- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 March 31, 2005 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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: 43,604,444 shares as of April 29, 2005. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS <Table> <Caption> PAGE ---- PART I--FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited).................. 4 Tenneco Automotive Inc. and Consolidated Subsidiaries-- Report of Independent Registered Public Accounting Firm................................................ 4 Statements of Income (Loss).......................... 5 Balance Sheets....................................... 6 Statements of Cash Flows............................. 7 Statements of Changes in Shareholders' Equity........ 8 Statements of Comprehensive Loss..................... 9 Notes to Consolidated Financial Statements........... 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 48 Item 4. Controls and Procedures........................... 48 PART II--OTHER INFORMATION Item 1. Legal Proceedings................................. * Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................................... 49 Item 3. Defaults Upon Senior Securities................... * Item 4. Submission of Matters to a Vote of Security Holders................................................ * Item 5. Other Information................................. * Item 6. Exhibits.......................................... 49 </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 "may," "will," "believes," "should," "could," "plans," "expects," "anticipate," "intends," "estimates," and similar expressions (and variations thereof), identify these forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, these expectations may not prove to be correct. Because these forward-looking statements are also subject to risks and uncertainties, actual results may differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include: - changes in automotive manufacturers' production rates and their actual and forecasted requirements for our products, including the overall highly competitive nature of the automotive parts industry, and our resultant inability to realize the sales represented by our awarded book of business which is based on anticipated pricing for the applicable program over its life, and is subject to increases or decreases due to changes in customer requirements, customer and consumer preferences, and the number of vehicles actually produced by customers; - increases in the costs of raw materials, including our ability to successfully reduce the impact of any such cost increases through materials substitutions, cost reduction initiatives and other methods; 2 - the cyclical nature of the global vehicular industry, including the performance of the global aftermarket sector, and changes in consumer demand and prices, including longer product lives of automobile parts and the cyclicality of automotive production and sales of automobiles which include our products, and the potential negative impact on our revenues and margins from such products; - our continued success in cost reduction and cash management programs and our ability to execute restructuring and other cost reduction plans and to realize anticipated benefits from these plans; - general economic, business and market conditions; - the impact of consolidation among automotive parts suppliers and customers on our ability to compete; - operating hazards associated with our business; - changes in distribution channels or competitive conditions in the markets and countries where we operate, including the impact of changes in distribution channels for aftermarket products on our ability to increase or maintain aftermarket sales; - the cost and outcome of existing and any future legal proceedings, and compliance with changes in regulations, including environmental regulations; - labor disruptions at our facilities or at any of our significant customers or suppliers; - economic, exchange rate and political conditions in the foreign countries where we operate or sell our products; - customer acceptance of new products; - new technologies that reduce the demand for certain of our products or otherwise render them obsolete; - our ability to realize our business strategy of improving operating performance; - capital availability or costs, including changes in interest rates, market perceptions of the industries in which we operate or ratings of securities; - 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 REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TENNECO AUTOMOTIVE INC. We have reviewed the accompanying consolidated balance sheet of Tenneco Automotive Inc. and consolidated subsidiaries as of March 31, 2005, and the related consolidated statements of income (loss), comprehensive loss, cash flows and changes in shareholders' equity for the three-month periods ended March 31, 2005 and 2004. These interim financial statements are the responsibility of Tenneco Automotive Inc.'s management. We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Tenneco Automotive Inc. and consolidated subsidiaries as of December 31, 2004, and the related consolidated statements of income (loss), cash flows, changes in shareholders' equity and comprehensive income (loss) for the year then ended prior to the restatement for the change in method of accounting for certain inventory from the last-in, first-out ("LIFO") method to the lower of cost, determined on a first-in, first-out ("FIFO") basis, or market method, (not presented herein); and in our report dated March 8, 2005, we expressed an unqualified opinion on those consolidated financial statements (such report includes an explanatory paragraph relating to a change in accounting for goodwill and intangible assets upon the adoption of Statement of Financial Accounting Standards No. 142). We also audited the adjustments described in Note 3 that were applied to restate the December 31, 2004 consolidated balance sheet of Tenneco Automotive Inc. and consolidated subsidiaries (not presented herein). In our opinion, such adjustments are appropriate and have been properly applied and the information set forth in the accompanying consolidated balance sheet as of December 31, 2004 is fairly stated, in all material respects, in relation to the restated consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Chicago, Illinois May 10, 2005 4 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF INCOME (LOSS) (UNAUDITED) <Table> <Caption> THREE MONTHS ENDED MARCH 31, --------------------------- 2005 2004 ------------ ------------ (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) REVENUES Net sales and operating revenues.......................... $ 1,101 $ 1,033 ----------- ----------- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)..... 888 829 Engineering, research, and development.................... 24 17 Selling, general, and administrative...................... 98 109 Depreciation and amortization of other intangibles........ 46 45 ----------- ----------- 1,056 1,000 ----------- ----------- OTHER INCOME (EXPENSE)...................................... (1) -- ----------- ----------- INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST.................................................. 44 33 Interest expense (net of interest capitalized)............ 32 35 Income tax expense (benefit).............................. 4 (1) Minority interest......................................... 1 1 ----------- ----------- NET INCOME (LOSS)........................................... $ 7 $ (2) =========== =========== EARNINGS (LOSS) PER SHARE Average shares of common stock outstanding-- Basic..................................................... 42,674,558 40,861,204 Diluted................................................... 44,995,875 43,539,508 Basic earnings (loss) per share of common stock............. $ 0.17 $ (0.05) Diluted earnings (loss) per share of common stock........... $ 0.16 $ (0.05) </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> AS ADJUSTED (NOTE 3) MARCH 31, DECEMBER 31, 2005 2004 --------- ------------ (MILLIONS) ASSETS Current assets: Cash and cash equivalents................................. $ 68 $ 214 Receivables-- Customer notes and accounts, net........................ 528 458 Other................................................... 28 30 Inventories-- Finished goods.......................................... 183 167 Work in process......................................... 104 85 Raw materials........................................... 109 105 Materials and supplies.................................. 39 39 Deferred income taxes..................................... 70 70 Prepayments and other..................................... 143 124 ------- ------- 1,272 1,292 ------- ------- Other assets: Long-term notes receivable, net........................... 21 24 Goodwill.................................................. 196 196 Intangibles, net.......................................... 23 24 Deferred income taxes..................................... 309 304 Other..................................................... 145 145 ------- ------- 694 693 ------- ------- Plant, property, and equipment, at cost..................... 2,418 2,451 Less--Reserves for depreciation and amortization.......... 1,323 1,317 ------- ------- 1,095 1,134 ------- ------- $ 3,061 $ 3,119 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt)................................................... $ 48 $ 19 Trade payables............................................ 707 696 Accrued taxes............................................. 25 24 Accrued interest.......................................... 32 35 Accrued liabilities....................................... 220 226 Other..................................................... 30 47 ------- ------- 1,062 1,047 ------- ------- Long-term debt.............................................. 1,360 1,401 ------- ------- Deferred income taxes....................................... 125 126 ------- ------- Postretirement benefits..................................... 281 276 ------- ------- Deferred credits and other liabilities...................... 73 86 ------- ------- Commitments and contingencies Minority interest........................................... 25 24 ------- ------- Shareholders' equity: Common stock.............................................. -- -- Premium on common stock and other capital surplus......... 2,768 2,764 Accumulated other comprehensive loss...................... (220) (185) Retained earnings (accumulated deficit)................... (2,173) (2,180) ------- ------- 375 399 Less--Shares held as treasury stock, at cost.............. 240 240 ------- ------- 135 159 ------- ------- $ 3,061 $ 3,119 ======= ======= </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> THREE MONTHS ENDED MARCH 31, ------------- 2005 2004 ----- ---- (MILLIONS) OPERATING ACTIVITIES Net income (loss)........................................... $ 7 $ (2) Adjustments to reconcile income (loss) to cash provided by operating activities-- Depreciation and amortization of other intangibles........ 46 45 Deferred income taxes..................................... (4) (9) Changes in components of working capital (net of acquisition)-- (Increase) decrease in receivables..................... (78) (70) (Increase) decrease in inventories..................... (46) (27) (Increase) decrease in prepayments and other current assets................................................ (23) (26) Increase (decrease) in payables........................ 21 79 Increase (decrease) in accrued taxes................... -- 5 Increase (decrease) in accrued interest................ (3) (2) Increase (decrease) in other current liabilities....... (8) 15 Other..................................................... (11) 5 ----- ---- Net cash provided (used) by operating activities............ (99) 13 ----- ---- INVESTING ACTIVITIES Net proceeds from the sale of assets........................ 1 11 Expenditures for plant, property, and equipment............. (32) (25) Acquisition of business..................................... (11) -- Investments and other....................................... 3 (1) ----- ---- Net cash used by investing activities....................... (39) (15) ----- ---- FINANCING ACTIVITIES Issuance of common shares................................... 2 3 Retirement of long-term debt................................ (41) (2) Net increase (decrease) in short-term debt excluding current maturities of long-term debt.............................. 33 (2) Other....................................................... 1 1 ----- ---- Net cash used by financing activities....................... (5) -- ----- ---- Effect of foreign exchange rate changes on cash and cash equivalents............................................... (3) 6 ----- ---- Increase (decrease) in cash and cash equivalents............ (146) 4 Cash and cash equivalents, January 1........................ 214 145 ----- ---- Cash and cash equivalents, March 31 (Note).................. $ 68 $149 ===== ==== Cash paid during the period for interest.................... $ 31 $ 37 Cash paid during the period for income taxes (net of refunds).................................................. $ 7 $ 3 </Table> NOTE: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. The accompanying notes to financial statements are an integral part of these statements of cash flows. 7 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) <Table> <Caption> AS ADJUSTED (NOTE 3) THREE MONTHS ENDED MARCH 31, ---------------------------------------------- 2005 2004 --------------------- --------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------- ---------- ------- (MILLIONS EXCEPT SHARE AMOUNTS) COMMON STOCK Balance January 1.................................. 44,275,594 $ -- 42,167,296 $ -- Issued pursuant to benefit plans................. 290,330 -- 445,791 -- Stock options exercised.......................... 335,340 -- 551,199 -- ---------- ------- ---------- ------- Balance March 31................................... 44,901,264 -- 43,164,286 -- ========== ========== PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS Balance January 1.................................. 2,764 2,751 Premium on common stock issued pursuant to benefit plans................................. 4 3 ------- ------- Balance March 31................................... 2,768 2,754 ------- ------- ACCUMULATED OTHER COMPREHENSIVE LOSS Balance January 1.................................. (185) (241) Other comprehensive loss......................... (35) (6) ------- ------- Balance March 31................................... (220) (247) ------- ------- RETAINED EARNINGS (ACCUMULATED DEFICIT) Balance January 1, as previously reported.......... (2,189) (2,212) Adjustment for the cumulative effect on prior years of applying retroactively the new method of inventory valuation........................ 9 7 ------- ------- Balance January 1, as adjusted................... (2,180) (2,205) Net income (loss)................................ 7 (2) ------- ------- Balance March 31................................... (2,173) (2,207) ------- ------- LESS--COMMON STOCK HELD AS TREASURY STOCK, AT COST Balance January 1 and March 31..................... 1,294,692 240 1,294,692 240 ========== ------- ========== ------- Total....................................... $ 135 $ 60 ======= ======= </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 LOSS (UNAUDITED) <Table> <Caption> THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------- 2005 2004 ----------------------------- ----------------------------- ACCUMULATED ACCUMULATED OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME INCOME INCOME INCOME (LOSS) (LOSS) (LOSS) (LOSS) ------------- ------------- ------------- ------------- (MILLIONS) NET INCOME (LOSS)....................... $ 7 $(2) ---- --- ACCUMULATED OTHER COMPREHENSIVE LOSS CUMULATIVE TRANSLATION ADJUSTMENT Balance January 1..................... $ (63) $(143) Translation of foreign currency statements....................... (35) (35) (6) (6) ----- ----- Balance March 31...................... (98) (149) ----- ----- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance January 1 and March 31........ (122) (98) ----- ----- Balance March 31........................ $(220) $(247) ===== ---- ===== --- Other comprehensive loss................ (35) (6) ---- --- COMPREHENSIVE LOSS...................... $(28) $(8) ==== === </Table> The accompanying notes to financial statements are an integral part of these statements of comprehensive loss. 9 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) As you read the accompanying financial statements and Management's Discussion and Analysis you should also read our Annual Report on Form 10-K for the year ended December 31, 2004 which we plan to amend to restate prior years' financial statements in connection with our accounting change described in Note 3 below. In our opinion, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly Tenneco Automotive Inc.'s financial position, results of operations, cash flows, changes in shareholders' equity, and comprehensive loss for the periods indicated. We have prepared the unaudited interim consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for annual financial statements. Our consolidated financial statements include all majority-owned subsidiaries. We carry investments in 20 percent to 50 percent owned companies at cost plus equity in undistributed earnings and cumulative translation adjustments from the date of acquisition since we have the ability to exert significant influence over operating and financial policies. We have reclassified prior year's financial statements where appropriate to conform to 2005 presentations. (2) In February 2005, we announced the acquisition of substantially all the exhaust assets of Gabilan Manufacturing, Inc., a privately held company that has developed and manufactured motorcycle exhaust systems for Harley-Davidson motorcycles since 1978. The company also produces aftermarket muffler kits for Harley-Davidson. We purchased Gabilan's assets for $11 million in cash and expect the acquisition to be accretive within the first year. Gabilan generated approximately $38 million in revenue in 2004. (3) Prior to the first quarter of 2005, inventories in the U.S. based operations (17 percent and 19 percent of our total consolidated inventories at December 31, 2004 and 2003, respectively) were valued using the last-in, first-out ("LIFO") method and all other inventories were valued using the first-in, first-out ("FIFO") or average cost methods at the lower of cost or market value. Effective January 1, 2005, we changed our accounting method for valuing inventory for our U.S. based operations from the LIFO method to the FIFO method. As a result, all U.S. inventories are now stated at the lower of cost, determined on a FIFO basis, or market. We elected to change to the FIFO method as we believe it is preferable for the following reasons: 1) the change will provide better matching of revenue and expenditures and 2) the change will achieve greater consistency in valuing our global inventory. Additionally, we initially adopted LIFO as it provided certain U.S. tax benefits which we no longer realize due to our U.S. net operating losses (when applied for tax purposes, tax laws require that LIFO be applied for GAAP as well). As a result of the change, we also expect to realize administrative efficiencies. In accordance with GAAP, the change in inventory accounting has been applied by adjusting prior year's financial statements. The effect of the change in accounting principle as of December 31, 2004, was to increase inventories by $14 million, reduce deferred tax assets by $5 million, and increase retained earnings by $9 million. Previously reported results of operations presented herein have not been restated because there was no impact on consolidated net income (loss) for the three-month periods ended March 31, 2005 and 2004. (4) In April 2004, we entered into three separate fixed-to-floating interest rate swaps with two separate financial institutions. These agreements swapped an aggregate of $150 million of fixed interest rate debt at a per annum rate of 10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus a spread of 5.68 percent. Each agreement requires semi-annual settlements through July 15, 2013. The LIBOR rate as of December 31, 2004 as determined under these agreements is 1.86 percent. This rate remained in effect until January 15, 2005 when it increased to 2.89 percent. Based upon the LIBOR of 2.89 percent, which was in effect as of January 15, 2005 under these agreements (and remains in effect until July 15, 2005), these swaps 10 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) would reduce our 2005 annual interest expense by approximately $2 million. These swaps qualify as fair value hedges in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and as such are recorded on the balance sheet at market value with an offset to the underlying hedged item, which is long term debt. As of March 31, 2005, the fair value of the interest rate swaps was a liability of approximately $5 million, which has been recorded as a decrease to long-term debt and an increase to other long-term liabilities. In February 2005 we amended