONS)
OPERATING ACTIVITIES
Net cash provided (used) by operating
activities.......................... $ 380 $ 62 $(239) $-- $ 203
----- ---- ----- --- -----
INVESTING ACTIVITIES
Net proceeds from sale of assets...... 4 3 -- -- 7
Expenditures for plant, property, and
equipment........................... (37) (71) -- -- (108)
Acquisitions of Businesses............ (1) (4) -- -- (5)
Investments and other................. (13) (2) -- -- (15)
----- ---- ----- --- -----
Net cash provided (used) by investing
activities.......................... (47) (74) -- -- (121)
----- ---- ----- --- -----
FINANCING ACTIVITIES
Issuance of common and treasury
stock............................... -- -- 13 -- 13
Proceeds from subsidiary equity
issue............................... -- 1 -- -- 1
Issuance of long-term debt............ -- 1 -- -- 1
Retirement of long-term debt.......... -- (2) (65) -- (67)
Net increase (decrease) in short-term
debt excluding current maturities of
long-term debt...................... -- (25) -- -- (25)
Intercompany dividends and net
increase (decrease) in intercompany
obligations......................... (316) 19 297 -- --
Dividends (common).................... -- -- (5) -- (5)
Other................................. (10) -- (1) -- (11)
----- ---- ----- --- -----
Net cash provided (used) by financing
activities.......................... (326) (6) 239 -- (93)
----- ---- ----- --- -----
Effect of foreign exchange rate
changes on cash and temporary cash
investments......................... -- (5) -- -- (5)
----- ---- ----- --- -----
Increase (decrease) in cash and
temporary cash investments.......... 7 (23) -- -- (16)
Cash and temporary cash investments,
January 1........................... 28 56 -- -- 84
----- ---- ----- --- -----
Cash and temporary cash investments,
September 30 (Note)................. $ 35 $ 33 $ -- $-- $ 68
===== ==== ===== === =====
</Table>
NOTE:Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
(The preceding notes are an integral part of the foregoing financial
statements.)
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
NET SALES AND OPERATING REVENUES
<Table>
<Caption>
THREE MONTHS
ENDED
SEPTEMBER 30,
--------------
2001 2000 CHANGE
---- ---- ------
(MILLIONS)
North America............................................... $440 $464 (5)%
Europe...................................................... 302 311 (3)%
Rest of World............................................... 75 90 (17)%
---- ----
$817 $865 (6)%
==== ====
</Table>
Results for 2000 have been reclassified for comparability to reflect the
reclassification of certain sales incentives. This reclassification is made in
accordance with the provisions of the FASB's Emerging Issues Task Force May 2000
consensus on Issue No. 00-14, Accounting for Certain Sales Incentives. Effective
January 1, 2001, we changed the way we classify some sales incentives in
accordance with the consensus reached by the EITF. The impact of this
reclassification on third quarter 2000 results was a reduction in net sales of
$5 million with an offsetting reduction in selling, general, and administrative
expense.
Our North American revenues decreased $24 million in the third quarter of
2001 compared to last year's third quarter reflecting lower sales generated from
both the original equipment and aftermarket businesses. OE revenues declined 6
percent to $295 million in the third quarter of this year due to significant OE
production cut backs in both the light and heavy-duty vehicle segments as
vehicle manufacturers adjusted production levels in the face of a slowing
economy. OE ride control revenues were down 14 percent for the quarter. OE
emissions control revenues declined 3 percent which is attributable to a $27
million decline in volume partially offset by a $19 million increase in
catalytic converter revenues due to increased cost of precious metals that are
passed through to our customers. Lower ride control volumes, especially in our
heavy-duty elastomer business, resulted in the decline in OE ride control
revenues. Aftermarket revenues for North America were $145 million in the third
quarter of 2001, representing a decline of 3 percent compared to the same period
in the prior year. Excluding this increase in pass through catalytic converter
revenues, OE emissions control revenues declined 15 percent. Lower industry
volumes continue to impact our North American aftermarket business. Aftermarket
emissions control revenues declined 15 percent in the quarter primarily due to
lower volumes. Ride control revenues increased 8 percent compared to a year ago
due to price increases implemented in the first quarter and early second quarter
as well as increased volumes due to the initial order with a new ride control
customer.
Our European segment's revenues declined $9 million in the third quarter of
2001 compared to last year due primarily to a 15 percent decline in aftermarket
revenues, which were $81 million for the quarter compared to $95 million in the
same period a year ago. The decline resulted from the continued softness of the
aftermarket industry combined with declining exhaust replacement rates due
primarily to the increasing use of longer lasting stainless steel on OE
vehicles. Price increases that relate to our global aftermarket pricing strategy
continued to show favorable results in the third quarter of 2001 contributing
some positive revenue growth and helping to partially offset the impact from
lower volumes. OE revenues increased 2 percent to $221 million in the third
quarter. The increase was driven by $17 million of pass through converter sales
which came as a result of rising precious metal prices that we have passed
through to our OE customers. Excluding the increase in pass through converter
sales, revenues decreased 7 percent largely due to lower volumes and the
retirement of a platform. The devaluation of European currencies compared to the
U.S. dollar resulted in a reduction in OE revenues of $1 million in the third
quarter of this year.
Revenues from our operations in the rest of the world, specifically South
America, Australia and Asia, decreased $15 million in the quarter primarily due
to $12 million of negative foreign currency adjustments
24
impacting the quarter's results. Excluding these currency impacts, total
revenues for the rest of the world would have decreased 3 percent compared to
the same quarter last year. The impact of foreign currency was $8 million in
South America and $4 million in Australia. South America results were also
impacted by economic softness in the region, while Australia volumes were down
due to a labor strike at another auto component supplier which shut down OE
production for one week. In Asia, OE volumes increased for the quarter due to
new platforms in production at our exhaust manufacturing facility in Shanghai.
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2001 2000
REPORTED REPORTED
RESULTS RESULTS CHANGE
-------- -------- ------
(MILLIONS)
North America............................................... $23 $29 (21)%
Europe...................................................... 9 14 (36)%
Rest of World............................................... 5 8 (38)%
Other expenses.............................................. -- (4) NA
--- ---
$37 $47 (21)%
=== ===
</Table>
We reported EBIT of $37 million for the third quarter of 2001, compared to
$47 million for the same quarter last year. In the preceding table other
expenses in the third quarter of 2000 include a $13 million pre-tax charge for a
stock option buy-back program and a $9 million reversal of a reserve for
transaction costs related to the November 1999 spin-off of Pactiv Corporation.
The combination of these two one-time, non-operational items reduced our EBIT by
$4 million for the third quarter 2000.