our senior credit facility to reduce by 75 basis points the interest rate on the term loan B facility and the tranche B-1 letter of credit/revolving loan facility. In connection with the amendment, we voluntarily prepaid $40 million in principal on the term loan B, reducing the term loan B facility from $396 million to $356 million. Additional provisions of the amendment to the senior credit facility agreement were as follows: (i) amend the definition of EBITDA to exclude up to $60 million in restructuring-related expenses announced and taken after February 2005, (ii) increase permitted investments to $50 million, (iii) exclude expenses related to the issuance of stock options from the definition of consolidated net income, (iv) permit us to redeem up to $125 million of senior secured notes after January 1, 2008 (subject to certain conditions), (v) increase our ability to add commitments under the revolving credit facility by $25 million, and (vi) make other minor modifications. We incurred approximately $1 million in fees and expenses associated with this amendment, which will be capitalized and amortized over the remaining term of the agreement. Following the February 2005 voluntary prepayment of $40 million, the term loan B facility is payable as follows: $74 million due March 31, 2010, and $94 million due each of June 30, September 30 and December 12, 2010. The revolving credit facility requires that if any amounts are drawn, they be repaid by December 2008. Prior to that date, funds may be borrowed, repaid and reborrowed under the revolving credit facility without premium or penalty. Letters of credit may be issued under the revolving credit facility. The tranche B-1 letter of credit/revolving loan facility requires that it be repaid by December 2010. We can borrow revolving loans from the tranche B-1 letter of credit/revolving loan facility and use that facility to support letters of credit. The tranche B-1 letter of credit/revolving loan facility lenders have deposited funds in an amount equal to the size of the facility with the administrative agent, who has invested that amount in time deposits. We do not have an interest in any of the funds on deposit. When we draw revolving loans under this facility, the loans are funded from the funds on deposit with the administrative agent. When we make repayments, the repayments are redeposited with the administrative agent. Under current accounting rules, the tranche B-1 letter of credit/revolving loan facility will be reflected as debt on our balance sheet only if we have outstanding thereunder revolving loans or payments by the facility in respect of letters of credit. We will not be liable for any losses to or misappropriation of any (i) return due to the administrative agent's failure to achieve the return described above or to pay all or any portion of such return to any lender under such facility or (ii) funds on deposit in such account by such lender (other than the obligation to repay funds released from such accounts and provided to us as revolving loans under such facility). In March 2005, we increased the amount of commitments under our revolving credit facility from $220 million to $285 million and reduced the amount of commitments under our tranche B-1 letter of credit/revolving loan facility from $180 million to $170 million. This reduction of our tranche B-1 letter of credit/revolving loan facility was required under the terms of the senior credit facility, as we had increased the amount of our revolving credit facility commitments by more than $55 million. In April 2005, we further increased the amount of commitments under our revolving credit facility from $285 million to $300 million and, as required under the terms of our senior credit facility, reduced the amount 11 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) of commitments under our tranche B-1 letter of credit/revolving loan facility from $170 million to $155 million. (5) Over the past several years we have adopted plans to restructure portions of our operations. These plans were approved by the Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. Prior to the change in accounting required for exit or disposal activities, we recorded charges to income related to these plans for costs that do not benefit future activities in the period in which the plans were finalized and approved, while actions necessary to affect these restructuring plans occurred over future periods in accordance with established plans. In the fourth quarter of 2001, our Board of Directors approved a restructuring plan, a project known as Project Genesis, designed to lower our fixed costs, improve efficiency and utilization, and better optimize our global footprint. Project Genesis involved closing eight facilities, improving the process flow and efficiency through value mapping and plant arrangement at 20 facilities, relocating production among facilities, and centralizing some functional areas. The total of all these restructuring and other costs recorded in the fourth quarter of 2001 was $32 million before tax, $31 million after tax, or $0.81 per diluted common share. We eliminated 974 positions in connection with Project Genesis. Additionally, we executed this plan more efficiently than originally anticipated and as a result in the fourth quarter of 2002 reduced our reserves related to this restructuring activity by $6 million, which was recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2 million of severance reserve to the asset impairment reserve. This reclassification became necessary, as actual asset impairments along with the sale of our closed facilities were different than the original estimates. We completed the remaining restructuring activities under Project Genesis as of the end of 2004. Since Project Genesis was announced, we have undertaken a number of related projects designed to restructure our operations, described below. In the first quarter of 2003, we incurred severance costs of $1 million associated with eliminating 17 salaried positions through selective layoffs and an early retirement program. Additionally, 93 hourly positions were eliminated through selective layoffs in the quarter. These reductions were done to reduce ongoing labor costs in North America. This charge was primarily recorded in cost of sales. In October of 2003, we announced the closing of an emission control manufacturing facility in Birmingham, U.K. Approximately 130 employees were eligible for severance benefits in accordance with union contracts and U.K. legal requirements. We incurred approximately $3 million in costs related to this action in 2004. This action is in addition to the plant closings announced in Project Genesis in the fourth quarter of 2001. In October 2004, we announced a plan to eliminate 250 salaried positions through selected layoffs and an elective early retirement program. The majority of layoffs were at middle and senior management levels. We expect to incur total charges of approximately $24 to $26 million related to these reductions. As of March 31, 2005, we have incurred $23 million in severance costs. Of this total, $7 million was recorded in cost of sales and $16 million was recorded in selling, general and administrative expense. We anticipate incurring the remaining costs during the second quarter of 2005. Of the total $23 million in severance costs incurred to date, $17 million were cash payments with the remainder accrued in other short-term liabilities. Including the above costs, we incurred $3 million in restructuring and restructuring-related costs in the first quarter of 2005. Including the costs incurred in 2002 through 2004 of $59 million, we have incurred a total of $62 million for activities related to our restructuring actions initiated in prior periods that could not be accrued as part of the restructuring charges for these actions. Under the terms of our amended and restated senior credit agreement that took effect on December 12, 2003, we were allowed to exclude up to $60 million of cash charges and expenses, before taxes, related to cost reduction initiatives over the 2002 to 2006 time period from the calculation of the financial covenant ratios we 12 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) are required to maintain under our senior credit agreement. In February of 2005, our senior credit facility was amended to exclude all remaining cash charges and expenses related to restructuring initiatives started before February of 2005. As of March 31, 2005, we have excluded $62 million in allowable charges relating to restructuring initiatives previously started. Under our amended facility, we are allowed to exclude up to an additional $60 million of cash charges and expenses, before taxes, related to restructuring activities initiated after February 2005 from the calculation of the financial covenant ratios required under our senior credit facility. As of March 31, 2005, we have no exclusions against the $60 million available under the terms of the February 2005 amendment to the senior credit facility. (6) We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense 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 experiences and data released by the United States Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. Where future cash flows are fixed or reliably determinable, we have discounted the liabilities. All other environmental liabilities are recorded at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our financial statements. As of March 31, 2005, we are designated as a potentially responsible party in one Superfund site. We have estimated our share of the remediation costs for this site to be less than $1 million in the aggregate. In addition to the Superfund site, 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 $10 million. For the Superfund site and the current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund site, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at the Superfund site, and of other liable parties at our current and former facilities, has been considered, where appropriate, in our determination of our estimated liability. We believe that any potential costs associated with our current status as a potentially responsible party in the Superfund site, or as a liable party at our current or former facilities, will not be material to our results of operations or consolidated financial position. We also from time to time are involved in legal proceedings, claims or investigations that are incidental to the conduct of our business. Some of these proceedings allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warnings issues, and other product liability related matters), taxes, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divesti- 13 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) tures. We vigorously defend ourselves against all of these claims. In future periods, we could be subjected to cash costs or non-cash charges to earnings if any of these matters is resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our future consolidated financial position or results of operations. In addition, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. Many of these cases involve significant numbers of individual claimants. However, only a small percentage of these claimants allege that they were automobile mechanics who were allegedly exposed to our former muffler products and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other evidence, it is unlikely that mechanics were exposed to asbestos by our former muffler products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number of each in some cases exceeding 200 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. As major asbestos manufacturers continue to go out of business, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these matters is resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolution in the form of a dismissal of the claim or a judgment in our favor. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future financial condition or results of operations. We provide warranties on some of our products. The warranty terms vary but range from one year up to limited lifetime warranties on some of our premium aftermarket products. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified on OE products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. We actively study trends of warranty claims and take action to improve product quality and minimize warranty claims. We believe that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. The reserve is included in both long-term and short-term liabilities on the balance sheet. Below is a table that shows the activity in the warranty accrual accounts: <Table> <Caption> THREE MONTHS ENDED MARCH 31, -------------- 2005 2004 ---- ---- (MILLIONS) Beginning Balance........................................... $19 $18 Accruals related to product warranties...................... 3 3 Reductions for payments made................................ (3) (2) --- --- Ending Balance.............................................. $19 $19 === === </Table> (7) In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs an amendment of Accounting Research Bulletin No. 43, Chapter 4." This statement requires idle facility expenses, excessive spoilage, double freight and rehandling costs to be recognized as current period charges regardless of whether they meet the criterion of "so abnormal." SFAS No. 151 is 14 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) effective for fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material impact on our financial position or results of operations. In December 2004, the FASB revised SFAS No. 123, "Share-Based Payment" which supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." This revised statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. The revised SFAS No. 123 is effective for interim reporting periods that begin at the beginning of the next fiscal year January 1, 2006. We estimate that the impact on our net income for the full year 2004 would not exceed approximately $2 million or $0.05 per diluted share had we adopted SFAS No. 123. In December 2004, the FASB issued FSP No. 109-1. FSP No. 109-1 provides guidance on the application of FASB Statement No. 109, "Accounting for Income Taxes," to the provision within The American Jobs Creation Act of 2004 (The Act) that provides a tax deduction on qualified production activities. The purpose behind this special deduction is to provide a tax incentive to companies that maintain or expand U.S. manufacturing activities. FSP No. 109-1 was effective upon issuance. The adoption of FSP 109-1 did not have any impact on our consolidated financial statements. In December 2004, the FASB issued FSP No. 109-2. FSP No. 109-2 addresses the question on the impact of a company's APB No. 23 Accounting for Income Taxes--Special Areas representation under The Act, which provides for a special one-time 85 percent dividend deduction on dividends from foreign subsidiaries. FSP No. 109-2 was effective upon issuance. The issuance of FSP No. 109-2 does not change how we apply APB No. 23, and therefore, did not have any impact on our consolidated financial statements. In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5, "Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003). The statement addresses whether a reporting enterprise should consider whether it holds an implicit variable interest in a variable interest entity ("VIE") or potential VIE when specific conditions exist. The guidance should be applied in the first reporting period beginning after March 3, 2005. The adoption of FSP No. FIN 46(R)-5 does not have an impact on our consolidated financial statements. In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional Asset Retirement Obligations." This interpretation clarifies that the term conditional asset retirement obligation as used in FASB No. 143, "Accounting for Assets Retirement Obligation," refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. This interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 is not expected to have a material impact on our financial position or results of operation. (8) We sell an interest in some of our U.S. trade accounts receivable to a third party. Receivables become eligible for the program on a daily basis, at which time the receivables are sold to the third party, net of a factoring discount, through a wholly-owned subsidiary. Under this agreement, as well as individual agreements with third parties in Europe, we have sold accounts receivable of $147 million and $144 million at March 31, 2005 and 2004, respectively. We recognized a loss of less than $1 million for each of the quarters ended March 31, 2005 and 2004, respectively, on these sales of trade accounts, representing the discount from book values at which these receivables were sold to the third party. The discount rate varies based on funding cost incurred by the third party, and it averaged six percent during the time period in 2005 when we sold receivables. We retained ownership of the remaining interest in the pool of receivables not sold to the third 15 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) party. The retained interest represents a credit enhancement for the program. We value the retained interest based upon the amount we expect to collect from our customers, which approximates book value. (9) We account for our stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees." As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," and amended by SFAS No. 148, "Accounting for Stock-based Compensation--Transition and Disclosure, an amendment of FASB Statement No. 123," we follow the disclosure only requirements of SFAS No. 123. The following table illustrates the effect on net income (loss) and earnings (loss) per share if we had applied the fair value recognition provisions of SFAS No. 123: <Table> <Caption> THREE MONTHS ENDED MARCH 31, ----------------- 2005 2004 ----- ------ (MILLIONS EXCEPT PER SHARE AMOUNTS) Net income (loss)........................................... $ 7 $ (2) Add: Stock-based employee compensation expense included in net income, net of income tax............................. 1 7 Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of income tax................................................ (2) (8) ----- ------ Pro forma net income (loss)................................. $ 6 $ (3) ===== ====== Earnings (loss) per share: Basic--as reported.......................................... $0.17 $(0.05) Basic--pro forma............................................ $0.16 $(0.06) Diluted--as reported........................................ $0.16 $(0.05) Diluted--pro forma.......................................... $0.15 $(0.06) </Table> The fair value of each option granted during the first three months of 2005 and 2004 is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions for grants in the first three months of 2005 and 2004, respectively: (i) risk-free interest rates of 4.2 percent and 4.1 percent; (ii) expected lives of 7 years and 10 years; (iii) expected volatility of 43.0 percent and 43.6 percent; and (iv) no dividend yield. 16 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (10) Earnings (loss) per share of common stock outstanding were computed as follows: <Table> <Caption> THREE MONTHS ENDED MARCH 31, ------------------------------ 2005 2004 ------------ ------------ (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) Basic earnings (loss) per share-- Income (loss)............................................. $ 7 $ (2) =========== =========== Average shares of common stock outstanding................ 42,674,558 40,861,204 =========== =========== Earnings (loss) per average share of common stock......... $ 0.17 $ (0.05) =========== =========== Diluted earnings (loss) per share-- Income (loss)............................................. $ 7 $ (2) =========== =========== Average shares of common stock outstanding................ 42,674,558 40,861,204 Effect of dilutive securities: Restricted stock....................................... 313,372 291,656 Stock options.......................................... 2,007,945 2,386,648 ----------- ----------- Average shares of common stock outstanding including dilutive securities.................................... 44,995,875 43,539,508 =========== =========== Earnings (loss) per average share of common stock......... $ 0.16 $ (0.05) =========== =========== </Table> Options to purchase 1,249,391 and 738,652 shares of common stock were outstanding at March 31, 2005 and 2004, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares on such dates. (11) Net periodic pension costs (income) and postretirement benefit costs (income) consist of the following components: <Table> <Caption> THREE MONTHS ENDED MARCH 31, -------------------------------------------------- 2005 2004 2005 2004 -------------- -------------- ----- ----- PENSION POSTRETIREMENT -------------------------------- -------------- US FOREIGN US FOREIGN US US --- ------- ---- ------- ----- ----- (MILLIONS) Service cost--benefits earned during the year... $ 5 $ 2 $ 4 $ 1 $ 1 $ 1 Interest cost................................... 4 4 4 3 2 2 Expected return on plan assets.................. (4) (4) (3) (4) -- -- Net amortization: Actuarial loss................................ 1 1 -- 1 2 1 Prior service cost............................ -- -- 1 -- (2) (2) --- --- --- --- --- --- Net pension and postretirement costs............ $ 6 $ 3 $ 6 $ 1 $ 3 $ 2 === === === === === === </Table> For the three months ended March 31, 2005, we made pension contributions of approximately $3 million for our domestic pension plans and $2 million for our foreign pension plans. Based on current actuarial estimates, we believe we will be required to make approximately $44 million to $49 million in contributions for the remainder of 2005. We made postretirement contributions of approximately $2 million during the first three months of 2005. Based on current actuarial estimates, we believe we will be required to make approximately $7 million in contributions for the remainder of 2005. 17 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (12) We occasionally provide guarantees that could require us to make future payments in the event that the third party primary obligor does not make its required payments. We have not recorded a liability for any of these guarantees. The only third party guarantee we have made is the performance of lease obligations by a former affiliate. Our maximum liability under this guarantee was approximately $4 million at both March 31, 2005 and 2004, respectively. We have no recourse in the event of default by the former affiliate. However, we have not been required to make any payments under this guarantee. Additionally, we have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our then existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee our senior credit facility, our senior secured notes and our senior subordinated notes on a joint and several basis. The arrangement for the senior credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of 66 percent of the stock of certain first-tier foreign subsidiaries. The arrangement for the $475 million senior secured notes is also secured by second-priority liens on substantially all our domestic assets, excluding some of the stock of our domestic subsidiaries. No assets or capital stock of our direct or indirect foreign subsidiaries secure these notes. You should also read Note 14 where we present the Supplemental Guarantor Condensed Consolidating Financial Statements. We have issued guarantees through letters of credit in connection with some obligations of our affiliates. We have guaranteed through letters of credit support for local credit facilities, travel and procurement card programs, and cash management requirements for some of our subsidiaries totaling $26 million. We have also issued $19 million in letters of credit to support some of our subsidiaries' insurance arrangements. In addition, we have issued $3 million in guarantees through letters of credit to guarantee other obligations of subsidiaries primarily related to environmental remediation activities. (13) In October 2004, we announced a change in the structure of our organization which changed our reportable segments. The European segment now includes South American operations. While this has no impact on our consolidated results, it changes our segment results. We are a global manufacturer with three geographic reportable segments: North America, Europe and South America, and Asia Pacific. Each segment manufactures and distributes ride control and emission control products primarily for the automotive industry. We have not aggregated individual operating segments within these reportable segments. We evaluate segment performance based primarily on income before interest expense, income taxes, and minority interest. Products are transferred between segments and geographic areas on a basis intended to reflect as nearly as possible the "market value" of the products. 18 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) The following table summarizes certain Tenneco segment information: <Table> <Caption> SEGMENT ----------------------------------------------------------------- EUROPE & SOUTH ASIA RECLASS & NORTH AMERICA AMERICA PACIFIC ELIMS CONSOLIDATED ------------- -------- ------- --------- ------------ (MILLIONS) AT MARCH 31, 2005, AND FOR THE THREE MONTHS THEN ENDED Revenues from external customers.......... $ 505 $ 507 $ 89 $ -- $1,101 Intersegment revenues..................... 1 15 3 (19) -- Income before interest, income taxes, and minority interest....................... 37 5 2 -- 44 Total assets.............................. 1,282 1,390 280 109 3,061 AT MARCH 31, 2004, AND FOR THE THREE MONTHS THEN ENDED Revenues from external customers.......... $ 503 $ 442 $ 88 $ -- $1,033 Intersegment revenues..................... 2 13 4 (19) -- Income before interest, income taxes, and minority interest....................... 30 -- 3 -- 33 Total assets, as adjusted (Note 3)........ 1,207 1,281 260 176 2,924 </Table> (14) Supplemental guarantor condensed financial statements are presented below: Basis of Presentation Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries (which are referred to as the Guarantor Subsidiaries) fully and unconditionally guarantee our senior subordinated notes due 2014 and our senior secured notes due 2013 on a joint and several basis. We have not presented separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries because management has determined that such information is not material to the holders of the notes. Therefore, the Guarantor Subsidiaries are combined in the presentation below. These condensed consolidating financial statements are presented on the equity method. Under this method, our investments are recorded at cost and adjusted for our ownership share of a subsidiary's cumulative results of operations, capital contributions and distributions, and other equity changes. You should read the condensed consolidating financial statements of the Guarantor Subsidiaries in connection with our consolidated financial statements and related notes of which this note is an integral part. Distributions There are no significant restrictions on the ability of the Guarantor Subsidiaries to make distributions to us. 19 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS) <Table> <Caption> FOR THE THREE MONTHS ENDED MARCH 31, 2005 ---------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- --------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External...................... $521 $580 $ -- $ -- $1,101 Affiliated companies.......... 17 130 -- (147) -- ---- ---- ---- ----- ------ 538 710 -- (147) 1,101 ---- ---- ---- ----- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)..... 427 608 -- (147) 888 Engineering, research, and development................... 14 10 -- -- 24 Selling, general, and administrative................ 40 58 -- -- 98 Depreciation and amortization of other intangibles............. 18 28 -- -- 46 ---- ---- ---- ----- ------ 499 704 -- (147) 1,056 ---- ---- ---- ----- ------ OTHER INCOME (EXPENSE)............. 2 (3) -- -- (1) ---- ---- ---- ----- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES........................ 41 3 -- -- 44 Interest expense-- External (net of interest capitalized)................ -- 1 31 -- 32 Affiliated companies (net of interest income)............ 27 (2) (25) -- -- Income tax expense (benefit)..... 13 1 (3) (7) 4 Minority interest................ -- 1 -- -- 1 ---- ---- ---- ----- ------ 1 2 (3) 7 7 Equity in net income (loss) from affiliated companies.......... 8 -- 10 (18) -- ---- ---- ---- ----- ------ NET INCOME (LOSS).................. $ 9 $ 2 $ 7 $ (11) $ 7 ==== ==== ==== ===== ====== </Table> 20 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS) <Table> <Caption> FOR THE THREE MONTHS ENDED MARCH 31, 2004 ---------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- --------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External...................... $401 $632 $ -- $ -- $1,033 Affiliated companies.......... 17 26 -- (43) -- ---- ---- ---- ---- ------ 418 658 -- (43) 1,033 ---- ---- ---- ---- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)..... 319 553 -- (43) 829 Engineering, research, and development................... 7 10 -- -- 17 Selling, general, and administrative................ 56 53 -- -- 109 Depreciation and amortization of other intangibles............. 19 26 -- -- 45 ---- ---- ---- ---- ------ 401 642 -- (43) 1,000 ---- ---- ---- ---- ------ OTHER INCOME (EXPENSE)............. 8 (3) -- (5) -- ---- ---- ---- ---- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES........................ 25 13 -- (5) 33 Interest expense-- External (net of interest capitalized)................ -- 1 34 -- 35 Affiliated companies (net of interest income)............ 21 (2) (19) -- -- Income tax expense (benefit)..... (3) 2 (18) 18 (1) Minority interest................ -- 1 -- -- 1 ---- ---- ---- ---- ------ 7 11 3 (23) (2) Equity in net income (loss) from affiliated companies.......... 14 -- (5) (9) -- ---- ---- ---- ---- ------ NET INCOME (LOSS).................. $ 21 $ 11 $ (2) $(32) $ (2) ==== ==== ==== ==== ====== </Table> 21 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) BALANCE SHEET <Table> <Caption> MARCH 31, 2005 ------------------------------------------------------------------------ TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- --------- ------------ (MILLIONS) ASSETS Current assets: Cash and cash equivalents.......... $ -- $ 68 $ -- $ -- $ 68 Receivables, net................... 154 579 25 (202) 556 Inventories........................ 134 301 -- -- 435 Deferred income taxes.............. 59 10 36 (35) 70 Prepayments and other.............. 22 121 -- -- 143 ------ ------ ------ ------- ------ 369 1,079 61 (237) 1,272 ------ ------ ------ ------- ------ Other assets: Investment in affiliated companies....................... 428 -- 958 (1,386) -- Notes and advances receivable from affiliates...................... 3,096 14 4,680 (7,790) -- Long-term notes receivable, net.... 2 19 -- -- 21 Goodwill........................... 136 60 -- -- 196 Intangibles, net................... 13 10 -- -- 23 Deferred income taxes.............. 257 52 178 (178) 309 Other.............................. 35 75 35 -- 145 ------ ------ ------ ------- ------ 3,967 230 5,851 (9,354) 694 ------ ------ ------ ------- ------ Plant, property, and equipment, at cost............................... 897 1,521 -- -- 2,418 Less--Reserves for depreciation and amortization.................... 562 761 -- -- 1,323 ------ ------ ------ ------- ------ 335 760 -- -- 1,095 ------ ------ ------ ------- ------ $4,671 $2,069 $5,912 $(9,591) $3,061 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt) Short-term debt--non-affiliated.......... $ -- $ 18 $ 30 $ -- $ 48 Short-term debt--affiliated..... 20 95 10 (125) -- Trade payables..................... 233 547 -- (73) 707 Accrued taxes...................... 32 14 -- (21) 25 Other.............................. 128 126 31 (3) 282 ------ ------ ------ ------- ------ 413 800 71 (222) 1,062 Long-term debt--non-affiliated....... -- 14 1,346 -- 1,360 Long-term debt--affiliated........... 3,434 -- 4,356 (7,790) -- Deferred income taxes................ 257 66 -- (198) 125 Postretirement benefits and other liabilities........................ 260 84 4 6 354 Commitments and contingencies Minority interest.................... -- 25 -- -- 25 Shareholders' equity................. 307 1,080 135 (1,387) 135 ------ ------ ------ ------- ------ $4,671 $2,069 $5,912 $(9,591) $3,061 ====== ====== ====== ======= ====== </Table> 22 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) BALANCE SHEET <Table> <Caption> AS ADJUSTED (NOTE 3) DECEMBER 31, 2004 ---------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- --------- ------------ (MILLIONS) ASSETS Current assets: Cash and cash equivalents............ $ 140 $ 74 $ -- $ -- $ 214 Receivables, net..................... 122 588 27 (249) 488 Inventories.......................... 116 280 -- -- 396 Deferred income taxes................ 59 10 23 (22) 70 Prepayments and other................ 12 112 -- -- 124 ------ ------ ------ ------- ------ 449 1,064 50 (271) 1,292 ------ ------ ------ ------- ------ Other assets: Investment in affiliated companies... 396 -- 980 (1,376) -- Notes and advances receivable from affiliates......................... 3,060 87 4,588 (7,735) -- Long-term notes receivable, net...... 2 22 -- -- 24 Goodwill............................. 136 60 -- -- 196 Intangibles, net..................... 14 10 -- -- 24 Deferred income taxes................ 275 29 179 (179) 304 Other................................ 37 73 35 -- 145 ------ ------ ------ ------- ------ 3,920 281 5,782 (9,290) 693 ------ ------ ------ ------- ------ Plant, property, and equipment, at cost................................. 894 1,557 -- -- 2,451 Less--Reserves for depreciation and amortization....................... 553 764 -- -- 1,317 ------ ------ ------ ------- ------ 341 793 -- -- 1,134 ------ ------ ------ ------- ------ $4,710 $2,138 $5,832 $(9,561) $3,119 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt) Short-term debt--non-affiliated.... $ -- $ 14 $ 5 $ -- $ 19 Short-term debt--affiliated........ 93 69 10 (172) -- Trade payables....................... 218 552 -- (74) 696 Accrued taxes........................ 25 21 -- (22) 24 Other................................ 135 141 34 (2) 308 ------ ------ ------ ------- ------ 471 797 49 (270) 1,047 Long-term debt-non-affiliated.......... -- 16 1,385 -- 1,401 Long-term debt-affiliated.............. 3,408 79 4,248 (7,735) -- Deferred income taxes.................. 242 63 -- (179) 126 Postretirement benefits and other liabilities.......................... 261 95 -- 6 362 Commitments and contingencies Minority interest...................... -- 24 -- -- 24 Shareholders' equity................... 328 1,064 150 (1,383) 159 ------ ------ ------ ------- ------ $4,710 $2,138 $5,832 $(9,561) $3,119 ====== ====== ====== ======= ====== </Table> 23 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) STATEMENT OF CASH FLOWS <Table> <Caption> THREE MONTHS ENDED MARCH 31, 2005 ---------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- --------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities............. $ (52) $ 8 $(55) $ -- $ (99) ----- ---- ---- ----- ----- INVESTING ACTIVITIES Net proceeds from the sale of assets........................... -- 1 -- -- 1 Expenditures for plant, property, and equipment.................... (10) (22) -- -- (32) Acquisition of business............ -- (11) -- -- (11) Investments and other.............. 1 2 -- -- 3 ----- ---- ---- ----- ----- Net cash used by investing activities....................... (9) (30) -- -- (39) ----- ---- ---- ----- ----- FINANCING ACTIVITIES Issuance of common shares.......... -- -- 2 -- 2 Retirement of long-term debt....... -- (1) (40) -- (41) Net increase (decrease) in short-term debt excluding current maturities of long-term debt..... -- 4 29 -- 33 Intercompany dividends and net increase (decrease) in intercompany obligations......... (79) 15 64 -- -- Other.............................. -- 1 -- -- 1 ----- ---- ---- ----- ----- Net cash provided (used) by financing activities............. (79) 19 55 -- (5) ----- ---- ---- ----- ----- Effect of foreign exchange rate changes on cash and cash equivalents...................... -- (3) -- -- (3) ----- ---- ---- ----- ----- Increase (decrease) in cash and cash equivalents................. (140) (6) -- -- (146) Cash and cash equivalents, January 1................................ 140 74 -- -- 214 ----- ---- ---- ----- ----- Cash and cash equivalents, March 31 (Note)........................... $ -- $ 68 $ -- $ -- $ 68 ===== ==== ==== ===== ===== </Table> NOTE: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. 24 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) STATEMENT OF CASH FLOWS <Table> <Caption> THREE MONTHS ENDED MARCH 31, 2004 ---------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- --------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities............. $ 9 $ 62 $(58) $ -- $ 13 ---- ---- ---- ----- ---- INVESTING ACTIVITIES Net proceeds from the sale of assets........................... -- 11 -- -- 11 Expenditures for plant, property, and equipment.................... (9) (16) -- -- (25) Investments and other.............. -- (1) -- -- (1) ---- ---- ---- ----- ---- Net cash used by investing activities....................... (9) (6) -- -- (15) ---- ---- ---- ----- ---- FINANCING ACTIVITIES Issuance of common shares.......... -- -- 3 -- 3 Retirement of long-term debt....... -- (1) (1) -- (2) Net increase (decrease) in short-term debt excluding current maturities of long-term debt..... -- (2) -- -- (2) Intercompany dividends and net increase (decrease) in intercompany obligations......... (10) (46) 56 -- -- Other.............................. -- 1 -- -- 1 ---- ---- ---- ----- ---- Net cash provided (used) by financing activities............. (10) (48) 58 -- -- ---- ---- ---- ----- ---- Effect of foreign exchange rate changes on cash and cash equivalents...................... -- 6 -- -- 6 ---- ---- ---- ----- ---- Increase (decrease) in cash and cash equivalents................. (10) 14 -- -- 4 Cash and cash equivalents, January 1................................ 70 75 -- -- 145 ---- ---- ---- ----- ---- Cash and cash equivalents, March 31 (Note)........................... $ 60 $ 89 $ -- $ -- $149 ==== ==== ==== ===== ==== </Table> NOTE: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. (The preceding notes are an integral part of the foregoing financial statements.) 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE SUMMARY We are one of the world's leading manufacturers of automotive emission control and ride control products and systems. We serve both original equipment (OE) vehicle manufacturers and the repair and replacement markets, or aftermarket, globally through leading brands, including Monroe(R), Rancho(R), Clevite(R) Elastomers and Fric Rot(TM) ride control products and Walker(R), Fonos(TM), and Gillet(TM) emission control products. Worldwide we serve more than 30 different original equipment manufacturers, and our products or systems are included on six of the top 10 passenger car models produced in North American and Western Europe and all of the top 10 light truck models produced in North America for 2004. During 2004, our aftermarket customers were comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. We operate more than 70 manufacturing facilities worldwide and employ approximately 18,400 people to service our customer's demands. Factors that are critical to our success include new business awards, managing our overall global manufacturing footprint to ensure proper placement and workforce levels in line with business needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes, fixing or eliminating unprofitable businesses and reducing overall costs. In addition, our ability to adapt to key industry trends, such as the consolidation of OE customers, increasing technologically sophisticated content, changing aftermarket distribution channels, increasing environmental standards and extended product life of automotive parts, also plays a critical role in our success. Other factors that are critical to our success include adjusting to environmental and economic challenges such as increases in the cost of raw materials and our ability to successfully reduce the impact of any such cost increases through material substitutions, cost reduction initiatives and other methods. We have a substantial amount of indebtedness, with total debt, net of cash balances, of $1.34 billion as of March 31, 2005. Our ability to generate cash--both to fund operations and service our debt--is also a significant area of focus for our company. See "Liquidity and Capital Resources" below for further discussion of cash flows. Total revenues for the first three months of 2005 were $1.1 billion, a seven percent increase over the first three months of 2004. Higher global OE volumes, strengthening currencies and improved aftermarket revenues drove this increase. Gross margin for the first quarter of 2005 was 19.3 percent compared with 19.7 percent a year ago. Restructuring and restructuring related costs impacted gross margin by one-tenth of a percentage point in the current quarter compared to three-tenths of a percentage point in the first quarter of 2004. In the first quarter of this year, higher steel costs reduced gross margin by $9 million, or eight-tenths of a percentage point, more than accounting for the year-over-year decline. We reported selling, general, administrative and engineering expenses for the first quarter of 2005 of 11.0 percent of revenues versus 12.2 percent a year ago. First quarter 2005 selling, general, administrative and engineering expenses included one-tenth of a percentage point for restructuring and restructuring related costs, as compared with the first quarter of 2004 that included seven-tenths of a percentage point for restructuring and restructuring related costs, expenses related to a new aftermarket customer and consulting fees indexed to the stock price. Earnings before interest expense, income taxes and minority interest ("EBIT") was $44 million for the first quarter of 2005, up $11 million from the $33 million reported in the first quarter of 2004. Stronger operational performances in our North American and European and South American segments were partially offset by lower results from Asia Pacific and steel cost increases, net of other expected material cost savings and recovery from customers of $9 million. In October 2004, we announced a change in the structure of our organization that impacts our reportable segments. The European segment now includes South American operations. In addition, Asia Pacific is a new reportable segment that includes Asian and Australian operations. The change in segment reporting has been reflected in this management discussion and analysis for quarters ended March 31, 2005 and prior. 