EBIT for North American operations declined to $23 million in the third
quarter 2001 from $29 million one year ago as weaker sales volumes in our OE
segment impacted earnings in the third quarter. A drop in both the light and
heavy-duty vehicle production volumes and a decline in the higher margin
elastomer business combined to reduce EBIT for the North American OE business by
$3 million. Further contributing to the decline in EBIT in North American OE
operations were unfavorable pricing impacts and foreign currency impacts. North
American aftermarket EBIT increased $7 million year over year. Lower selling,
general, and administrative expenses; cost savings generated from our
restructuring efforts; and price increases more than offset foreign currency
impacts and aftermarket industry weakness which resulted in lower volumes and
reduced EBIT by $9 million. We also incurred increased customer changeover costs
this quarter of $7 million compared to last year, primarily associated with a
new ride control customer.
Our European segment's EBIT declined by $5 million to $9 million in the
third quarter of 2001. Our OE business was negatively impacted by higher
engineering expenses related to new platforms as well as inventory shrinkage at
one location. Our European aftermarket operations had improved results despite
continued weaknesses in the overall industry. Lower selling, general and
administrative expenses, cost savings generated from our restructuring efforts
and price increases helped offset the industry weakness. Foreign currency
movements in Europe impacted EBIT by $1 million in the quarter.
EBIT for the company's operations in the rest of the world declined in the
third quarter of 2001 compared to the same quarter one year ago. The impact of
foreign currency was $1 million, primarily in our Australian operations. Further
impacting EBIT was lower volume in South America and Australia. South America
volumes have declined due to economic softness primarily in Argentina and
Brazil. Australian volumes were down due to a labor strike at another auto
component supplier which shut down OE production for one week.
25
EBIT AS A PERCENTAGE OF REVENUE
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2001 2000
---- ----
North America............................................... 5% 6%
Europe...................................................... 3% 5%
Rest of World............................................... 7% 9%
Total Tenneco Automotive............................. 5% 5%
</Table>
In North America, EBIT as a percentage of revenue decreased by 1 percent.
Production cuts by vehicle manufacturers, declines in higher margin elastomer
sales and pricing pressure from vehicle manufacturers contributed to the lower
margins. In the North America aftermarket EBIT as a percentage of revenue
improved due to lower SG&A expenses and increased prices. In Europe, EBIT
margins declined in the third quarter primarily due to lower margins in our OE
operations. OE exhaust margins are being impacted by increased precious metals
prices that are passed through to our customers. The impact of precious metals
on sales for the quarter was $17 million. Our European aftermarket operations
had improved margins due to price increases, lower selling, general and
administrative expenses, and cost savings generated from our restructuring
efforts. EBIT as a percentage of revenue for the rest of the world decreased
over the prior year. The decrease in volumes has resulted in a poorer mix in the
rest of the world.
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $42 million for the quarter ended September
30, 2001, compared to $46 million during the same period in 2000. The decrease
in total interest expense is primarily due to lower interest rates on our
variable rate debt. See more detailed explanations on our debt structure in
"Liquidity and Capital Resources--Capitalization" later in this Management's
Discussion and Analysis.
INCOME TAXES
Income taxes were a $3 million benefit for the quarter ended September 30,
2001, compared to $5 million benefit for the quarter ended September 30, 2000.
The effective tax rate was 29 percent for the third quarter of 2001 and 31
percent for 2000. Third quarter 2001 tax benefit includes a $1 million benefit
for the cumulative catch up of the effective rate for the first 6 months of 2001
where the effective rate was 25 percent.
EARNINGS PER SHARE
We reported a loss in earnings per diluted common share of $.06 for the
quarter ended September 30, 2001, compared to earnings of $.16 per diluted
common share for the same period in the prior year. You should also read Note 7
in the "Notes to Financial Statements" for more detailed information on earnings
per share.
RESTRUCTURING 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. Charges to income related to these plans are recorded in the period in
which the plans are finalized and approved, while actions necessary to affect
these restructuring plans occur over future periods in accordance with
established plans.
We have substantially completed the restructuring actions related to the
1999 plan. The 1999 plan involved closing a ride control manufacturing facility
and an exhaust plant in Europe, closing or downsizing
26
four European aftermarket distribution centers, closing a North American exhaust
manufacturing facility plus employee reductions of approximately 780. Over 750
employees have been terminated under the 1999 plan with the remainder of the
planned reductions achieved through normal activities. The timing of the closing
one European aftermarket distribution location has changed as a result of
customer requirements. Actions necessary to complete closing this location are
in process, and we expect to complete those actions and close the location in
2002.
In the fourth quarter of 2000, our Board of Directors approved a
restructuring plan to further reduce administrative and operational overhead
costs. We recorded a pre-tax charge related to the plan of $46 million, $32
million after tax, or $.92 per diluted common share. Within the statement of
income, $13 million of the pre-tax charge is reflected in cost of sales, while
$33 million is included in selling, general, and administrative expenses. The
charge is comprised of $24 million of severance and related costs for salaried
employment reductions worldwide and $22 million for the reduction of
manufacturing and distribution capacity in response to long-term market trends.
The 2000 plan involved closing a North American aftermarket exhaust distribution
facility and ride control manufacturing plant in our Asian market, as well as
the consolidation of some exhaust manufacturing facilities in Europe. In
addition, the plan involves the elimination of up to 700 positions, including
temporary employees. We wrote down the assets at the locations to be closed to
their fair value, less costs to sell. We estimated the market value of buildings
using external real estate appraisals. As a result of the single purpose nature
of the machinery and equipment to be disposed of, fair value was estimated to be
scrap value less costs to dispose in most cases. We do not expect that cash
proceeds on the sale of these assets will be significant. As of September 30,
2001, approximately 550 employees have been terminated under the 2000 plan
primarily in North America and Europe. Additionally, 57 temporary employees have
been terminated. All restructuring actions are being completed in accordance
with our established plan. We expect to complete all restructuring activities
related to this plan by the end of the first quarter of 2002.
Also in the fourth quarter of 2000, we recorded other charges of $15
million, $10 million after tax, or $.29 per diluted common share. These charges
relate to a strategic decision to reduce some of the aftermarket parts we offer
and to relocation expenses incurred associated with the restructuring plans. The
aftermarket parts were written down to their estimated scrap value less costs to
sell.
In the first quarter of 2001, our Board of Directors approved a
restructuring plan in response to increasingly difficult industry conditions. On
January 31, 2001, we announced plans to eliminate up to 405 salaried positions
worldwide. We recorded pre-tax charges related to the restructuring of $11
million, $8 million after tax, or $.21 per diluted common share. Within the
statement of income, $2 million of the pre-tax charge is reflected in cost of
sales, while $9 million is included in selling, general, and administrative
expenses. These charges are comprised of $8 million for severance and related
costs for salaried employment reductions worldwide and $3 million for costs
related to closing a testing facility in North America. As of September 30,
2001, we have eliminated about 290 positions in connection with this plan. We
also incurred $4 million for other restructuring related costs and expenses such
as relocation and moving costs that could not be accrued as part of the
restructuring reserve. We estimate that we will complete these restructuring
activities no later than the first quarter 2002. All workforce reductions are
being done in compliance with all legal and contractual requirements including
obligations to consult with worker committees, union representatives and others.