26 In February 2005, we announced the acquisition of substantially all the exhaust assets of Gabilan Manufacturing, Inc., a privately held company that has developed and manufactured motorcycle exhaust systems for Harley-Davidson motorcycles since 1978. The company also produces aftermarket muffler kits for Harley-Davidson. We purchased Gabilan's assets, including working capital adjustments, for $11 million in cash and expect the acquisition to be accretive within the first year. Gabilan generated approximately $38 million in revenue in 2004. RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 NET SALES AND OPERATING REVENUES The following tables reflect our revenues for the first quarter of 2005 and 2004. We present these reconciliations of revenues in order to reflect the trend in our sales in various product lines and geographic regions separately from the effects of doing business in currencies other than the U.S. dollar. Additionally, "pass-through" catalytic converter sales include precious metals pricing, which may be volatile. These "pass-through" catalytic converter sales occur when, at the direction of our OE customers, we purchase catalytic converters or components from suppliers, use them in our manufacturing process, and sell them as part of the completed system. While our original equipment customers assume the risk of this volatility, it impacts our reported revenue. Excluding "pass-through" catalytic converter sales removes this impact. We have not reflected any currency impact in the 2004 table since this is the base period for measuring the effects of currency during 2005 on our operations. We use this information to analyze the trend in our revenues before these factors. We believe investors find this information useful in understanding period-to-period comparisons in our revenues. <Table> <Caption> THREE MONTHS ENDED MARCH 31, 2005 ----------------------------------------------------------------- PASS-THROUGH REVENUES SALES EXCLUDING REVENUES EXCLUDING CURRENCY AND CURRENCY EXCLUDING CURRENCY PASS-THROUGH REVENUES IMPACT CURRENCY IMPACT SALES -------- -------- --------- ------------ ------------ (MILLIONS) North America Aftermarket Ride Control............................ $ 91 $-- $ 91 $ -- $ 91 Emission Control........................ 39 -- 39 -- 39 ------ --- ------ ---- ---- Total North America Aftermarket.... 130 -- 130 -- 130 North America Original Equipment Ride Control............................ 127 -- 127 -- 127 Emission Control........................ 248 2 246 67 179 ------ --- ------ ---- ---- Total North America Original Equipment....................... 375 2 373 67 306 Total North America............. 505 2 503 67 436 Europe Aftermarket Ride Control............................ 37 2 35 -- 35 Emission Control........................ 45 2 43 -- 43 ------ --- ------ ---- ---- Total Europe Aftermarket........... 82 4 78 -- 78 Europe Original Equipment Ride Control............................ 109 11 98 -- 98 Emission Control........................ 272 16 256 75 181 ------ --- ------ ---- ---- Total Europe Original Equipment.... 381 27 354 75 279 South America............................. 44 3 41 4 37 Total Europe & South America.... 507 34 473 79 394 Asia...................................... 42 -- 42 13 29 Australia................................. 47 1 46 4 42 ------ --- ------ ---- ---- Total Asia Pacific.............. 89 1 88 17 71 ------ --- ------ ---- ---- Total Tenneco Automotive.................. $1,101 $37 $1,064 $163 $901 ====== === ====== ==== ==== </Table> 27 <Table> <Caption> THREE MONTHS ENDED MARCH 31, 2004 ----------------------------------------------------------------- PASS-THROUGH REVENUES SALES EXCLUDING REVENUES EXCLUDING CURRENCY AND CURRENCY EXCLUDING CURRENCY PASS-THROUGH REVENUES IMPACT CURRENCY IMPACT SALES -------- -------- --------- ------------ ------------ (MILLIONS) North America Aftermarket Ride Control............................ $ 85 $ -- $ 85 $ -- $ 85 Emission Control........................ 37 -- 37 -- 37 ------ ----- ------ ---- ---- Total North America Aftermarket.... 122 -- 122 -- 122 North America Original Equipment Ride Control............................ 118 -- 118 -- 118 Emission Control........................ 263 -- 263 88 175 ------ ----- ------ ---- ---- Total North America Original Equipment....................... 381 -- 381 88 293 Total North America............. 503 -- 503 88 415 Europe Aftermarket Ride Control............................ 38 -- 38 -- 38 Emission Control........................ 42 -- 42 -- 42 ------ ----- ------ ---- ---- Total Europe Aftermarket........... 80 -- 80 -- 80 Europe Original Equipment Ride Control............................ 85 -- 85 -- 85 Emission Control........................ 243 -- 243 77 166 ------ ----- ------ ---- ---- Total Europe Original Equipment.... 328 -- 328 77 251 South America............................. 34 -- 34 4 30 Total Europe & South America.... 442 -- 442 81 361 Asia...................................... 39 -- 39 13 26 Australia................................. 49 -- 49 4 45 ------ ----- ------ ---- ---- Total Asia Pacific.............. 88 -- 88 17 71 ------ ----- ------ ---- ---- Total Tenneco Automotive.................. $1,033 $ -- $1,033 $186 $847 ====== ===== ====== ==== ==== </Table> Revenues from our North American operations increased $2 million in the first quarter of 2005 compared to the same period last year. Higher sales from the aftermarket business were partially offset by lower OE volumes. Total North American OE revenues fell two percent to $375 million in the first quarter of 2005, as compared to $381 million for the first quarter of 2004. OE emission control revenues dropped six percent to $248 million in the first quarter of 2005, primarily as a result of substantially lower pass-through sales. Pass- through catalytic converter sales were down 24 percent to $67 million, mostly driven by the expiration of the prior Ford Mustang platform. Adjusted for pass-through sales and currency, OE emission control sales were up two percent compared to last year. OE ride control revenues for the first quarter of 2005 increased seven percent from the prior year, supported by an increase in heavy-duty volumes and incremental new business. Total North American OE revenues, excluding pass-through sales and currency, increased four percent in the first quarter of 2005, while North American light vehicle production decreased approximately four percent from one year ago. Favorable platform mix, new platform launches, strong heavy-duty ride control volumes and $6 million in revenues from our recent acquisition of the exhaust business for Harley Davidson helped offset production declines on key vehicle platforms. Aftermarket revenues for North America were $130 million in the first quarter of 2005, representing an increase of seven percent compared to the prior year. New business, stronger unit sales and higher pricing drove this increase. Aftermarket ride control revenues grew to $91 million in the first quarter of 2005, up seven percent from the same period last year. Aftermarket emission control revenues increased seven percent in the first quarter of 2005 to $39 million, as compared to $37 million in 2004. Our European and South American segment's revenues increased $65 million, or 15 percent, in the first quarter of 2005 compared to last year. Total Europe OE revenues were $381 million in the first quarter of 28 2005, up 16 percent from the same period last year. OE emission control revenues increased 12 percent to $272 million in the first quarter of 2004, as compared to $243 million in the first quarter of 2004. Excluding a $2 million decrease in pass-through sales and a $16 million increase due to strengthening currency, OE emission control revenues increased nine percent over 2004, while European light vehicle production levels decreased approximately one percent from one year ago. Our increase of nine percent outperformed the market decline of one percent, as a result of higher sales from the launch and ramp up of successful platforms with BMW, Volvo, General Motors, Ford, PSA and Porsche. OE ride control revenues increased to $109 million in the first quarter of 2005, up 28 percent from $85 million a year ago. Excluding an $11 million benefit from currency appreciation, OE ride control revenues increased 15 percent. We experienced this revenue increase, despite the decline in the European build rate, due to our position on top selling platforms with Volkswagen, Ford, Volvo and Mazda, and incremental new business from sales of our electronic controlled shock on several Volvo platforms and the Audi A6. European aftermarket sales were $82 million in the first quarter of 2005 compared to $80 million in the prior year. Excluding $4 million attributable to currency appreciation, European aftermarket revenues declined three percent in the first quarter of 2005 compared to last year. Ride control aftermarket revenues, excluding the impact of currency, were down eight percent compared to the prior year with most of the decline being driven by heightened competition, a soft market in Southern Europe and weaker exports due to the current strength of the euro. Aftermarket emission control revenues were up six percent, benefiting from new customers and gains in market share despite continued market declines relating to the introduction of stainless steel by the OE manufacturers some 10 years ago. Excluding the benefits of currency, aftermarket emission control revenues were up two percent. South American revenues were $44 million during the first quarter of 2005, compared with $34 million a year earlier. Higher OE revenues explain most of this 31 percent increase. Currency appreciation in Brazil and Argentina also added $3 million to South America's revenues. Revenues from our Asia Pacific segment, which includes Australia and Asia, increased $1 million to $89 million in the first quarter of 2005 compared to the same period last year. First quarter revenues for Australia fell four percent to $47 million. Favorable currency appreciation benefited Australian revenue by $1 million. Weaker OE volumes resulting from a major customer's startup issues primarily drove Australia's revenue decline. Australian aftermarket sales were also weaker due to lower export sales. Asia revenues for the first quarter of 2005 were $42 million, up eight percent from last year. Stronger sales in India and Thailand more than offset the revenue decline in China caused by weakened market conditions. EBIT <Table> <Caption> THREE MONTHS ENDED MARCH 31, --------------- 2005 2004 CHANGE ---- ---- ------ (MILLIONS) North America............................................... $37 $30 $ 7 Europe & South America...................................... 5 -- 5 Asia Pacific................................................ 2 3 (1) --- --- --- $44 $33 $11 === === === </Table> 29 The EBIT results shown in the preceding table include the following items, discussed below under "Restructuring and Other Charges" which have an effect on the comparability of EBIT results between periods: <Table> <Caption> THREE MONTHS ENDED MARCH 31, --------------- 2005 2004 ---- ---- (MILLIONS) North America Restructuring-related expenses............................ $2 $2 Changeover costs for a major new aftermarket customer..... -- 6 Consulting fees indexed to stock price.................... -- 1 Europe & South America Restructuring-related expenses............................ 1 3 Consulting fees indexed to stock price.................... -- 1 Asia Pacific Consulting fees indexed to stock price.................... -- 1 </Table> EBIT for North American operations increased to $37 million in the first quarter of 2005, from $30 million one year ago. Higher OE volumes excluding pass-through sales increased EBIT by $1 million and lower selling, general, administrative and engineering costs added $4 to EBIT in the first quarter of 2005 compared to the prior year. Higher North American aftermarket revenues increased EBIT by $4 million and lower selling, general, administrative and engineering costs improved EBIT by $6 million. These increases to North American EBIT were partially offset by steel cost increases, net of other expected material cost savings and recovery from customers. Included in North America's first quarter 2005 EBIT were $2 million in restructuring and restructuring-related expenses. Included in North America's first quarter 2004 EBIT were $2 million in restructuring and restructuring-related expenses, $6 million of changeover costs for a major new aftermarket customer and $1 million in consulting fees indexed to stock price. The customer changeover costs include the cost of acquiring and disposing of competitor inventory when we supply aftermarket parts to a new customer. These costs were substantial in the first quarter of 2004 as we replaced a competitor at a significant customer. The 2004 consulting fees relate to a 1999 agreement that provided that a portion of the consultant's compensation would be in stock appreciation rights that were priced above the market price of our stock at the grant date. These rights expired in November 2004. Our European and South American segment's EBIT was $5 million for the first quarter of 2005 compared to breakeven during the same period last year. Higher European OE volumes from both emission and ride control product lines contributed $4 million to EBIT. Currency appreciation added $1 million to EBIT. These increases were offset by higher selling, general, administrative and engineering costs and steel cost increases, net of other expected material cost savings and recovery from customers. First quarter 2005 European aftermarket manufacturing efficiencies of $3 million and lower selling, general, administrative and selling expenses helped improve EBIT compared to the prior year. Lower aftermarket ride control volumes reduced EBIT by $1 million. South American pricing offset higher steel and manufacturing costs. South America also benefited from lower selling, general, administrative and engineering costs compared to the same period last year. Included in 2005's first quarter EBIT was $1 million in restructuring related expenses. Included in 2004's first quarter EBIT were $3 million in restructuring related expenses and $1 million in consulting fees indexed to stock price. EBIT for our Asia Pacific segment was $2 million, down $1 million in the first quarter of 2005 compared to $3 million in the first quarter of 2004. Lower OE volumes in Australia and unfavorable platform mix in Asia reduced EBIT by $1 million. Higher selling, general, administrative and engineering costs and steel cost increases, net of other expected material cost savings and recovery from customers, also unfavorably impacted Asia Pacific's EBIT. Partially offsetting these decreases to Asia Pacific's EBIT were manufacturing cost reductions and efficiencies of $5 million. Included in the first quarter of 2004's EBIT was $1 million in consulting fees indexed to stock price. 30 EBIT AS A PERCENTAGE OF REVENUE <Table> <Caption> THREE MONTHS ENDED MARCH 31, --------------- 2005 2004 ---- ---- North America............................................... 7% 6% Europe & South America...................................... 1% --% Asia Pacific................................................ 2% 3% Total Tenneco Automotive.................................. 4% 3% </Table> In North America, EBIT as a percentage of revenue for the first quarter of 2005 was up one percent compared to last year. Higher volumes, favorable platform mix, customer price recovery and lower selling, general, administrative and engineering expenses, were partially offset by higher steel costs. In addition, during the first quarter of 2005, North American results included higher restructuring and other charges. In Europe and South America, EBIT margins for the first quarter of 2005 were one percent higher compared to the prior year. Strong OE volumes, customer price recovery and manufacturing efficiencies more than offset the impact of higher steel costs and selling, general, administrative and engineering expenses. EBIT as a percentage of revenue for our Asia Pacific segment decreased one percent in the first quarter of 2005 versus the prior year. Partially offset by manufacturing cost reductions and efficiencies, lower OE volumes on key platforms combined with higher steel costs and selling, general, administrative and engineering expenses mostly drove this decrease in EBIT margins. INTEREST EXPENSE, NET OF INTEREST CAPITALIZED We reported interest expense of $32 million in the first quarter of 2005 compared to $35 million in the prior year. This decrease is primarily due to the November 2004 refinancing of $500 million 11 5/8 percent senior subordinated notes for $500 million of 8 5/8 percent senior subordinated notes due in 2014. Interest expense was also reduced due to a $40 million prepayment of our senior term loan B facility and an amendment to our senior credit facility to reduce by 75 basis points the interest rate on the term loan B facility and the tranche B-1 letter of credit/revolving loan facility. These decreases were partially offset by higher interest expense on the variable portion of our debt. See more detailed explanations on our debt structure, including our issuance of $500 million of 8 5/8 percent senior subordinated notes due 2014 in November 2004, prepayments and amendments to our senior credit facility in February of 2005, and their anticipated impact on our interest expense, in "Liquidity and Capital Resources--Capitalization" later in this Management's Discussion and Analysis. In April 2004, we entered into three separate fixed-to-floating interest rate swaps with two separate financial institutions. These agreements swapped an aggregate of $150 million of fixed interest rate debt at a per annum rate of 10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus a spread of 5.68 percent. Each agreement requires semi-annual settlements through July 15, 2013. The LIBOR in effect for these swaps during the course of 2004 resulted in lower interest expense of approximately $3 million for the year. The LIBOR rate as of December 31, 2004 as determined under these agreements is 1.86 percent. This rate remained in effect until January 15, 2005 when it increased to 2.89 percent. Based upon the LIBOR of 2.89 percent, which was in effect as of January 15, 2005 under these agreements (and remains in effect until July 15, 2005), these swaps would reduce our 2005 annual interest expense by approximately $2 million. These swaps qualify as fair value hedges in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and as such are recorded on the balance sheet at market value with an offset to the underlying hedged item, which is long term debt. As of March 31, 2005, the fair value of the interest rate swaps was a liability of approximately $5 million, which has been recorded as a decrease to long-term debt and an increase to other long-term liabilities. 31 INCOME TAXES Income tax expense was $4 million in the first quarter of 2005 compared to a benefit of $1 million in the first quarter of 2004. The effective tax rate for the first quarter of 2005 was 35 percent. The effective tax rate for the first three months of 2004 was 40 percent. EARNINGS PER SHARE We reported net income of $7 million or $0.16 per diluted common share for the first quarter of 2005, as compared to a loss of $2 million or $0.05 per diluted common share for the first quarter of 2004. Included in the results for the first quarter of 2005 were negative impacts from expenses related to our restructuring activities. The net impact of these items decreased earnings per diluted share by $0.04. Included in the results for the first three months of 2004 were negative impacts from expenses related to our restructuring activities, customer changeover costs for a major new aftermarket customer and consulting fees indexed to the stock price. The net impact of these items decreased earnings per diluted share by $0.20. Please read the Notes to the consolidated financial statements for more detailed information on earnings per share. RESTRUCTURING AND OTHER CHARGES Over the past several years we have adopted plans to restructure portions of our operations. These plans were approved by the Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. Prior to the change in accounting required for exit or disposal activities, we recorded charges to income related to these plans for costs that do not benefit future activities in the period in which the plans were finalized and approved, while actions necessary to affect these restructuring plans occurred over future periods in accordance with established plans. In the fourth quarter of 2001, our Board of Directors approved a restructuring plan, a project known as Project Genesis, designed to lower our fixed costs, improve efficiency and utilization, and better optimize our global footprint. Project Genesis involved closing eight facilities, improving the process flow and efficiency through value mapping and plant arrangement at 20 facilities, relocating production among facilities, and centralizing some functional areas. The total of all these restructuring and other costs recorded in the fourth quarter of 2001 was $32 million before tax, $31 million after tax, or $0.81 per diluted common share. We eliminated 974 positions in connection with Project Genesis. Additionally, we executed this plan more efficiently than originally anticipated and as a result in the fourth quarter of 2002 reduced our reserves related to this restructuring activity by $6 million, which was recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2 million of severance reserve to the asset impairment reserve. This reclassification became necessary, as actual asset impairments along with the sale of our closed facilities were different than the original estimates. We completed the remaining restructuring activities under Project Genesis as of the end of 2004. Since Project Genesis was announced, we have undertaken a number of related projects designed to restructure our operations, described below. In the first quarter of 2003, we incurred severance costs of $1 million associated with eliminating 17 salaried positions through selective layoffs and an early retirement program. Additionally, 93 hourly positions were eliminated through selective layoffs in the quarter. These reductions were done to reduce ongoing labor costs in North America. This charge was primarily recorded in cost of sales. In October of 2003, we announced the closing of an emission control manufacturing facility in Birmingham, U.K. Approximately 130 employees were eligible for severance benefits in accordance with union contracts and U.K. legal requirements. We incurred approximately $3 million in costs related to this action in 2004. This action is in addition to the plant closings announced in Project Genesis in the fourth quarter of 2001. In October 2004, we announced a plan to eliminate 250 salaried positions through selected layoffs and an elective early retirement program. The majority of layoffs were at middle and senior management levels. We expect to incur total charges of approximately $24 to $26 million related to these reductions. As of March 31, 2005, we have incurred $23 million in severance costs. Of this total, $7 million was recorded in cost of sales 32 and $16 million was recorded in selling, general and administrative expense. We anticipate incurring the remaining costs during the second quarter of 2005. Of the total $23 million in severance costs incurred to date, $17 million were cash payments with the remainder accrued in other short-term liabilities. We expect to generate savings of approximately $20 million annually from this initiative. Including the above costs, we incurred $3 million in restructuring and restructuring-related costs in the first quarter of 2005. Including the costs incurred in 2002 through 2004 of $59 million, we have incurred a total of $62 million for activities related to our restructuring actions initiated in prior periods that could not be accrued as part of the restructuring charges for these actions. We have generated about $31 million of annual savings from Project Genesis. Approximately $7 million of savings was related to closing the eight facilities, approximately $16 million of savings was related to value mapping and plant arrangement and approximately $8 million of savings was related to relocating production among facilities and centralizing some functional areas. There have been no significant deviations from planned savings. All actions for Project Genesis have been completed. Under the terms of our amended and restated senior credit agreement that took effect on December 12, 2003, we were allowed to exclude up to $60 million of cash charges and expenses, before taxes, related to cost reduction initiatives over the 2002 to 2006 time period from the calculation of the financial covenant ratios we are required to maintain under our senior credit agreement. In February of 2005, our senior credit facility was amended to exclude all remaining cash charges and expenses related to restructuring initiatives started before February of 2005. As of March 31, 2005, we have excluded $62 million in allowable charges relating to restructuring initiatives previously started. Under our amended facility, we are allowed to exclude up to an additional $60 million of cash charges and expenses, before taxes, related to restructuring activities initiated after February 2005 from the calculation of the financial covenant ratios required under our senior credit facility. As of March 31, 2005, we have no exclusions against the $60 million available under the terms of the February 2005 amendment to the senior credit facility. In addition to the announced actions, we will continue to evaluate additional opportunities and expect that we will initiate actions that will reduce our costs through implementing the most appropriate and efficient logistics, distribution and manufacturing footprint for the future. There can be no assurances, however, that we will undertake additional restructuring actions. Actions that we take, if any, will require the approval of our Board of Directors, or its authorized committee. We plan to conduct any workforce reductions that result in compliance with all legal and contractual requirements including obligations to consult with workers' councils, union representatives and others. CRITICAL ACCOUNTING POLICES We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America. Preparing our financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following paragraphs include a discussion of some critical areas where estimates are required. Revenue Recognition We recognize revenue for sales to our original equipment and aftermarket customers under the terms of our arrangements with those customers, generally at the time of shipment from our plants or distribution centers. For our aftermarket customers, we provide for promotional incentives and returns at the time of sale. Estimates are based upon the terms of the incentives and historical experience with returns. Where we have offered product warranty, we also provide for warranty costs. Those estimates are based upon historical experience and upon specific warranty issues as they arise. While we have not experienced any material 33 differences between these estimates and our actual costs, it is reasonably possible that future warranty issues could arise that could have a significant impact on our financial statements. Long-Term Receivables We expense pre-production design and development costs incurred for our original equipment customers unless we have a contractual guarantee for reimbursement of those costs from the customer. At March 31, 2005, we had $15 million recorded as a long-term receivable from original equipment customers for guaranteed pre-production design and development arrangements. While we believe that the vehicle programs behind these arrangements will enter production, these arrangements allow us to recover our pre-production design and development costs in the event that the programs are cancelled or do not reach expected production levels. We have not experienced any material losses on arrangements where we have a contractual guarantee of reimbursement from our customers. Income Taxes We have a U.S. Federal tax net operating loss ("NOL") carryforward at March 31, 2005, of $566 million, which will expire in varying amounts from 2018 to 2025. The federal tax effect of that NOL is $198 million, and is recorded as an asset on our balance sheet at March 31, 2005. We estimate, based on available evidence both positive and negative, that it is more likely than not that we will utilize the NOL within the prescribed carryforward period. That estimate is based upon our expectations regarding future taxable income of our U.S. operations and upon strategies available to accelerate usage of the NOL. Circumstances that could change that estimate include future U.S. earnings at lower than expected levels or a majority ownership change as defined in the rules of the U.S. tax law. If that estimate changed, we would be required to cease recognizing an income tax benefit for any new NOL and could be required to record a reserve for some or all of the asset currently recorded on our balance sheet. As of March 31, 2005, we believe that there has been a significant change in our ownership, but not a majority change, in the last three years. Stock-Based Compensation We utilize the intrinsic value method to account for our stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." If our compensation costs for our stock-based compensation plans were determined using the fair value method of accounting as provided in Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," we estimate that our pro-forma net income (loss) and earnings (loss) per share would be lower by by less than $1 million or $0.01 per diluted share for both the first quarter of 2004 and 2005. Goodwill and Other Intangible Assets We utilize an impairment-only approach to value our purchased goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year in the fourth quarter, we perform an impairment analysis on the balance of goodwill. Inherent in this calculation is the use of estimates as the fair value of our designated reporting units is based upon the present value of our expected future cash flows. In addition, our calculation includes our best estimate of our weighted average cost of capital and growth rate. If the calculation results in a fair value of goodwill which is less than the book value of goodwill, an impairment charge would be recorded in the operating results of the impaired reporting unit. Pension and Other Postretirement Benefits We have various defined benefit pension plans that cover substantially all of our employees. We also have postretirement health care and life insurance plans that cover a majority of our domestic employees. Our pension and postretirement health care and life insurance expenses and valuations are dependent on management's assumptions used by our actuaries in calculating such amounts. These assumptions include discount rates, health care cost trend rates, long-term return on plan assets, retirement rates, mortality rates and other factors. Health care cost trend rate assumptions are developed based on historical cost data and an 34 assessment of likely long-term trends. Retirement and mortality rates are based primarily on actual plan experience. Our approach to establishing the discount rate assumption for both our domestic and foreign plans starts with high-quality investment-grade bonds adjusted for an incremental yield based on actual historical performance. This incremental yield adjustment is the result of selecting securities whose yields are higher than the "normal" bonds that comprise the index. Based on this approach, at September 30, 2004 we lowered the weighted average discount rate for pension plans to 6.0 percent, from 6.1 percent. The discount rate for postretirement benefits was lowered from 6.5 percent at September 30, 2003 to 6.25 percent at September 30, 2004. Our approach to determining expected return on plan asset assumptions evaluates both historical returns as well as estimates of future returns, and is adjusted for any expected changes in the long-term outlook for the equity and fixed income markets. As a result, our estimate of the weighted average long-term rate of return on plan assets for our pension plans was 8.4 percent for both 2004 and 2005. Generally, our pension plans are non-contributory. Our policy is to fund our pension plans in accordance with applicable U.S. and foreign government regulations and to make additional payments as funds are available to achieve full funding of the accumulated benefit obligation. At March 31, 2005, all legal funding requirements had been met. Other postretirement benefit obligations, such as retiree medical, are not funded. Inventory Valuation Prior to the first quarter of 2005, inventories in the U.S. based operations (17 percent and 19 percent of our total consolidated inventories at December 31, 2004 and 2003, respectively) were valued using the last-in, first-out ("LIFO") method and all other inventories were valued using the first-in, first-out ("FIFO") or average cost methods at the lower of cost or market value. Effective January 1, 2005, we changed our accounting method for valuing inventory for our U.S. based operations from the LIFO method to the FIFO method. As a result, all U.S. inventories are now stated at the lower of cost, determined on a FIFO basis, or market. We elected to change to the FIFO method as we believe it is preferable for the following reasons: 1) the change will provide better matching of revenue and expenditures and 2) the change will achieve greater consistency in valuing our global inventory. Additionally, we initially adopted LIFO as it provided certain U.S. tax benefits which we no longer realize due to our U.S. net operating losses (when applied for tax purposes, tax laws require that LIFO be applied for accounting principles generally accepted in the United States of America ("GAAP") as well). As a result of the change, we also expect to realize administrative efficiencies. In accordance with GAAP, the change in inventory accounting has been applied by adjusting prior year's financial statements. The effect of the change in accounting principle as of December 31, 2004, was to increase inventories by $14 million, reduce deferred tax assets by $5 million, and increase retained earnings by $9 million. Previously reported results of operations presented herein have not been restated because there was no impact on consolidated net income (loss) for the three-month periods ended March 31, 2005 and 2004. CHANGES IN ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs an amendment of Accounting Research Bulletin No. 43, Chapter 4." This statement requires idle facility expenses, excessive spoilage, double freight and rehandling costs to be recognized as current period charges regardless of whether they meet the criterion of "so abnormal." SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material impact on our financial position or results of operations. In December 2004, the FASB revised SFAS No. 123, "Share-Based Payment" which supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." This revised statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in 35 exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. The revised SFAS No. 123 is effective for interim reporting periods that begin at the beginning of the next fiscal year January 1, 2006. We estimate that the impact on our net income for the full year 2004 would not exceed approximately $2 million or $0.05 per diluted share had we adopted SFAS No. 123. In December 2004, the FASB issued FSP No. 109-1. FSP No. 109-1 provides guidance on the application of FASB Statement No. 109, "Accounting for Income Taxes," to the provision within The American Jobs Creation Act of 2004 (The Act) that provides a tax deduction on qualified production activities. The purpose behind this special deduction is to provide a tax incentive to companies that maintain or expand U.S. manufacturing activities. FSP No. 109-1 was effective upon issuance. The adoption of FSP 109-1 did not have any impact on our consolidated financial statements. In December 2004, the FASB issued FSP No. 109-2. FSP No. 109-2 addresses the question on the impact of a company's APB No. 23 Accounting for Income Taxes--Special Areas representation under The Act, which provides for a special one-time 85 percent dividend deduction on dividends from foreign subsidiaries. FSP No. 109-2 was effective upon issuance. The issuance of FSP No. 109-2 does not change how we apply APB No. 23, and therefore, did not have any impact on our consolidated financial statements. In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5, "Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003). The statement addresses whether a reporting enterprise should consider whether it holds an implicit variable interest in a variable interest entity ("VIE") or potential VIE when specific conditions exist. The guidance should be applied in the first reporting period beginning after March 3, 2005. The adoption of FSP No. FIN 46(R)-5 does not have an impact on our consolidated financial statements. In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional Asset Retirement Obligations." This interpretation clarifies that the term conditional asset retirement obligation as used in FASB No. 143, "Accounting for Assets Retirement Obligation," refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. This interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 is not expected to have a material impact on our financial position or results of operation. LIQUIDITY AND CAPITAL RESOURCES CAPITALIZATION <Table> <Caption> AS ADJUSTED MARCH 31, DECEMBER 31, 2005 2004 % CHANGE --------- ------------ -------- (MILLIONS) Short-term debt and current maturities...................... $ 48 $ 19 153% Long-term debt.............................................. 1,360 1,401 (3) ------ ------ Total debt.................................................. 1,408 1,420 (1) ------ ------ Total minority interest..................................... 25 24 4 Shareholders' equity........................................ 135 159 (15) ------ ------ Total capitalization........................................ $1,568 $1,603 (2) ====== ====== </Table> General. The year-to-date decrease in shareholders' equity primarily results from $35 million related to the translation of foreign balances into U.S. dollars. This amount was partially offset by our net income, premium on common stock issued pursuant to benefit plans and other transactions which contributed $11 million shareholders' equity. Although our book equity balance was small at March 31, 2005, it should not affect our business operations. We have no debt covenants that are based upon our book equity, and there are 36 no other agreements that are adversely impacted by our relatively low book equity. You should also read Note 3 to our consolidated financial statements. 