In the second quarter of 2001, our Board of Directors approved a separate
restructuring plan related to closing a North American ride control production
line. We recorded pre-tax charges related to the plan of $8 million, $6 million
after tax, or $.16 per diluted common share. Within the statement of income, the
$8 million charge is included in cost of sales and relates primarily to
impairing the assets related to the production line to their fair value, less
costs to sell. As a result of the single purpose nature of the machinery and
equipment to be disposed of, fair value was estimated to be scrap value less
costs to dispose in most cases. We do not expect that cash proceeds on the sale
of these assets will be significant. We expect to complete all restructuring
activities related to this plan by the end of 2001.
27
Amounts related to activities that are part of the restructuring plans are
as follows:
<Table>
<Caption>
DECEMBER 31, 2000 2001 2001 CHARGED TO IMPACT OF SEPTEMBER 30, 2001
RESTRUCTURING RESTRUCTURING CASH ASSET EXCHANGE RESTRUCTURING
RESERVE CHARGES PAYMENTS ACCOUNTS RATES RESERVE
----------------- ------------- -------- ---------- --------- ------------------
Severance............ $23 $ 8 $(18) $-- $(1) $12
Asset Impairment..... -- 9 -- (9) -- --
Facility exit
costs.............. 3 2 (1) -- (1) 3
--- --- ---- --- --- ---
$26 $19 $(19) $(9) $(2) $15
=== === ==== === === ===
</Table>
In addition to the actions taken through the end of the third quarter, we
are evaluating additional opportunities to initiate actions that will reduce our
costs through implementing the most appropriate and efficient logistics,
distribution, and manufacturing footprint for the future. Any actions that we
take will require the approval of our Board of Directors and any workforce
reductions that result will be done in compliance with all legal and contractual
requirements including obligations to consult with worker committees, union
representatives, and others. While the actions we expect to initiate the fourth
quarter of 2001 are still being developed, we expect to record a significant
restructuring charge in the fourth quarter that could range up to $32 million.
Also, we currently estimate that we will incur about $2 million of expense
during the remainder of 2001 with respect to restructuring-related costs and
expenses for actions that have already been announced that could not be accrued
as part of the restructuring reserve.
CHANGES IN ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative instruments,
including derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting treatment. This statement cannot
be applied retroactively and is effective for all fiscal years beginning after
June 15, 2000. We adopted this statement effective January 1, 2001 and it did
not have a significant impact on our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." This SAB
provides guidance on the recognition, presentation, and disclosure of revenue in
the financial statements and is effective no later than the fourth quarter of
fiscal years beginning after December 15, 1999. The SAB draws on the existing
accounting rules and defines the basic criteria that must be met before we can
record revenue. The impact of adopting SAB 101 did not have a significant effect
on our results of operations or financial position.
In May 2000, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-14, Accounting for Certain Sales Incentives. This
issue addresses the recognition, measurement, and income statement
classification of various types of sales incentives, including discounts,
coupons, rebates, and free products. Consequently, beginning January 1, 2001, we
classified some incentives that were previously shown in selling, general, and
administrative expense as a reduction in revenues. As a result of the change,
revenue was $12 million lower for the first nine months of 2001, with an
offsetting decline in selling, general, and administrative expenses. We have
restated prior year results for comparability, resulting in a reduction in net
sales of $15 million for the nine months ended September 30, 2000, with an
offsetting reduction in selling, general, and administrative expense.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 142 changes the accounting for purchased
28
goodwill from an amortization method to an impairment-only approach. Therefore
amortization of all purchased goodwill, including amortization of goodwill
recorded in past business combinations, will cease upon adoption of SFAS No.
142. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. Early adoption of the SFAS No. 142 is not permitted nor is retroactive
application to prior period (interim or annual) financial statements. At the end
of the third quarter, the balance of unamortized goodwill was $439 million.
Goodwill is being amortized at the rate of $4 million each quarter. We are
currently evaluating the effect that this statement may have on our financial
position and results of operations.
In April 2001, the EITF reached a consensus on Issue No. 00-25, Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products. This consensus requires that consideration
provided by a vendor to a purchaser of the vendor's products be recognized as a
reduction of sales, except in those instances where an identifiable and
measurable benefit is or will be received by the vendor from the purchaser.
Issue No. 00-25 requires effective with the fourth quarter of 2001 that certain
expenses that historically have been included in selling, general and
administrative costs be reclassified as deductions from sales. We do not believe
adopting this statement will have a significant impact on our financial position
or results of operations.
RESULTS FROM OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
NET SALES AND OPERATING REVENUES
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
2001 2000 CHANGE
---- ---- ------
(MILLIONS)
North America............................................... $1,368 $1,507 (9)%
Europe...................................................... 998 927 8%
Rest of World............................................... 240 251 (4)%
------ ------
$2,606 $2,685 (3)%
====== ======
</Table>
Results for 2000 have been reclassified for comparability to reflect the
reclassification of certain sales incentives. This reclassification is made in
accordance with the provisions of the FASB's Emerging Issues Task Force May 2000
consensus on Issue No. 00-14, Accounting for Certain Sales Incentives. Effective
January 1, 2001, we changed the way we classify some sales incentives in
accordance with the consensus reached by the EITF. The impact of this
reclassification on third quarter 2000 results was a reduction in net sales of
$15 million with an offsetting reduction in selling, general, and administrative
expense.
Our North American revenues decreased $139 million in the first nine months
of 2001 compared to the same period in the prior year reflecting lower sales
generated from both our original equipment and aftermarket businesses. OE
revenues declined 10 percent to $969 million in the current year due to
significant OE production cut backs in both the light and heavy-duty vehicle
segments as vehicle manufacturers adjusted production levels in the face of a
slowing economy. OE ride control revenues were down 19 percent for the nine
months ended September 30, 2001. OE emissions control revenues declined 6
percent which is attributable to the $91 million decline in volume partially
offset by the $54 million increase in catalytic converter revenues due to
increased cost of precious metals that are passed through to our customers.
Lower ride control volumes, especially in our heavy-duty elastomer business,
resulted in the decline in OE ride control revenues. Aftermarket revenues for
North America were $399 million in the first nine months of 2001, representing a
decline of 8 percent compared to the same period in the prior year. Excluding
this increase in pass through customer revenues, OE emissions control revenues
declined 16 percent. Lower industry volumes continue to impact our North
American aftermarket business. Aftermarket emissions control revenues declined
14 percent in the first nine months, while our aftermarket ride control revenues
dropped 5 percent compared to a year ago. Lower volumes accounted for $46
million of the reduction in aftermarket revenues. This was partially offset by
the initial order with a new ride control customer in the third quarter of 2001.
Price
29
increases implemented on some products in North America in the first and second
quarters of 2001 have taken hold and have more than offset negative price
adjustments that were initiated during 2000.