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 approximately $29 million primarily related to borrowings outstanding under our revolving credit facility. The current portion of long-term debt decreased by approximately $4 million and was offset by a $4 million increase in foreign subsidiaries' obligations. Borrowings under our revolving credit facility were $29 million as of March 31, 2005. There were no borrowings outstanding under our revolving credit facility as of March 31, 2004. The overall decrease in long-term debt resulted from payments made on our outstanding long-term debt and capital leases in addition to our position on interest rate swaps entered into in April 2004. See below for further information on the interest rate swaps. Senior Credit Facility--Overview and Recent Transactions. Our financing arrangements are primarily provided by a committed senior secured financing arrangement with a syndicate of banks and other financial institutions. The arrangement is secured by substantially all our domestic assets and pledges of 66 percent of the stock of certain first-tier foreign subsidiaries, as well as guarantees by our material domestic subsidiaries. We originally entered into this facility in 1999 and since that time have periodically requested and received amendments to the facility for various purposes. In December of 2003, we engaged in a series of transactions that resulted in the full refinancing of the facility, through an amendment and restatement. In February 2005, we amended the facility, which resulted in reduced interest rates on the term loan B and tranche B-1 letter of credit/revolving loan portions of the facility. We also made a voluntary prepayment of $40 million on the term loan B facility, reducing borrowings to $356 million. In March 2005, we increased the amount of commitments under our revolving loan facility from $220 million to $285 million and reduced the amount of commitments under our tranche B-1 letter of credit/revolving loan facility from $180 million to $170 million. As of March 31, 2005, the senior credit facility consisted of a seven-year, $356 million term loan B facility maturing in December 2010; a five-year, $285 million revolving credit facility maturing in December 2008; and a seven-year, $170 million tranche B-1 letter of credit/revolving loan facility maturing in December 2010. These transactions are described in more detail below. In June 2003, we issued $350 million of 10 1/4 percent senior secured notes. The notes have a final maturity date of July 15, 2013. We received net proceeds in the second quarter of 2003 from the offering of the notes, after deducting underwriting discounts, commissions and expenses, of $338 million. We used the net proceeds of the offering to repay outstanding amounts under our senior credit facility as follows: (i) to prepay $199 million on the term loan A that was due November 4, 2005, (ii) to prepay $52 million on the term loans B and C that was due November 4, 2007 and May 4, 2008, respectively, and (iii) to prepay outstanding borrowings of $87 million under the revolving credit portion of our senior credit facility. These notes are described in more detail below under "Senior Secured and Subordinated Notes." In December 2003, we amended and restated our senior credit facility and issued an additional $125 million of 10 1/4 percent senior secured notes. We received $136 million of net proceeds from the offering of the additional $125 million of 10 1/4 percent senior secured notes, after deducting underwriting discounts and other expenses and including a 13 percent price premium over par. We also received $391 million in net proceeds from new term loan B borrowings under the amended and restated senior credit facility, after deducting fees and other expenses. We used the combined net proceeds of $527 million to prepay the remaining $514 million outstanding under term loans A, B and C under the senior credit facility immediately prior to the completion of the transaction. The remaining $13 million of net proceeds were used for general corporate purposes. We incurred $27 million in fees associated with the issuance of the aggregate $475 million of 10 1/4 percent senior secured notes and the amendment and restatement of our senior credit facility. These fees will be amortized over the term of the senior secured notes and the amended and restated senior credit facility. Based on our use of the net proceeds from both the June and December 2003 transactions, these transactions would have increased our annual interest expense by approximately $9 million. This does not give effect to the fixed-to-floating interest rate swaps we completed in April 2004, described below. In addition, we 37 expensed in the second and fourth quarters of 2003 a total of approximately $12 million of existing deferred debt issuance costs as a result of retiring the term loans under the senior credit facility. In April 2004, we entered into three separate fixed-to-floating interest rate swaps with two separate financial institutions. These agreements swapped an aggregate of $150 million of fixed interest rate debt at a per annum rate of 10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus a spread of 5.68 percent. Each agreement requires semi-annual settlements through July 15, 2013. The LIBOR in effect for these swaps during the course of 2004 resulted in lower interest expense of approximately $3 million for the year. Based upon the current LIBOR as determined under these agreements of 2.89 percent (which remains in effect until July 15, 2005), these swaps would reduce our 2005 annual interest expense by approximately $2 million. These swaps qualify as fair value hedges in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and as such are recorded on the balance sheet at market value with an offset to the underlying hedged item, which is long term debt. As of March 31, 2005, the fair value of the interest rate swaps was a liability of approximately $5 million, which has been recorded as a decrease to long term debt and an increase to other long term liabilities. On March 31, 2005, we had $993 million in long-term debt obligations that have fixed interest rates. Of that amount, $475 million is fixed through July 2013 and $500 million through November 2014, while the remainder is fixed over periods of 2005 through 2025. Included in the $993 million is $150 million of long-term debt obligations subject to variable interest rates as a result of our swap agreements. There is also $367 million in long-term debt obligations that have variable interest rates based on a current market rate of interest. In November 2004, we refinanced our $500 million of 11 5/8 percent senior subordinated notes maturing in October of 2009 with new senior subordinated notes. The new notes have an interest rate of 8 5/8 percent, a maturity date of November 15, 2014 and contain substantially similar terms as the notes refinanced. Premium payments and other fees in connection with the refinancing of these notes totaled approximately $40 million, including a $29 million or 5.813% price premium over par on the redeemed notes. The new notes accrue interest from November 19, 2004 with an initial interest payment date of May 15, 2005. These notes are described in more detail below under "Senior Secured and Subordinated Notes." In connection with the refinancing of the $500 million in senior subordinated notes we amended the senior credit facility effective November 17, 2004. This amendment allowed us to use up to $50 million in cash on hand to pay redemption premiums and/or other fees and costs in connection with the redemption and refinancing of the senior subordinated notes. This amendment also excluded any redemption premium associated with the 11 5/8 percent senior subordinated notes and any interest incurred on the notes between the call date of November 19, 2004 and the redemption date of December 20, 2004 from cash interest expense for purposes of the definition of consolidated interest expense in the senior credit facility. In exchange for these amendments, we agreed to pay a small fee to the consenting lenders. We also incurred approximately $13 million in legal, advisory and other costs related to the amendment and the issuance of the new senior subordinated notes. These amounts were capitalized and will be amortized over the remaining terms of the senior subordinated notes and senior credit facility. Our interest expense increased in 2004 by $42 million due to the fees and expenses associated with the refinancing of our senior subordinated notes, which includes an expense of $8 million for existing deferred debt issuance costs associated with the 11 5/8 percent senior subordinated notes. Beginning in 2005, annual interest expense savings from this transaction are anticipated to be about $15 million. This does not give effect to the fixed-to-floating interest rate swaps we completed in April 2004 described above. In February 2005 we amended our senior credit facility to reduce by 75 basis points the interest rate on the term loan B facility and the tranche B-1 letter of credit/revolving loan facility. In connection with the amendment, we voluntarily prepaid $40 million in principal on the term loan B, reducing the term loan B facility from $396 million to $356 million. Additional provisions of the amendment to the senior credit facility agreement were as follows: (i) amend the definition of EBITDA to exclude up to $60 million in restructuring-related expenses announced and taken after February 2005, (ii) increase permitted investments to $50 million, (iii) exclude expenses related to the issuance of stock options from the definition of consolidated net income, (iv) permit us to redeem up to 38 $125 million of senior secured notes after January 1, 2008 (subject to certain conditions), (v) increase our ability to add commitments under the revolving credit facility by $25 million, and (vi) make other minor modifications. We incurred approximately $1 million in fees and expenses associated with this amendment, which will be capitalized and amortized over the remaining term of the agreement. As a result of the amendment and the voluntary prepayment of $40 million under the term loan B, our interest expense in 2005 will be approximately $6 million lower than what it would otherwise have been. In March 2005, we increased the amount of commitments under our revolving credit facility from $220 million to $285 million and reduced the amount of commitments under our tranche B-1 letter of credit/revolving loan facility from $180 million to $170 million. This reduction of our tranche B-1 letter of credit/revolving loan facility was required under the terms of the senior credit facility, as we had increased the amount of our revolving credit facility commitments by more than $55 million. In April 2005, we further increased the amount of commitments under our revolving credit facility from $285 million to $300 million and, as required under the terms of our senior credit facility, reduced the amount of commitments under tranche B-1 letter of credit/revolving loan facility from $170 million to $155 million. Senior Credit Facility--Forms of Credit Provided. Following the February 2005 voluntary prepayment of $40 million, the term loan B facility is payable as follows: $74 million due March 31, 2010, and $94 million due each of June 30, September 30 and December 12, 2010. The revolving credit facility requires that if any amounts are drawn, they be repaid by December 2008. Prior to that date, funds may be borrowed, repaid and reborrowed under the revolving credit facility without premium or penalty. Letters of credit may be issued under the revolving credit facility. The tranche B-1 letter of credit/revolving loan facility requires that it be repaid by December 2010. We can borrow revolving loans from the $170 million tranche B-1 letter of credit/revolving loan facility and use that facility to support letters of credit. The tranche B-1 letter of credit/revolving loan facility lenders have deposited $170 million with the administrative agent, who has invested that amount in time deposits. We do not have an interest in any of the funds on deposit. When we draw revolving loans under this facility, the loans are funded from the $170 million on deposit with the administrative agent. When we make repayments, the repayments are redeposited with the administrative agent. Under current accounting rules, the tranche B-1 letter of credit/revolving loan facility will be reflected as debt on our balance sheet only if we have outstanding thereunder revolving loans or payments by the facility in respect of letters of credit. We will not be liable for any losses to or misappropriation of any (i) return due to the administrative agent's failure to achieve the return described above or to pay all or any portion of such return to any lender under such facility or (ii) funds on deposit in such account by such lender (other than the obligation to repay funds released from such accounts and provided to us as revolving loans under such facility). Senior Credit Facility--Interest Rates and Fees. Borrowings under the term loan B facility and the tranche B-1 letter of credit/revolving loan facility bear interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 300 basis points (reduced to 225 basis points in February 2005); or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 200 basis points (reduced to 125 basis points in February 2005). There is no cost to us for issuing letters of credit under the tranche B-1 letter of credit/revolving loan facility, however outstanding letters of credit reduce our availability to borrow revolving loans under this portion of the facility. If a letter of credit issued under this facility is subsequently paid and we do not reimburse the amount paid in full, then a ratable portion of each lender's deposit would be used to fund the letter of credit. We pay the tranche B-1 lenders a fee which is equal to LIBOR plus 300 basis points (reduced to 225 basis points in February 2005). This fee is offset by the return on the funds deposited with the administrative agent which earn interest at a per annum rate approximately equal to LIBOR. Outstanding revolving loans reduce the funds on deposit with the administrative agent which in turn reduce the earnings of those deposits and effectively increases our interest expense at a per annum rate equal to LIBOR. The interest margins for borrowings under the term loan B facility and tranche B-1 letter of credit/revolving loan facility will be further reduced by 25 basis points following: the end of each fiscal quarter for which the consolidated 39 leverage ratio is less than 3.0 or at the point our credit ratings are improved to BB- or better by Standard & Poor's (and are rated at least B1 by Moody's) or to Ba3 or better by Moody's (and are rated at least B+ by Standard & Poor's). Through the first quarter of 2005, borrowings under the revolving credit facility bore interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 325 basis points; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 225 basis points. Letters of credit issued under the revolving credit facility accrue a letter of credit fee at a per annum rate of 325 basis points for the pro rata account of the lenders under such facility and a fronting fee for the ratable account of the issuers thereof at a per annum rate in an amount to be agreed upon payable quarterly in arrears. The interest margins for borrowings and letters of credit issued under the revolving credit facility are subject to adjustment based on the consolidated leverage ratio (consolidated indebtedness divided by consolidated EBITDA as defined in the senior credit facility agreement) measured at the end of each quarter. The margin we pay on the revolving credit facility is reduced by 25 basis points following each fiscal quarter for which the consolidated leverage ratio is less than 4.0 beginning in March 2005. Since our consolidated leverage ratio was 3.52 as of March 31, 2005, the margin we pay on the revolving credit facility will be reduced by 25 basis points in the second quarter of 2005. We also pay a commitment fee of 50 basis points on the unused portion of the revolving credit facility. This commitment fee will be reduced by 12.5 basis points following the end of each fiscal quarter for which the consolidated leverage ratio is less than 3.5. Senior Credit Facility--Other Terms and Conditions. The amended and restated senior credit facility requires that we maintain financial ratios equal to or better than the following consolidated leverage ratio (consolidated indebtedness divided by consolidated EBITDA), consolidated interest coverage ratio (consolidated EBITDA divided by consolidated cash interest paid), and fixed charge coverage ratio (consolidated EBITDA less consolidated capital expenditures, divided by consolidated cash interest paid) at the end of each period indicated. The financial ratios required under the amended senior credit facility and, the actual ratios we achieved for the first quarter of 2005, are shown in the following tables: <Table> <Caption> QUARTER ENDED --------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2005 2005 2005 2005 ------------ -------- ------------- ------------ REQ. ACT. REQ. REQ. REQ. ---- ---- -------- ------------- ------------ Leverage Ratio (maximum)........................ 4.75 3.52 4.75 4.50 4.50 Interest Coverage Ratio (minimum)............... 2.00 2.83 2.00 2.00 2.00 Fixed Charge Coverage Ratio (minimum)........... 1.10 1.86 1.10 1.10 1.10 </Table> <Table> <Caption> QUARTERS ENDING ------------------------------------------------------------------------ MARCH 31- MARCH 31- MARCH 31- MARCH 31- MARCH 31- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2006 2007 2008 2009 2010 ------------ ------------ ------------ ------------ ------------ REQ. REQ. REQ. REQ. REQ. ------------ ------------ ------------ ------------ ------------ Leverage Ratio (maximum)............... 4.25 3.75 3.50 3.50 3.50 Interest Coverage Ratio (minimum)...... 2.10 2.20 2.35 2.50 2.75 Fixed Charge Coverage Ratio (minimum)............................ 1.15 1.25 1.35 1.50 1.75 </Table> The senior credit facility agreement provides: (i) the ability to refinance our senior subordinated notes and/or our senior secured notes using the net cash proceeds from the issuance of similarly structured debt; (ii) the ability to repurchase our senior subordinated notes and/or our senior secured notes using the net cash proceeds from issuing shares of our common stock; and (iii) the prepayment of the term loans by an amount equal to 50 percent of our excess cash flow as defined by the agreement. The senior credit facility agreement also contains restrictions on our operations that are customary for similar facilities, including limitations on: (i) incurring additional liens; (ii) sale and leaseback transactions (except for the permitted transactions as described in the amendment); (iii) liquidations and dissolutions; (iv) incurring additional indebtedness or guarantees; (v) capital expenditures; (vi) dividends; (vii) mergers 40 and consolidations; and (viii) prepayments and modifications of subordinated and other debt instruments. Compliance with these requirements and restrictions is a condition for any incremental borrowings under the senior credit facility agreement and failure to meet these requirements enables the lenders to require repayment of any outstanding loans. As of March 31, 2005, we were in compliance with all the financial covenants (as indicated above) and operational restrictions of the facility. Our senior credit facility does not contain any terms that could accelerate the payment of the facility as a result of a credit rating agency downgrade. Senior Secured and Subordinated Notes. Our outstanding debt also includes $475 million of 10 1/4 percent senior secured notes due July 15, 2013, in addition to the $500 million of 8 5/8 percent senior subordinated notes due November 15, 2014 described above. We can redeem some or all of the notes at any time after July 15, 2008, in the case of the senior secured notes, and November 15, 2009, in the case of the senior subordinated notes. If we sell certain of our assets or experience specified kinds of changes in control, we must offer to repurchase the notes. We are permitted to redeem up to 35 percent of the senior secured notes with the proceeds of certain equity offerings completed before July 15, 2006 and up to 35 percent of the senior subordinated notes with the proceeds of certain equity offerings completed before November 15, 2007. Our senior secured and subordinated notes require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, our consolidated fixed charge coverage ratio, as calculated on a proforma basis, to be greater than 2.25 and 2.00, respectively. We have not incurred any of the types of indebtedness not otherwise permitted by the indentures. The indentures also contain restrictions on our operations, including limitations on: (i) incurring additional indebtedness or liens; (ii) dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations. Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee these notes on a joint and several basis. In addition, the senior secured notes and related guarantees are secured by second priority liens, subject to specified exceptions, on all of our and our subsidiary guarantors' assets that secure obligations under our senior credit facility, except that only a portion of the capital stock of our and our subsidiary guarantor's domestic subsidiaries is provided as collateral and no assets or capital stock of our direct or indirect foreign subsidiaries secure the notes or guarantees. There are no significant restrictions on the ability of the subsidiaries that have guaranteed these notes to make distributions to us. The senior subordinated notes rank junior in right of payment to our senior credit facility and any future senior debt incurred. As of March 31, 2005, we were in compliance with the covenants and restrictions of these indentures. Accounts Receivable Securitization. In addition to our senior credit facility, senior secured notes and senior subordinated notes, we also sell some of our accounts receivable. In North America, we have an accounts receivable securitization program with two commercial banks. We sell original equipment and aftermarket receivables on a daily basis under this program. We sold accounts receivable under this program of $88 million and $54 million at March 31, 2005 and 2004, respectively. This program is subject to cancellation prior to its maturity date if we were to (i) fail to pay interest or principal payments on an amount of indebtedness exceeding $50 million, (ii) default on the financial covenant ratios under the senior credit facility, or (iii) fail to maintain certain financial ratios in connection with the accounts receivable securitization program. In January 2005, this program was renewed for 364 days to January 30, 2006 at the existing facility size of $75 million. In March 2005, the program was amended to increase the size to $90 million. We also sell some receivables in our European operations to regional banks in Europe. At March 31, 2005 we sold $59 million of accounts receivable in Europe down from $90 million at March 31, 2004. The arrangements to sell receivables in Europe are not committed and can be cancelled at any time. If we were not able to sell receivables under either the North American or European securitization programs, our borrowings under our revolving credit agreements would increase. These accounts receivable securitization programs provide us with access to cash at costs that are generally favorable to alternative sources of financing, and allow us to reduce borrowings under our revolving credit agreements. Capital Requirements. We believe that cash flows from operations, combined with available borrowing capacity described above, assuming that we maintain compliance with the financial covenants and other 41 requirements of our loan agreement, will be sufficient to meet our future capital requirements for the following year. Our ability to meet the financial covenants depends upon a number of operational and economic factors, many of which are beyond our control. Factors that could impact our ability to comply with the financial covenants include the rate at which consumers continue to buy new vehicles and the rate at which they continue to repair vehicles already in service, as well as our ability to successfully implement our restructuring plans. Lower North American vehicle production levels, weakening in the global aftermarket, or a reduction in vehicle production levels in Europe, beyond our expectations, could impact our ability to meet our financial covenant ratios. In the event that we are unable to meet these financial covenants, we would consider several options to meet our cash flow needs. These options could include further renegotiations with our senior credit lenders, additional cost reduction or restructuring initiatives, sales of assets or common stock, or other alternatives to enhance our financial and operating position. Should we be required to implement any of these actions to meet our cash flow needs, we believe we can do so in a reasonable time frame. CONTRACTUAL OBLIGATIONS Our remaining required debt principal amortization and payment obligations under lease and certain other financial commitments as of March 31, 2005, are shown in the following table: <Table> <Caption> PAYMENTS DUE IN: -------------------------------------------------------- BEYOND 2005 2006 2007 2008 2009 2009 TOTAL ---- ---- ---- ---- ---- ------ ------ (MILLIONS) Obligations: Revolver borrowings....................... $ 29 $ -- $ -- $ -- $ -- $ -- $ 29 Senior long-term debt..................... -- -- -- -- -- 356 356 Long-term notes........................... 1 -- 1 2 -- 471 475 Capital leases............................ 3 3 3 3 2 3 17 Subordinated long-term debt............... -- -- -- -- -- 500 500 Other subsidiary debt..................... 1 -- -- -- 1 -- 2 Short-term debt........................... 14 -- -- -- -- -- 14 ---- ---- ---- ---- ---- ------ ------ Debt and capital lease obligations.......... 48 3 4 5 3 1,330 1,393 Operating leases............................ 9 11 10 7 5 4 46 Interest payments........................... 81 108 108 108 108 386 899 Capital commitments......................... 27 -- -- -- -- -- 27 ---- ---- ---- ---- ---- ------ ------ Total Payments.............................. $165 $122 $122 $120 $116 $1,720 $2,365 ==== ==== ==== ==== ==== ====== ====== </Table> We principally use our revolving credit facilities to finance our short-term capital requirements. As a result, we classify any outstanding balances of the revolving credit facilities within our short-term debt even though the revolving credit facility has a termination date of December 13, 2008 and the tranche B-1 letter of credit facility/revolving loan facility has a termination date of December 13, 2010. If we do not maintain compliance with the terms of our senior credit facility, senior secured notes indenture and senior subordinated debt indenture described above, all amounts under those arrangements could, automatically or at the option of the lenders or other debt holders, become due. Additionally, each of those facilities contains provisions that certain events of default under one facility will constitute a default under the other facility, allowing the acceleration of all amounts due. We currently expect to maintain compliance with terms of all of our various credit agreements for the foreseeable future. Included in our contractual obligations is the amount of interest to be paid on our long-term debt. As our debt structure contains both fixed and variable rate interest debt, we have made assumptions in calculating the amount of the future interest payments. Interest on our senior secured notes and senior subordinated notes is calculated using the fixed rates of 10 1/4 percent and 8 5/8 percent, respectively. Interest on our variable rate debt is calculated as 225 basis points plus LIBOR of 2.84 percent which was the rate at March 31, 2005. We have assumed that LIBOR will remain unchanged for the outlying years. See "--Capitalization." In addition we 42 have included the impact of our interest rate swaps entered into in April 2004. See "Interest Rate Risk" below. We have also included an estimate of expenditures required after March 31, 2005 to complete the facilities and projects authorized at December 31, 2004, in which we have made substantial commitments in connections with facilities. We have not included purchase obligations as part of our contractual obligations as we generally do not enter into long-term agreements with our suppliers. In addition, the agreements we currently have do not specify the volumes we are required to purchase. If any commitment is provided, in many cases the agreements state only the minimum percentage of our purchase requirements we must buy from the supplier. As a result, these purchase obligations fluctuate from year to year and we are not able to quantify the amount of our future obligation. We have not included material cash requirements for taxes as we are a taxpayer in certain foreign jurisdictions but not in domestic locations. Additionally, it is difficult to estimate taxes to be paid as changes in where we generate income can have a significant impact on future tax payments. We have also not included cash requirements for funding pension and postretirement benefit costs. Based upon current estimates we believe we will be required to make contributions between $49 million to $54 million to those plans in 2005, of which approximately $5 million has been contributed as of March 31, 2005. Pension and postretirement contributions beyond 2005 will be required but those amounts will vary based upon many factors, including the performance of our pension fund investments during 2005. In addition, we have not included cash requirements for environmental remediation. Based upon current estimates we believe we will be required to spend approximately $10 million over the next 20 to 30 years. However, due to possible modifications in remediation processes and other factors, it is difficult to determine the actual timing of the payments. See "--Environmental and Other Matters". We occasionally provide guarantees that could require us to make future payments in the event that the third party primary obligor does not make its required payments. We have not recorded a liability for any of these guarantees. The only third party guarantee we have made is the performance of lease obligations by a former affiliate. Our maximum liability under this guarantee was approximately $4 million at both March 31, 2005 and 2004, respectively. We have no recourse in the event of default by the former affiliate. However, we have not been required to make any payments under this guarantee. Additionally, we have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our then existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee our senior credit facility, our senior secured notes and our senior subordinated notes on a joint and several basis. The arrangement for the senior credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of 66 percent of the stock of certain first-tier foreign subsidiaries. The arrangement for the $475 million senior secured notes is also secured by second-priority liens on substantially all our domestic assets, excluding some of the stock of our domestic subsidiaries. No assets or capital stock of our direct or indirect foreign subsidiaries secure these notes. You should also read Note 14 where we present the Supplemental Guarantor Condensed Consolidating Financial Statements. We have issued guarantees through letters of credit in connection with some obligations of our affiliates. We have guaranteed through letters of credit support for local credit facilities, travel and procurement card programs, and cash management requirements for some of our subsidiaries totaling $26 million. We have also issued $19 million in letters of credit to support some of our subsidiaries' insurance arrangements. In addition, we have issued $3 million in guarantees through letters of credit to guarantee other obligations of subsidiaries primarily related to environmental remediation activities. 43 CASH FLOWS <Table> <Caption> THREE MONTHS ENDED MARCH 31, ------------- 2005 2004 ----- ----- (MILLIONS) Cash provided (used) by: Operating activities...................................... $(99) $ 13 Investing activities...................................... (39) (15) Financing activities...................................... (5) -- </Table> Operating Activities For the three months ended March 31, 2005, operating activities used $99 million in cash compared to a source of $13 million in cash during the same period last year. For the first three months of 2005, cash used for working capital was $137 million versus $26 million for the first three months of 2004. Higher sales levels during the first quarter of 2005 versus the first quarter of 2004 were the primary reason for higher year over year receivables balances that resulted in a cash outflow of $78 million, an $8 million increase from last year. Inventory represented a cash outflow of $46 million during the first quarter of 2005, an increase of $19 over the prior year. This primarily resulted from building higher inventories in advance of the selling season, particularly in the aftermarket business units. Accounts payable provided cash of $21 million, down significantly from last year's cash inflow of $79 million. Day's payable outstanding was in line with our two-year historical average, but much lower than the levels we experienced in the first quarter of 2004. Last year's higher payables levels were driven by the timing of purchases and payments to suppliers, particularly in Europe. Other current liabilities resulted in a use of $8 million in cash for the first quarter of 2005, versus providing a source of $15 million in cash during the same period last year. This change of $23 million was related to severance payments and an increase in pension contributions during the first quarter of 2005, as well as last year's increase in accruals for a new aftermarket customer. Cash taxes were a $7 million outflow in the latest three months ending March 31, 2005, compared with a $3 million outflow in the prior year, primarily due to the timing of foreign tax payments. In June 2001, we entered into arrangements with two major OE customers in North America under which, in exchange for a discount, payments for product sales are made earlier than otherwise required under existing payment terms. These arrangements reduced accounts receivable by $74 million and $89 million as of March 31, 2005 and 2004, respectively. One of these programs was discontinued during the first quarter of 2005. In addition, we have been informed that the second program will be terminated during the second quarter of 2005. To mitigate the impact on our liquidity of the termination of these programs, on March 31, 2005, we supplemented our existing senior credit facility by increasing from $220 million to $285 million the amount of lenders' commitments under the revolving credit facility portion of the senior credit facility. As part of this agreement, we reduced from $180 million to $170 million the amount of lenders' commitments under the tranche B-1 letter of credit/revolving loan facility portion of the senior credit facility. In April 2005, we further increased the amount of commitments under our revolving credit facility from $285 million to $300 million and, as required under the terms of our senior credit facility, reduced the amount of commitments under our tranche B-1 letter of credit/revolving loan facility from $170 million to $155 million. In June 2003, we entered into a similar arrangement with a third major OE customer in North America. This arrangement reduced accounts receivable by $8 million as of December 31, 2004. This program was discontinued during the first quarter of 2005. One of our European subsidiaries receives payment from an OE customer whereby accounts receivable are satisfied through the delivery of negotiable financial instruments. These financial instruments are then sold at a discount to a European bank. The sales of these financial instruments are not included in the account receivables sold in 2005. Any of these financial instruments that were not sold as of December 31, 2004 or March 31, 2005 are classified as other current assets and are excluded from our definition of cash equivalents. 44 These types of payments accounted for $31 million at March 31, 2005, compared with $44 million at December 31, 2004. Investing Activities Cash used for investing activities was $24 million higher in the first three months of 2005 compared to the same period one year ago. During the first quarter of 2005, we used $11 million in cash to acquire the exhaust operations of Gabilan Manufacturing, partially offset by net proceeds from the sale of assets of $1 million. In the first quarter of 2004, we received $11 million in cash from the sale of our Birmingham, U.K. facility. Capital expenditures were $32 million in the first three months of 2005 compared to $25 million a year ago. This increase of $7 million in capital expenditures was primarily due to the timing of future OE customer platform launches. Financing Activities Cash flow from financing activities was a $5 million outflow in the first three months of 2005 compared to being flat in the same period of 2004. This is primarily attributable to $40 million in cash used to reduce our long-term debt, partially offset by increased borrowings from our revolving credit facility in the first quarter of 2005. INTEREST RATE RISK Our financial instruments that are sensitive to market risk for changes in interest rates are our debt securities. We primarily use our revolving credit facilities to finance our short-term capital requirements. We pay a current market rate of interest on these borrowings. We have financed our long-term capital requirements with long-term debt with original maturity dates ranging from six to ten years. In April 2004, we entered into three separate fixed-to-floating interest rate swaps with two separate financial institutions. These agreements swapped an aggregate of $150 million of fixed interest rate debt at a per annum rate of 10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus a spread of 5.68 percent. Each agreement requires semi-annual settlements through July 15, 2013. The LIBOR in effect for these swaps during the course of 2004 resulted in lower interest expense of approximately $3 million for the year. Based on the current LIBOR as determined under these agreements of 2.89 percent (which remains in effect until July 15, 2005), these swaps would reduce our 2005 annual interest expense by approximately $2 million. These swaps qualify as fair value hedges in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and as such are recorded on the balance sheet at market value with an offset to the underlying hedged item, which is long-term debt. As of March 31, 2005, the fair value of the interest rate swaps was a liability of approximately $5 million, which has been recorded as a decrease to long-term debt and an increase to other long-term liabilities. On March 31, 2005, we had $993 million in long-term debt obligations that have fixed interest rates. Of that amount, $475 million is fixed through July 2013 and $500 million through November 2014, while the remainder is fixed over periods of 2005 through 2025. Included in the $993 million is $150 million of long-term debt obligations subject to variable interest rates as a result of our swap agreements. There is also $367 million in long-term debt obligations that have variable interest rates based on a current market rate of interest. We estimate that the fair value of our long-term debt at March 31, 2005 was about 104 percent of its book value. A one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $2 million after tax, excluding the effect of the interest rate swaps we completed in April 2004. A one percentage point increase or decrease in interest rates on the swaps we completed in April 2004 would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by approximately $1 million after tax. 45 OUTLOOK Substantially higher steel pricing, volatile oil prices and rising interest rates make this an increasingly uncertain and challenging environment for automotive suppliers to operate. North American OE light vehicle production levels for 2004 were 15.8 million units, down one percent from 2003. Current estimates for 2005 indicate that North American OE light vehicle production levels will be equal to 2004 at 15.8 million units. However, we remain very cautious about the outlook for North American production rates due to recent and significant production cuts by the largest North American automakers and their apparent reluctance to continue to support higher consumer vehicle sales through incentives. We believe that new product launches and our position on top-selling platforms, along with increasing market positions with Toyota, Honda and Nissan, will help us to offset pressures from lower North American production rates. Western Europe light vehicle production volumes grew about one percent during 2004 to 16.6 million units. Expectations for 2005 indicate production will remain flat at 2004 levels. We saw a strong increase in heavy-duty truck production rates during 2004. Compared to 2003, heavy-duty truck production rates increased 36 percent in 2004, and are expected to increase another 16 to 19 percent in 2005. Although heavy-duty business represents a small percentage of our overall revenues, this should benefit our North American operations. In the global aftermarket, issues that have impacted revenues in the past will likely continue to be a challenge in 2005. Heightened competition in the European aftermarket, weaker export sales due to the strong euro and longer product replacement cycles are expected to have a continued impact on volumes. We saw signs of sales stabilization in the North American aftermarket exhaust business unit during 2004 and improved revenues during the first quarter of 2005. We are cautiously optimistic that these North American aftermarket conditions will continue in 2005. We also plan to continue our efforts to increase new and existing sales in the North American aftermarket ride control business unit. These factors make us cautious concerning the outlook for the remainder of 2005. However, we believe our diversified customer base, geographies, product lines, platforms and markets provide the opportunity to offset declines in one area. We are also benefiting from environmental legislation and consumer safety concerns that drive higher content for exhaust and ride control suppliers with innovative product solutions. We are intensely focused on mitigating the impact of higher costs by implementing a restructuring initiative announced in the fourth quarter, which is expected to generate $20 million in annual savings; improving manufacturing efficiency with Lean; generating at least $20 million in Six Sigma savings; and capitalizing on the projected $270 million increase in the 2005 OE book of business. Lower interest expense as a result of our company's debt refinancing in the fourth quarter of 2004 and amendments to our senior credit facility in the first quarter of 2005 will also help mitigate the impact. In addition, we are actively addressing higher steel costs and anticipate that these increases, net of other expected material cost savings and recovery from customers, will be between $30 million and $50 million for 2005. ENVIRONMENTAL AND OTHER MATTERS We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense 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 experiences and data released by the United States Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. Where future cash flows are fixed or reliably determinable, we have discounted the liabilities. All other environmental liabilities are recorded at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our financial statements. 46 As of March 31, 2005, we are designated as a potentially responsible party in one Superfund site. We have estimated our share of the remediation costs for this site to be less than $1 million in the aggregate. In addition to the Superfund site, 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 $10 million. For the Superfund site and the current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund site, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at the Superfund site, and of other liable parties at our current and former facilities, has been considered, where appropriate, in our determination of our estimated liability. We believe that any potential costs associated with our current status as a potentially responsible party in the Superfund site, or as a liable party at our current or former facilities, will not be material to our results of operations or consolidated financial position. From time to time we are subject to product warranty claims whereby we are required to bear costs of repair or replacement of certain of our products. Warranty claims may range from individual customer claims to full recalls of all products in the field. See Note 6 to our consolidated financial statements included under Item 1 for information regarding our warranty reserves. We also from time to time are involved in legal proceedings, claims or investigations that are incidental to the conduct of our business. Some of these proceedings allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warnings issues, and other product liability related matters), taxes, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. We vigorously defend ourselves against all of these claims. In future periods, we could be subjected to cash costs or non-cash charges to earnings if any of these matters is resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our future consolidated financial position or results of operations. In addition, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. Many of these cases involve significant numbers of individual claimants. However, only a small percentage of these claimants allege that they were automobile mechanics who were allegedly exposed to our former muffler products and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other evidence, it is unlikely that mechanics were exposed to asbestos by our former muffler products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number of each in some cases exceeding 200 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. As major asbestos manufacturers continue to go out of business, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these matters is resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolution in the form of a dismissal of the claim or a judgment in our favor. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future financial condition or results of operations. 47 EMPLOYEE STOCK OWNERSHIP PLANS We have established Employee Stock Ownership Plans for the benefit of our employees. Under the plans, subject to limitations in the Internal Revenue Code, participants may elect to defer up to 50 percent of their salary through contributions to the plan, which are invested in selected mutual funds or used to buy our common stock. We currently match in cash 50 percent of each employee's contribution up to eight percent of the employee's salary. We recorded expense for these matching contributions of approximately $2 million for each of the three months ended March 31, 2005 and 2004, respectively. All contributions vest immediately. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding our exposure to interest rate risk, see the caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated herein by reference. ITEM 4. CONTROLS AND PROCEDURES An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the quarter covered by this report. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures are effective to ensure that information required to be disclosed by our company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the quarter ended March 31, 2005, we implemented a new Enterprise Resource Planning system in a German emissions control facility resulting in a material change in our processes over financial reporting at that facility. We assessed the design effectiveness of the internal controls over the key processes affected by the system change. As a result of this assessment, management believes that we maintained adequate internal control over financial reporting. We implemented this new system as part of a planned upgrade of our information systems. 48 PART II ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) None. (b) Not applicable. (c) Purchase of equity securities by the issuer and affiliated purchasers. The following table provides information relating to the Company's purchase of shares of its common stock in the first quarter of 2005. All of these purchases reflect shares withheld upon vesting of restricted stock upon employees' retirement, to satisfy tax withholding obligations. <Table> <Caption> TOTAL NUMBER OF AVERAGE PERIOD SHARES PURCHASED PRICE PAID - ------ ---------------- ---------- January 2005................................................ 1,190 $16.70 February 2005............................................... -- -- March 2005.................................................. 3,377 $12.47 ----- Total..................................................... 4,567 $13.57 </Table> The Company presently has no publicly announced repurchase plan or program, but intends to continue to satisfy tax withholding obligations in connection with the vesting of outstanding restricted stock through the withholding of shares. ITEM 6. EXHIBITS (a) Exhibits. The exhibits filed with this report are listed on the Exhibit Index following the signature page of this report, which is incorporated herein by reference. 49 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, Tenneco Automotive Inc. has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TENNECO AUTOMOTIVE INC. By: /s/ KENNETH R. TRAMMELL ------------------------------------ Kenneth R. Trammell Senior Vice President and Chief Financial Officer Dated: May 10, 2005 50 INDEX TO EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR QUARTER ENDED MARCH 31, 2005 <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 -- By-laws of the registrant, as amended July 13, 2004 (incorporated herein by reference from Exhibit 3.2 of the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, 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). </Table> 51 <Table> <Caption> EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.5 -- Certificate of Incorporation of TMC Texas Inc. ("TMC") (incorporated herein by reference to Exhibit 3.5 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.6 -- By-laws of TMC (incorporated herein by reference to Exhibit 3.6 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.7 -- Amended and Restated Certificate of Incorporation of Tenneco International Holding Corp. ("TIHC") (incorporated herein by reference to Exhibit 3.7 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.8 -- Amended and Restated By-laws of TIHC (incorporated herein by reference to Exhibit 3.8 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.9 -- Certificate of Incorporation of Clevite Industries Inc. ("Clevite"), as amended (incorporated herein by reference to Exhibit 3.9 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.10 -- By-laws of Clevite (incorporated herein by reference to Exhibit 3.10 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.11 -- Amended and Restated Certificate of Incorporation of the Pullman Company ("Pullman") (incorporated herein by reference to Exhibit 3.11 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.12 -- By-laws of Pullman (incorporated herein by reference to Exhibit 3.12 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.13 -- Certificate of Incorporation of Tenneco Automotive Operating Company Inc. ("Operating") (incorporated herein by reference to Exhibit 3.13 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.14 -- By-laws of Operating (incorporated herein by reference to Exhibit 3.14 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 4.1(a) -- Rights Agreement dated as of September 8, 1998, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.1 of the registrant's Current Report on Form 8-K dated September 24, 1998, File No. 1-12387). 4.1(b) -- Amendment No. 1 to Rights Agreement, dated March 14, 2000, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 1-12387). 4.1(c) -- Amendment No. 2 to Rights Agreement, dated February 5, 2001, by and between the registrant and First Union National Bank, as Rights Agent (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Post-Effective Amendment No. 3, dated February 26, 2001, to its Registration Statement on Form 8-A dated September 17, 1998). 4.2(a) -- Indenture, dated as of November 1, 1996, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of the registrant's Registration Statement on Form S-4, Registration No. 333-14003). 4.2(b) -- First Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between 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). </Table> 52 <Table> <Caption> EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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). 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) -- Eleventh Supplemental Indenture, dated October 21, 1999, to Indenture dated November 1, 1996 between The Chase Manhattan Bank, as Trustee, and the registrant (incorporated herein by reference from Exhibit 4.2(l) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.3 -- Specimen stock certificate for Tenneco Automotive Inc. common stock (incorporated herein by reference from Exhibit 4.3 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2000, 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, Clevite Industries Inc. and TMC Texas Inc. in favor of The Bank of New York, as trustee (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.4(c) -- Subsidiary Guarantee dated as of October 14, 1999 from Tenneco Automotive Operating 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) -- Amended and Restated Credit Agreement, dated as of December 12, 2003, among Tenneco Automotive Inc., the several banks and other financial institutions or entities from time to time parties thereto, Bank of America, N.A. and Citicorp North America, Inc., as co-documentation agents, Deutsche Bank Securities Inc., as syndication agent, and JP Morgan Chase Bank, as administrative agent (incorporated herein by reference to Exhibit 4.5(a) to the registrant's Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-12387). 4.5(b) -- Amended and Restated Guarantee And Collateral Agreement, dated as of November 4, 1999, by Tenneco Automotive Inc. and the subsidiary guarantors named therein, in favor of JPMorgan Chase Bank, as Administrative Agent (incorporated herein by reference from Exhibit 4.5(f) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.5(c) -- First Amendment, dated as of April 30, 2004, to the Amended and Restated Credit Agreement dated as of December 12, 2003, among Tenneco Automotive Inc., JP Morgan Chase Bank as administrative agent and the various lenders party thereto (incorporated herein by reference from Exhibit 4.5(c) to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 1-12387). </Table> 53 <Table> <Caption> EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.5(d) -- Second Amendment, dated November 19, 2004, to the Amended and Restated Credit Agreement dated as of December 12, 2003, among Tenneco Automotive Inc., JP Morgan Chase Bank as administrative agent and the various lenders party thereto (incorporated herein by reference from Exhibit 99.2 of the registrant's Current Report on Form 8-K dated November 19, 2004, File No. 1-12387). 4.5(e) -- Third Amendment, dated February 17, 2005, to the Amended and Restated Credit Agreement, dated as of December 12, 2003 among Tenneco Automotive Inc., JP Morgan Chase Bank as administrative agent and the various lenders party thereto (incorporated by reference to Exhibit 99.1 to the registrant's Current Report on Form 8-K dated February 17, 2005, File No. 1-12387). *4.5(f) -- New Lender Supplement, dated as of March 31, 2005, by and among Wachovia Bank, National Association, Tenneco Automotive Inc. and JPMorgan Chase Bank, N.A.; New Lender Supplement, dated as of March 31, 2005, by and among Wells Fargo Foothill, LLC, Tenneco Automotive Inc. and JPMorgan Chase Bank, N.A.; New Lender Supplement, dated as of March 31, 2005, by and among Charter One Bank, NA, Tenneco Automotive Inc. and JPMorgan Chase Bank, N.A. *4.5(g) -- New Lender Supplement, dated as of April 29, 2005, by and among The Bank of Nova Scotia, Tenneco Automotive Inc. and JPMorgan Chase Bank, N.A. 4.6(a) -- Indenture, dated as of June 19, 2003, among Tenneco Automotive Inc., the subsidiary guarantors named therein and Wachovia Bank, National Association (incorporated herein by reference from Exhibit 4.6(a) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.6(b) -- Collateral Agreement, dated as of June 19, 2003, by Tenneco Automotive Inc. and the subsidiary guarantors named therein in favor of Wachovia Bank, National Association (incorporated herein by reference from Exhibit 4.6(b) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.6(c) -- Registration Rights Agreement, dated as of June 19, 2003, among Tenneco Automotive Inc., the subsidiary guarantors named therein, and the initial purchasers named therein, for whom JPMorgan Securities Inc. acted as representative (incorporated herein by reference from Exhibit 4.6(c) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.6(d) -- Supplemental Indenture, dated as of December 12, 2003, among Tenneco Automotive Inc., the subsidiary guarantors named therein and Wachovia Bank, National Association (incorporated herein by reference to Exhibit 4.6(d) to the registrant's Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-12387). 4.6(e) -- Registration Rights Agreement, dated as of December 12, 2003, among Tenneco Automotive Inc., the subsidiary guarantors named therein, and the initial purchasers named therein, for whom Banc of America Securities LLC acted as representative agent (incorporated herein by reference to Exhibit 4.5(a) to the registrant's Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-12387). 4.7 -- Intercreditor Agreement, dated as of June 19, 2003, among JPMorgan Chase Bank, as Credit Agent, Wachovia Bank, National Association, as Trustee and Collateral Agent, and Tenneco Automotive Inc. (incorporated herein by reference from Exhibit 4.7 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). </Table> 54 <Table> <Caption> EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.8(a) -- Indenture, dated as of November 19, 2004, among Tenneco Automotive Inc., the subsidiary guarantors named therein and The Bank of New York Trust Company (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated November 19, 2004, File No. 1-12387). 4.8(b) -- Supplemental Indenture, dated as of March 28, 2005, among Tenneco Automotive Inc., the Guarantor party thereto and the Bank of New York Trust Company, N.A., as trustee (incorporated herein by reference from Exhibit 4.3 to the registrant's Registration Statement on Form S-4, Reg. No. 333-123752). 4.8(c) -- Registration Rights Agreement, dated as of November 19, 2004, among Tenneco Automotive Inc., the guarantors party thereto and the initial purchasers party thereto (incorporated herein by reference from Exhibit 4.2 to the registrant's Registration Statement on Form S-4, Reg No. 333-123752). 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, El Paso Natural Gas Company and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.7 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.8 -- Tenneco Automotive Inc. Value Added "TAVA" 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, 2003, File No. 1-12387). </Table> 55 <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 10.11 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.12 -- Tenneco Automotive Inc. Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.12 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.13 -- Tenneco Automotive Inc. Supplemental Executive Retirement Plan (incorporated herein by reference from Exhibit 10.13 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.14 -- Human Resources Agreement by and between 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). 10.15 -- 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). 10.16 -- 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). 10.17 -- Assumption Agreement among Tenneco Automotive Operating Company Inc., Tenneco International Holding Corp., Tenneco Global Holdings Inc., The Pullman Company, Clevite Industries Inc., TMC Texas Inc., Salomon Smith Barney Inc. and the other Initial Purchasers listed in the Purchase Agreement dated as of November 4, 1999 (incorporated herein by reference from Exhibit 10.24 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 10.18 -- Amendment No. 1 to Change in Control Severance Benefits Plan for Key Executives (incorporated herein by reference from Exhibit 10.23 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.19 -- Letter Agreement dated July 27, 2000 between the registrant and Mark P. Frissora (incorporated herein by reference from Exhibit 10.24 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.20 -- Letter Agreement dated July 27, 2000 between the registrant and Richard P. Schneider (incorporated herein by reference from Exhibit 10.26 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.21 -- Letter Agreement dated July 27, 2000 between the registrant and Timothy R. Donovan (incorporated herein by reference from Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-12387). 10.22 -- Form of Indemnity Agreement entered into between the registrant and the following directors of the registrant: Paul Stecko, M. Kathryn Eickhoff and Dennis Severance (incorporated herein by reference from Exhibit 10.29 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-12387). </Table> 56 <Table> <Caption> EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.23 -- Mark P. Frissora Special Appendix under Tenneco Automotive Inc. Supplemental Executive Retirement Plan (incorporated herein by reference from Exhibit 10.30 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-12387). 10.24 -- Letter Agreement dated as of June 1, 2001 between the registrant and Hari Nair (incorporated herein by reference from Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2001. File No. 1-12387). 10.25 -- Tenneco Automotive Inc. 2002 Long-Term Incentive Plan (As Amended and Restated Effective March 11, 2003) (incorporated herein by reference from Exhibit 10.26 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. File No. 1-12387). 10.26 -- Amendment No. 1 to Tenneco Automotive Inc. Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.27 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387). 10.27 -- Tenneco Automotive Inc. Supplemental Stock Ownership Plan (incorporated herein by reference from Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387). 10.28 -- Form of Stock Equivalent Unit Award Agreement under the 2002 Long-Term Incentive Plan, as amended (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). 10.29 -- Form of Stock Option Agreement for employees under the 2002 Long-Term Incentive Plan, as amended (providing for a ten year option term) (incorporated herein by reference from Exhibit 99.2 of the registrant's Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). 10.30 -- Form of Stock Option Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended (providing for a ten year option term) (incorporated herein by reference from Exhibit 99.3 of the registrant's Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). 10.31 -- Form of Restricted Stock Award Agreement for employees under the 2002 Long-Term Incentive Plan, as amended (three year cliff vesting) (incorporated herein by reference from Exhibit 99.4 of the registrant's Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). 10.32 -- Form of Restricted Stock Award Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended (incorporated herein by reference from Exhibit 99.5 of the registrant's Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). 10.33 -- Form of Restricted Stock Award Agreement for employees under the 2002 Long-Term Incentive Plan, as amended (vesting 1/3 annually) (incorporated herein by reference from Exhibit 99.1 of the registrant's Current Report on Form 8-K dated January 17, 2005, File No. 1-12387). 10.34 -- Form of Stock Option Agreement for employees under the 2002 Long-Term Incentive Plan, as amended (providing for a seven year option term) (incorporated herein by reference from Exhibit 99.2 of the registrant's Current Report on Form 8-K dated January 17, 2005, File No. 1-12387). 10.35 -- Form of Stock Option Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended (providing for a seven year option term) (incorporated herein by reference from Exhibit 99.3 of the registrant's Current Report on Form 8-K dated January 17, 2005, File No. 1-12387). </Table> 57 <Table> <Caption> EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.36 -- Form of Performance Share Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended. (incorporated herein by reference from Exhibit 10.36 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-12387). 10.37 -- Summary of 2005 Outside Directors' Compensation. (incorporated herein by reference from Exhibit 10.37 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-12387). 10.38 -- Summary of 2005 Named Executive Officer Compensation. (incorporated herein by reference from Exhibit 10.38 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-12387). *10.39 -- First Amendment to the Tenneco Automotive Inc. Key Executive Pension Plan. *10.40 -- Summary of Amendments to Tenneco Automotive Inc. Supplemental Executive Retirement Plan, Key Executive Pension Plan and Deferred Compensation Plan. *10.41 -- Summary of Tenneco Automotive Inc. Supplemental Retirement Plan, Supplemental Pension Plan for Management and Incentive Deferral Plan. 11 -- None. *12 -- Computation of Ratio of Earnings to Fixed Charges. *15 -- Letter of Deloitte & Touche LLP regarding interim financial information. *18 -- Letter of Deloitte & Touche LLP regarding change in accounting principle. 19 -- None. 22 -- None. 23 -- None. 24 -- None. *31.1 -- Certification of Mark P. Frissora under Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 -- Certification of Kenneth R. Trammell under Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 -- Certification of Mark P. Frissora and Kenneth R. Trammell under Section 906 of the Sarbanes-Oxley Act of 2002. 99 -- None. </Table> - --------------- * Filed herewith. 58