Our European segment's revenues increased $71 million in the first nine
months of 2001 compared to last year due primarily to a 20 percent increase in
OE revenues, which were $755 million for the nine months. Contributing to the OE
revenue increase were stronger exhaust volumes in both our new and existing
programs, which added $166 million of additional revenue in the half. Of that
increase, $88 million came as a result of rising precious metal prices that we
have passed through to our OE exhaust customers. The devaluation of European
currencies compared to the U.S. dollar resulted in a reduction in OE revenues of
$39 million in the nine months ended September 30, 2001. Excluding these
currency impacts, European OE revenues would have increased 26 percent in the
first nine months of 2001 compared to the first nine months of 2000. European
aftermarket sales were $243 million in the first nine months of this year
compared to $296 million in the prior year. This 18 percent decline resulted
from the continued softness of the aftermarket industry combined with declining
exhaust replacement rates due primarily to the increasing use of longer lasting
stainless steel. Price increases that relate to our global aftermarket pricing
strategy provided favorable results in the first nine months of 2001
contributing some positive revenue growth and helping to partially offset the
impact from lower volumes. Negatively impacting European aftermarket revenue
growth was the depreciation of European currencies, which reduced revenues by
$10 million.
Revenues from our operations in the rest of the world, specifically South
America, Australia and Asia, decreased $11 million in the nine months ended
September 30, 2001 primarily due to $31 million of negative foreign currency
adjustments impacting the results for the first nine months. Excluding these
currency impacts, total revenues for the rest of the world would have increased
3 percent compared to the same period last year. The impact of foreign currency
was $18 million in South America and $13 million in Australia. This was offset
by strong volume growth in South America and Asia. The South America volume
growth is attributable to several new OE programs. In Asia, OE volumes increased
for the first nine months due to the new platforms in production at our exhaust
manufacturing facility in Shanghai.
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")
We reported EBIT of $90 million for the first nine months of 2001, compared
to $162 million for the same period last year. Reported results for 2001 include
restructuring and other charges that have an effect on comparability of EBIT
results between the years. To provide enhanced comparability, we have separately
identified these costs and charges by segment in the following table, and will
discuss our results in the following section using a comparison of "2001
Operating Units Results" to the "2000 Reported Results" for each segment.
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
2001 2000
-------------------------------------- --------
RESTRUCTURING OPERATING
REPORTED AND OTHER UNITS REPORTED
RESULTS CHARGES RESULTS RESULTS CHANGE
-------- ------------- --------- -------- ------
(MILLIONS)
North America................................. $40 $19 $ 59 $103 (43)%
Europe........................................ 39 8 47 48 (2)%
Rest of World................................. 11 3 14 15 (7)%
Other......................................... -- -- -- (4) NA
--- --- ---- ----
$90 $30 $120 $162 (26)%
=== === ==== ====
</Table>
In the preceding table, amounts reported as restructuring and other charges for
2001 include: $19 million related to the 2001 restructuring plans; $3 million
for other restructuring related costs and expenses such as relocation and moving
costs that could not be accrued as part of the restructuring reserve; $6 million
for environmental remediation activity, principally in Europe; and $2 million
related to costs associated with the amendment of certain terms of our senior
credit facility. For further details of these costs see the sections
30
entitled "Restructuring Charges," and "Liquidity and Capital
Resources -- Capitalization" elsewhere in this Management's Discussion and
Analysis.
EBIT for North American operations declined to $59 million in the first
nine months of 2001 from $103 million one year ago as weaker sales volumes in
both our OE and aftermarket segments impacted our earnings in the first nine
months of 2001. A drop in both the light and heavy-duty vehicle production
volumes and a decline in the higher margin elastomer business combined to reduce
EBIT for the North American OE business by over $19 million. Further
contributing to the decline in EBIT in North American OE operations were
unfavorable pricing impacts, volume related operating inefficiencies, inventory
shrinkage, and foreign currency impacts. North American aftermarket EBIT
increased over the prior year. Lower selling, general and administrative
expenses and cost savings generated from our restructuring efforts of $23
million were partially offset by aftermarket industry weaknesses, which affected
volumes and bad debt. Also contributing to the aftermarket EBIT increase were
price increases implemented in the first and second quarters of 2001 which have
more than offset negative price adjustments implemented during 2000. Lower
volumes resulted in reduced EBIT of $21 million. We also incurred increased
customer changeover costs of $6 million compared to last year, primarily
associated with a new ride control customer.
Our European segment's EBIT declined $1 million to $47 million during the
first nine months of 2001 versus the prior year. Foreign currency movements in
Europe impacted EBIT by $4 million in the period. Our European OE business
posted improved results. The OE exhaust business benefited from higher volumes
and savings from restructuring initiatives. Our European aftermarket operations
had mixed results despite continued weaknesses in the overall industry, as the
aftermarket exhaust business had improved EBIT while ride control EBIT declined
consistent with the trends in the industry. Lower selling, general and
administrative expenses, cost savings generated from our restructuring efforts
and price increases helped offset the industry weakness.
EBIT for the company's operations in the rest of the world declined by $1
million in the nine months ended September 30, 2001 compared to the same period
one year ago. Included in the rest of world results were the impact of foreign
currency devaluation of $2 million. This was partially offset by our Asia
operations where EBIT improved in the first 9 months primarily due to stronger
volumes in our OE exhaust operations in Shanghai.
EBIT AS A PERCENTAGE OF REVENUE
The following table shows EBIT as a percentage of revenue by segment. The
EBIT percentage for the nine months ended September 30, 2001 is calculated after
excluding the "restructuring and other charges" described previously.
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
2001 2000
---- ----
North America............................................... 4% 7%
Europe...................................................... 5% 5%
Rest of World............................................... 6% 6%
Total Tenneco Automotive............................. 5% 6%
</Table>
In North America, EBIT as a percentage of revenue decreased by 3 percent.
Production cuts by vehicle manufacturers, declines in higher margin elastomer
sales and pricing pressure from vehicle manufacturers contributed to the lower
margins in our OE business. In the North America aftermarket, EBIT as a
percentage of revenue improved due to lower SG&A expenses and increased prices.
In Europe, EBIT margins were even in the first nine months. Our OE exhaust
margins are being impacted by increased precious metals prices that are passed
through to our customers with marginal EBIT associated. The impact of precious
metals on sales for the first nine months of this year was $88 million.
Significant improvements in OE exhaust operations and were offset by costs
associated with the Polish ride control plant start-up, reserves for bad debt,
currency impacts and lower aftermarket volumes. EBIT as a percentage of revenue
for the rest of the world
31
were even in the first nine months of 2001 despite the impact of foreign
currency devaluation. Stronger volumes and improved mix offset the foreign
currency devaluation.
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
We reported interest expense of $132 million during the nine months ended
September 30, 2001, compared to $139 million during the same period in 2000. The
decrease in total interest expense is primarily due to lower interest rates on
our variable rate debt. See more detailed explanations on our debt structure in
"Liquidity and Capital Resources--Capitalization" later in this Management's
Discussion and Analysis.
INCOME TAXES
Income taxes were a $12 million benefit at September 30, 2001. For the same
period in 2000, income taxes were $1 million benefit. The effective tax during
the nine months ended September 30, 2001, was 29 percent compared to 31 percent
for the same period in 2000. The prior year effective rate benefitted from a
strategic decision to consolidate all of our Mexican operations into one tax
entity, allowing us to utilize additional tax losses.
EARNINGS PER SHARE
We reported a loss in earnings per diluted common share of $.83 for the
nine months ended September 30, 2001, compared to a loss of $.77 per diluted
common share for June 30, 2001. In the nine months ended September 30, 2000,
earnings per diluted common share were at $.61. Included in results for the
first nine months of 2001 are the impacts from charges related to our
restructuring plans, environmental remediation activities and the costs related
to the amendment of certain terms of the senior credit facility. The cumulative
negative effect of these items on earnings per diluted common share was a
reduction of $.56 for the first nine months of this year. The majority of the
impact was comprised of the restructuring charges taken in the first and second
quarters of 2001 and the environmental costs which negatively impacted earnings
per share by $.41 and $.11, respectively. You should also read Note 7 in the
"Notes to Financial Statements" for more detailed information on earnings per
share.
LIQUIDITY AND CAPITAL RESOURCES
CAPITALIZATION
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Short-term debt and current portion of long-term debt....... $ 142 $ 92
Long-term debt.............................................. 1,359 1,435
------ ------
Total debt.................................................. 1,501 1,527
------ ------
Total minority interest..................................... 15 14
Common shareholders' equity................................. 242 330
------ ------
Total capitalization........................................ $1,758 $1,871
====== ======
</Table>
The company's debt to capitalization ratio was 85 percent at September 30,
2001 and 82 percent as of December 31, 2000. The increase in the ratio was
attributable to a decline in shareholders' equity, partially offset by a decline
in total debt. The year-to-date decline in shareholders' equity results from the
translation of foreign balance sheets into U.S. dollars, where the strength of
the dollar resulted in translation adjustments of $46 million, the fair market
value adjustment of interest rate swaps of $18 million and our recorded net loss
of $31 million.
Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries as well as our revolving
credit facility, increased by $50 million during the first nine months of 2001.
This increase resulted from a $62 million increase in the amount of long-term
debt that will mature in one year or less offset by lower borrowings of $12
million at September 30, 2001, under our revolving credit facility. There were
no borrowings outstanding under our revolving credit facility as of September
30, 2001, and $12 million as of December 31, 2000. Long-term debt includes
borrowings under financing arrangements
32
entered into to facilitate the debt realignment described below, approximately
$16 million of debt that was not retired in the cash tender and exchange offers
associated with the 1999 spin-off of our packaging business and other long term
obligations such as capitalized leases.
As part of the realignment of debt that was required in order to complete
the spin-off of the packaging business in 1999, we entered into a $1.55 billion
committed senior secured financing arrangement with a syndicate of banks and
other financial institutions. The company entered into an agreement to amend
this facility on October 20, 2000 to (i) relax the financial covenant ratios
beginning in the fourth quarter of 2000, (ii) exclude up to $80 million of cash
charges and expenses related to cost reduction initiatives from the calculation
of consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") used in our financial covenant ratios through 2001 and (iii) make
certain other technical changes. In exchange for these amendments, we agreed to
certain interest rate increases, lowered our capital expenditure limits and paid
an aggregate fee of about $3 million.
As a result of significant reductions in North American vehicle production
levels announced by our original equipment customers since the fourth quarter of
last year, as well as an accelerated weakening of the global aftermarket, we
entered into a second amendment of our senior credit facility on March 22, 2001.
The second amendment revised the financial covenant ratios we are required to
maintain for each of the fiscal quarters ending in 2001. The second amendment
also reduced the limitation on 2001 capital expenditures from $225 million to
$150 million, and required that net cash proceeds from all significant,
non-ordinary course asset sales be used to prepay the senior term loans. In
exchange for these amendments, we agreed to a 25 basis point increase in
interest rates on the senior term loans and borrowings under our revolving
credit facility and paid an aggregate fee of about $3 million to consenting
lenders. We incurred legal, advisory and other costs related to the amendment
process of approximately $2 million. The amendment also provides for the
continued availability of the full amount of the $500 million revolving credit
facility. Excluding the $57 million of letters of credit, we had $443 million
available for borrowing under the revolving credit facility at September 30,
2001. Based on our current projections for 2001, we believe that we will be able
to meet the revised financial covenant ratios and adhere to the limitation on
capital expenditures.
The senior secured credit facility, as amended on March 22, 2001, consists
of: (i) a $500 million revolving credit facility with a final maturity date of
November 4, 2005; (ii) a $406 million term loan with a final maturity date of
November 4, 2005; (iii) a $270 million term loan with a final maturity date of
November 4, 2007; and (iv) a $270 million term loan with a final maturity date
of May 4, 2008. A portion of each term loan is payable in quarterly installments
beginning October 1, 2001. Borrowings under the facility bear interest at an
annual rate equal to, at the borrower's option, either (i) the London Interbank
Offering Rate plus a margin of 325 basis points for the revolving credit
facility and the term loan maturing November 4, 2005, 375 basis points for the
term loan maturing November 4, 2007 and 400 basis points for the term loan
maturing May 4, 2008; 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 225 basis points for the revolving credit facility and the term loan maturing
November 4, 2005, 275 basis points for the term loan maturing November 4, 2007
and 300 basis points for the term loan maturing May 4, 2008. Under the
provisions of the senior credit facility agreement, the interest margins for
borrowings under the revolving credit facility and the term loan maturing
November 4, 2005 may be adjusted based on the consolidated leverage ratio
(consolidated indebtedness divided by consolidated EBITDA as defined in the
senior credit facility agreement) measured at the end of each quarter.
The amended senior credit facility agreement requires that the company
maintain: (i) a consolidated leverage ratio (consolidated indebtedness divided
by consolidated EBITDA) not greater than 6.00 at the end of the first quarter of
2001 and not greater than 6.25, 6.00 and 5.50 at the end of the second, third
and fourth quarters of 2001, respectively: (ii) a consolidated interest coverage
ratio (consolidated EBITDA divided by consolidated cash interest paid) of at
least 1.40 for the first quarter of 2001 and at least 1.35, 1.40 and 1.55 for
the second, third and fourth quarters of 2001, respectively; and (iii) a fixed
charge coverage ratio (consolidated EBITDA less consolidated capital
expenditures, divided by consolidated cash interest paid) greater than .60 for
the first quarter of 2001 and greater than .55, .65 and .80 for the second,
third and fourth
33
quarters of 2001, respectively. As of September 30, 2001 we were in compliance
with the financial covenant ratios required under the amended senior credit
facility.
The senior credit facility agreement also contains restrictions on our
operations that are customary for similar facilities, including limitations on:
(a) incurring additional liens; (b) sale and leaseback transactions; (c)
liquidations and dissolutions (d) incurring additional indebtedness or
guarantees; (e) capital expenditures; (f) dividends; (g) mergers and
consolidations; and (h) prepayments and modifications of subordinated and other
debt instruments. Compliance with these requirements and restrictions is a
condition for any incremental borrowings under the senior credit facility
agreement and failure to meet these requirements enables the lenders to require
repayment of any outstanding loans. As of September 30, 2001, we were in
compliance with these requirements.
The company's outstanding debt also includes $500 million of 11 5/8 percent
Senior Subordinated Notes due 2009. The senior subordinated debt indenture
requires that we, as a condition to incurring certain types of indebtedness not
otherwise permitted, initially maintain an interest coverage ratio of not less
than 2.00. Under the terms of the indenture, the minimum interest coverage ratio
increases to 2.25 beginning on October 15, 2001. The indenture also contains
restrictions on our operations, including limitations on: (1) incurring
additional indebtedness or liens; (2) dividends; (3) distributions and stock
repurchases; (4) investments; and (5) mergers and consolidations. All of our
existing and future material domestic wholly owned subsidiaries fully and
unconditionally guarantee these notes on a joint and several basis. There are no
significant restrictions on the ability of the subsidiaries that have guaranteed
these notes to make distributions to us.
We expect to maintain compliance with the financial covenants and other
requirements of our loan agreements through the end of 2001. In order to
maintain compliance with financial covenants in our senior loan agreement beyond
2001, we currently believe it will be necessary to further amend these
covenants. While no assurances can be given, we believe we can negotiate these
amendments at a reasonable cost. We believe that cash flows from operations,
combined with available borrowing capacity described above and assuming that we
maintain compliance with the financial covenants and other requirements of our
senior loan agreement, as they may be amended, will generally be sufficient to
meet our future capital requirements for the following year. Our ability to meet
the financial covenants in 2001 and beyond depends upon a number of operational
and economic factors, many of which are beyond our control. Factors that could
impact our compliance 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. Persistently lower North American vehicle
production levels, further weakening in the global aftermarket beyond our
expectation, or a reduction in vehicle production levels in Europe, could impact
our ability to meet our financial covenant ratios. In the event that we are
unable to meet these revised financial covenants, we would consider several
options to meet our cash flow needs. These options could include further
renegotiations with our senior credit lenders, additional cost reduction or
restructuring initiatives, sales of assets or capital stock, or other
alternatives to enhance our financial and operating position.
DIVIDENDS ON COMMON STOCK
During 2000, the company paid quarterly dividends of $.05 per common share.
These dividend payments totaled $5 million for the nine months ended September
30, 2000, and $7 million for the entire year. On January 10, 2001, the Company
announced that the Board of Directors had eliminated the quarterly regular
dividend on the company's common stock. The board took the action in response to
current industry conditions, significantly greater than anticipated production
volume reductions by original equipment manufacturers and continued softness in
the global light vehicle aftermarket.
34
CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2001 2000
---- ----
Cash provided (used) by:
Operating activities...................................... $149 $203
Investing activities...................................... (81) (121)
Financing activities...................................... (13) (93)
</Table>
OPERATING ACTIVITIES
For the nine months ended September 30, 2001 and September 30, 2000 cash
provided from operating activities represented $149 million and $203 million,
respectively. Lower earnings in the first nine months of 2001 was a key driver
of the decreased cash provided. This was partially offset by our continued focus
on working capital that allowed us to use $75 million less cash on working
capital before factoring of accounts receivable during the first nine months of
2001 compared with the same period in the prior year. Reduced accounts
receivable and inventory made a favorable impact on cash flows in the current
period compared to last year. Working capital, adjusted for receivables that
were sold as of September 30, 2001, was $152 million lower than it was as of
September 30, 2000. During the first nine months of this year, we increased the
size of the U.S. receivables securitization program by $3 million and our
European program by $3 million. In the same period in the prior year our
factoring programs in Europe and North America provided $76 million of cash. We
have also entered into arrangements with two major OE customers in North America
under which payments to Tenneco Automotive for product sales are made earlier
then otherwise required under existing payment terms. These arrangements reduced
accounts receivable by $26 million as of September 30, 2001. Included in our
2001 results is a $7 million pension plan contribution. No contribution was made
in the prior year period.
INVESTING ACTIVITIES
Cash used for investing activities was $40 million lower for the nine
months ended September 30, 2001, compared to the same period a year ago due to
lower expenditures for property, plant and equipment. Capital expenditures were
$74 million for the nine months ended September 30, 2001, down from $108 million
in the first nine months of last year.
FINANCING ACTIVITIES
Cash used by financing activities was $13 million for the first nine months
of 2001 compared to $93 million of cash used for the first nine months of 2000.
The decrease in the first nine months of this year is attributable to a
prepayment of long term debt in 2000. The first nine months of 2000 includes a
$25 million decrease in short-term debt and $5 million of dividend payments to
our common shareholders.
INTEREST RATE RISK
Financial instruments that are sensitive to market risk for changes in
interest rates are our debt securities. We primarily use a revolving credit
facility to finance our short-term capital requirements and pay a current market
rate of interest on these borrowings. Longer-term capital requirements were
financed with long-term obligations with original maturity dates ranging from
six to ten years.
Under the terms of the senior credit facility agreement, we were required
to hedge our exposure to floating interest rates within 180 days following the
1999 spin-off of the packaging business so that at least 50 percent of the
long-term debt would be fixed for a period of at least three years. In February
2000, $250 million of floating rate long-term debt was hedged with three-year,
floating to fixed interest rate swaps. In April 2000, an additional $50 million
of floating rate long-term debt was hedged with three-year, floating to fixed
interest rate swaps. The hedges that were executed fully satisfied the interest
rate-hedging requirement of
35
the senior credit facility agreement. These swaps are accounted for as cash flow
hedges, with changes in value recorded as a component of accumulated
comprehensive income on the balance sheet. As of September 30, 2001, $18 million
of deferred net losses on derivative instruments has been accumulated in other
comprehensive income. At September 30, 2001, we had approximately $542 million
in long-term debt obligations that have fixed interest rates and approximately
$817 million in long-term debt obligations that have variable interest rates
based on a current market rate of interest.
We estimate that the fair value of the company's long-term debt at
September 30, 2001 was about 59 percent of its book value. A one percentage
point increase or decrease in interest rates would increase or decrease the
annual interest expense that is recognized in the income statement and the cash
that is paid for interest costs by about $8 million, or approximately $5 million
on an after-tax basis.
OUTLOOK
In late fourth quarter 2000, several of the company's major North American
original equipment customers began announcing significant reductions in
scheduled vehicle production levels. Based on these reductions, we anticipate
that the North American original equipment manufacturer build rate for light
vehicles in 2001 will be down from 2000 levels in the range of 10 percent to 12
percent and that weaknesses in the heavy-duty truck market will continue through
2001 and into 2002. While we originally expected that the European original
equipment build rate would be approximately 20 million units, expected weakness
in Europe during the second half of 2001 could lower that build rate. The global
aftermarket exhibited a further weakening of demand for replacement parts during
the latter portion of last year. We anticipate that there will be further
declines in the global aftermarket industry in the range of 6 percent to 10
percent in 2001. In addition, we anticipate continuing negative impacts in 2001
due to the uncertain economic outlook in South America and currency translation
in Europe and Australia.
Based on anticipated vehicle production levels our global original
equipment customer book of business is currently $2,305 million, $2,533 million,
and $2,583 million for 2002, 2003, and 2004, respectively. When we refer to our
book of business, we mean revenues for original equipment manufacturer programs
that have been formally awarded to us as well as programs which we are highly
confident will result in revenues based on either informal customer indications
consistent with past practices and/or our status as supplier for the existing
program and relationship with the customer. This book of business 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. In addition, it is based on our anticipated pricing for the
applicable program over its life. However, we are under continuing pricing
pressure from our OE customers. See "Cautionary Statement for Purposes of the
"Safe Harbor" Provisions of the Private Securities Litigation Reform Act of
1995".
EURO CONVERSION
The European Monetary Union resulted in the adoption of a common currency,
the "euro," among eleven European nations. The euro is being adopted over a
three-year transition period beginning January 1, 1999. In October 1997, we
established a cross-functional Euro Committee, comprised of representatives of
the Company's operational divisions as well as its corporate offices. That
Committee had two principal objectives: (1) to determine the impact of the euro
on our business operations, and (2) to recommend and facilitate implementation
of those steps necessary to ensure that the company would be fully prepared for
the euro's introduction. As of January 1, 1999, we implemented those euro
conversion procedures that we had determined to be necessary and prudent to
adopt by that date, and we are on track to becoming fully "euro ready" on or
before the conclusion of the three-year euro transition period. We believe that
the costs associated with transitioning to the euro will not be material to our
financial position or results of operations.
ENVIRONMENTAL AND OTHER MATTERS
We and some of our subsidiaries and affiliates are parties to environmental
proceedings. We expense or capitalize, as appropriate, expenditures for ongoing
compliance with environmental regulations that relate to
36
current operations. We expense expenditures that relate to an existing condition
caused by past operations and that do not contribute to current or future
revenue generation. We record liabilities when environmental assessments
indicate that remedial efforts are probable and the costs can be reasonably
estimated. Estimates of the liability are based upon currently available facts,
existing technology, and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. We consider all available evidence including prior experience in
remediation of contaminated sites, other companies' cleanup experience and data
released by the United States Environmental Protection Agency or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new information. Where future cash flows are
fixed or reliably determinable, we have discounted the liabilities. All other
environmental liabilities are recorded at their undiscounted amounts. We
evaluate recoveries separately from the liability and, when they are assured,
recoveries are recorded and reported separately from the associated liability in
our financial statements.
As of September 30, 2001, the company continues to be designated as a
potentially responsible party in three Superfund sites. We have estimated our
share of the remediation costs for these sites to be approximately $1 million in
the aggregate. In addition to the Superfund sites, we may have the obligation to
remediate current or former facilities, and we estimate our share of remediation
costs at these facilities to be approximately $24 million. For both the
Superfund sites 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 sites, 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 has been considered, where
appropriate, in our determination of our estimated liability.
As we previously disclosed, we undertook a third-party evaluation of
estimated environmental remediation costs at one of our facilities beginning in
2000. The evaluation was initiated as a result of testing that indicated the
potential underground migration of some contaminants beyond our facility
property. We have completed and analyzed the results of our evaluation of
off-site contamination migration from that facility and as a result we have
increased the environmental remediation reserve we had for this facility by $5
million through a charge to income in the first quarter 2001. We also increased
our estimate of environmental remediation reserves for three other locations by
a total of $1 million in the first quarter of 2001. Additionally, in the first
quarter of 2001 we reached an agreement with a third party to assume
responsibility for remediation of a location at which we previously shared
responsibility. In exchange, we received cash and a note for a total of $4
million, the estimate of the third party's share of the total remediation
liability. We increased our environmental liability estimate for this location
by $4 million as a result. These amounts are reflected in our estimation of
remediation costs described above. We believe that these potential costs, as
well as the costs associated with our current status as a potentially
responsible party in the Superfund sites, or as a liable party at our current or
former facilities, will not be material to our consolidated financial position
or results of operations.
EMPLOYEE STOCK OWNERSHIP PLANS
We have established Employee Stock Ownership Plans (401(k) Plans) for the
benefit of our employees. Under the plans, participants may elect to defer up to
16 percent of their salary through contributions to the plan, which are invested
in selected mutual funds or used to buy our common stock. Through December 31,
2000, the company matched qualified employee contributions of up to 8 percent of
the employee's salary with a contribution matching 100 percent of each
employee's contribution. Beginning January 1, 2001 this match was reduced to 75
percent of each employee's contribution up to 8 percent of the employee's
salary. These matching contributions are made in common stock and vest
immediately. We incurred costs for these matching contributions of approximately
$7 million and $11 million for the nine months ended September 30, 2001 and
2000, respectively.
37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to interest rate risk, see the
caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations," which is
incorporated herein by reference.
38
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits filed with this report are listed on the Exhibit
Index following the signature page of this report, which is incorporated herein
by reference.
(b) Reports on Form 8-K. We filed the following Current Reports on Form 8-K
during the quarter ended September 30, 2001:
Current Report on Form 8-K dated July 24, 2001, including pursuant to Item 5
certain information pertaining to the results of our operations for the second
quarter 2001.
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Tenneco Automotive Inc. has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
TENNECO AUTOMOTIVE INC.
By: /s/ MARK A. MCCOLLUM
------------------------------------
Mark A. McCollum
Senior Vice President and
Chief Financial Officer
Dated: November 14, 2001
40
INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
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).
3.2(a) -- By-laws of the registrant, as amended March 14, 2000
(incorporated herein by reference from Exhibit 3.2(a) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1999, 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).
</Table>
41
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.7 -- Amended and Restate 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 4.1(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 4.1(b) of the registrant's Post-Effective Amendment
No. 3 dated February 26, 2001, to its Registration Statement
on Form 8-A dated September 17, 1998).
4.2(a) -- Indenture, dated as of November 1, 1996, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference from Exhibit 4.1 of the
registrant's Registration Statement on Form S-4,
Registration No. 333-14003).
4.2(b) -- First Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between 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) -- Second 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(c) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
4.2(d) -- 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).
</Table>
42
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.2(e) -- 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(f) -- Fifth 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(f) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
4.2(g) -- Sixth 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(g) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
4.2(h) -- Seventh 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(h) of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
4.2(i) -- Eighth Supplemental Indenture, dated as of April 28, 1997,
to Indenture, dated as of November 1, 1996 between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference from Exhibit 4.1 of the
registrant's Current Report on Form 8-K dated April 23,
1997, File No. 1-12387).
4.2(j) -- Ninth Supplemental Indenture, dated as of April 28, 1997, to
Indenture, dated as of November 1, 1996, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference from Exhibit 4.2 of the
registrant's Current Report on Form 8-K dated April 23,
1997, File No. 1-12387).
4.2(k) -- Tenth Supplemental Indenture, dated as of July 16, 1997, to
Indenture, dated as of November 1, 1996, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference from Exhibit 4.1 of the
registrant's Current Report on Form 8-K dated June 11, 1997,
File No. 1-12387).
4.2(l) -- 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 Annual
Report on Form 10-K for the year ended December 31, 1999,
File No. 1-12387).
4.3 -- Specimen stock certificate for Tenneco Automotive Inc.
common stock (incorporated herein by reference from Exhibit
4.3 of the registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, 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 Subsidiary Inc. (formerly Tenneco
Automotive Inc.), Tenneco International Holding Corp.,
Tenneco Global Holdings Inc., the Pullman Company and
Clevite Industries 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).
</Table>
43
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.4(c) -- Subsidiary Guarantee dated as of October 14, 1999 from
Tenneco Automotive Operating Subsidiary Inc. (formerly
Tenneco Automotive 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) -- Credit Agreement, dated as of September 30, 1999, among the
registrant, the Lenders named therein, Commerzbank and Bank
of America, N.A., Citicorp USA, Inc. and The Chase Manhattan
Bank (incorporated herein by reference from Exhibit 4.5(a)
of the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-12387).
4.5(b) -- First Amendment to the Credit Agreement, dated October 20,
2000, among the registrant, The Chase Manhattan Bank and
Citicorp USA, Inc. (incorporated herein by reference from
Exhibit 4.1 to the registrant's Current Report on Form 8-K
dated October 24, 2000, File No. 1-12387).
4.5(c) -- Second Amendment to Credit Agreement, dated as of March 22,
2001, among the registrant, the lenders party thereto and
The Chase Manhattan Bank (incorporated by reference to
Exhibit 4.1 to the registrant's current report on Form 8-K
dated March 22, 2001, File No. 1-12387).
9 -- None.
10.1 -- Distribution Agreement, dated November 1, 1996, by and among
El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), 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. (formerly Tenneco Inc.), 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. (formerly
Tenneco Inc.), 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. (formerly Tenneco Inc.), 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. (formerly Tenneco Inc.), 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. (formerly Tenneco Inc.),
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.
(formerly Tenneco Inc.), the registrant 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 -- Tenneco Automotive Inc. Executive Incentive Compensation
Plan (incorporated herein by reference from Exhibit 10.8 of
the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-12387).
</Table>
44
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.9 -- Tenneco Automotive Inc. 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 -- Tenneco Automotive Inc. 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 -- Tenneco Automotive Inc. Key Executive Pension Plan
(incorporated herein by reference from Exhibit 10.15 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-12387).
10.12 -- Tenneco Automotive Inc. Deferred Compensation Plan
(incorporated herein by reference from Exhibit 10.16 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-12387).
10.13 -- Tenneco Automotive Inc. Supplemental Executive Retirement
Plan (incorporated herein by reference from Exhibit 10.17 of
the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-12387).
10.14 -- Release Agreement dated as of October 18, 1999 by and
between Dana G. Mead and Tenneco Management Company and
Modification of Release Agreement dated as of October 18,
1999 among Dana G. Mead, Tenneco Automotive Inc. and Tenneco
Management Company (incorporated herein by reference from
Exhibit 10.18 of the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, File No.
1-12387).
10.15 -- Release Agreement dated as of September 17, 1999 by and
between Robert T. Blakely and Tenneco Management Company and
Modification of Release Agreement dated as of September 17,
1999 among Robert T. Blakely, Tenneco Automotive Inc. and
Tenneco Management Company (incorporated herein by reference
from Exhibit 10.15 to the registrant's Annual Report on Form
10-K for the year ended December 31, 1999, File No.
1-12387).
10.16 -- Agreement, dated as of April 12, 1999, among the registrant,
Tenneco Management Company, Tenneco Packaging Inc. and Paul
T. Stecko (incorporated herein by reference from Exhibit
10.30 of the registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, File No. 1-12387).
10.17 -- Human Resources Agreement by and between Tenneco Automotive
Inc. 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).
10.18 -- Tax Sharing Agreement by and between Tenneco Automotive Inc.
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).
10.19 -- Amended and Restated Transition Services Agreement by and
between Tenneco Automotive Inc. 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).
10.20 -- Purchase Agreement among Salomon Smith Barney Inc., the
other Initial Purchasers as named therein and Tenneco Inc.
dated October 8, 1999 (incorporated herein by reference from
Exhibit 10.18 of the registrant's Registration Statement on
Form S-4, Reg. No. 333-93757).
10.21 -- Registration Rights Agreement among Tenneco Inc., the
Guarantors named therein, Salomon Smith Barney Inc. and the
other Initial Purchasers named therein dated October 14,
1999 (incorporated herein by reference from Exhibit 10.19 of
the registrant's Registration Statement on Form S-4, Reg.
No. 333-93757).
</Table>
45
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.22 -- 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 10.20 of the registrant's
Registration Statement on Form S-4, Reg. No. 333-93757).
10.23 -- 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).
10.24 -- 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).
10.25 -- Letter Agreement dated July 27, 2000 between the registrant
and Mark A. McCollum (incorporated herein by reference from
Exhibit 10.25 to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, File No. 1-12387).
10.26 -- Letter Agreement dated July 27, 2000 between the registrant
and Richard P. Schneider (incorporated herein by reference
from Exhibit 10.26 to the registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, File No.
1-12387).
10.27 -- Letter Agreement dated July 27, 2000 between the registrant
and Richard P. Sloan (incorporated herein by reference from
Exhibit 10.27 to the registrant's report on Form 10-K for
the year ended December 31, 2000, File No. 1-12387).
10.28 -- 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 report on Form 10-K
for the year ended December 31, 2000, File No. 1-12387).
10.29 -- Distribution Agreement by and between the registrant and
Tenneco Packaging Inc. dated November 3, 1999 (incorporated
herein by reference to Exhibit 2 to the registrant's Current
Report on Form 8-K dated November 4, 1999, File No.
1-12387).
11 -- None.
*12 -- Computation of Ratio of Earnings to Fixed Charges.
*15 -- Letter Regarding Unaudited Interim Financial Information.
18 -- None.
19 -- None.
22 -- None.
23 -- None.
24 -- None.
99 -- None.
</Table>
- ---------------
* Filed herewith
46