news release (TENNECO LOGO)
Contacts: Jane Ostrander Leslie Hunziker
Media Relations Investor Relations
847 482-5607 847 482-5042
jostrander@tenneco.com lhunziker@tenneco.com
TENNECO ANNOUNCES RESTATEMENT OF FINANCIAL STATEMENTS PRIMARILY RELATED TO
ACCOUNTING FOR INTEREST RATE SWAPS
ESTIMATED $6 MILLION INCREASE TO INTEREST EXPENSE REPORTED FROM 2004
TO FIRST QUARTER 2007
Lake Forest, Illinois, July 23, 2007 -- Tenneco Inc. (NYSE: TEN)
announced that it will restate its previously reported financial
results primarily to correct the accounting for interest rate swaps
that the company entered into in 2004. The restatement will impact the
years ended December 31, 2004, 2005 and 2006 and the quarters ended
March 31, 2006 and 2007, June 30, 2006 and September 30, 2006. The
company anticipates filing restated financial statements covering
those periods with the Securities and Exchange Commission in August
2007.
In April 2004, Tenneco entered into three separate fixed-to-floating
interest rate swaps with two financial institutions. These agreements
swapped a total of $150 million of the company's 10.25% senior secured
notes to floating interest rate debt at LIBOR plus an average spread
of 5.68 percentage points.
From the inception of the swaps, the company has applied the so-called
"short-cut" method of fair value hedge accounting under Statement of
Financial Accounting Standards (SFAS) No.133, "Accounting for
Derivative Instruments and Hedging Activities." To qualify for the
"short-cut" method of hedge accounting, the terms of an interest rate
swap must be an exact match, or "mirror image," of the terms of the
debt it is hedging. When these conditions are met, the company can
then assume that the changes in the value of the hedges and the
underlying debt exactly offset each other, thereby having no effect on
earnings.
In reviewing the audit of the company's financial statements by its
external auditors, the Public Company Accounting Oversight Board
identified differences between the swaps and the underlying debt,
which did not fully meet the mirror image requirements of the
short-cut method. One difference is between the 30-day notice period
to terminate the swaps and the 30 to 60 day notice period to redeem
the notes. Another difference relates to the fact that while the debt
and swaps can both be redeemed before their maturity dates, the notes
allow the company to make redemptions in increments of $1,000 while
the interest rate swap agreements imply that they can only be redeemed
in their full amounts.
As a result, Tenneco will discontinue accounting for the swaps as
hedges. Instead, the company will record the changes in the fair value
of the interest rate swaps as increases or decreases to interest
expense in each period, without recording an offset for changes in the
fair
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value of the underlying debt. The fair value of these swaps has been
disclosed in the footnotes to the financial statements each quarter
since the swaps' inception.
Tenneco's change to mark-to-market accounting for the interest rate
swaps will increase the company's pre-tax interest expense by $1
million in 2004, $5 million in 2005, $1 million in 2006 and decrease
pre-tax interest in the first quarter of 2007 by $1 million.
Consequently, since the previous financial statements do not reflect
the correct accounting method, they should not be relied upon as
accurate.
"The interest rate swap transactions provide effective economic hedges
and this change in accounting method will in no way affect our cash
flow or minimize the benefits from this risk management strategy,"
said Gregg Sherrill, Chairman and CEO, Tenneco. "The accounting
standards for interest rate swaps are complex and we are disappointed
in having to restate our financial results."
As part of the restatement process, Tenneco will also reflect other
accounting adjustments, the cumulative effect of which the company
currently estimates will not be significant. For example, one
adjustment will be to move the accounting charge taken for employee
stock options in the fourth quarter of 2006 to earlier periods to
which it relates. The company is still completing its analysis of
these adjustments and the final results will be reflected in Tenneco's
restated financial statements that it expects to file in August 2007.
As previously discussed in SEC filings, the company is in the course
of strengthening its internal processes for income taxes, which
includes a detailed reconciliation of its deferred tax balances. At
this point, the company cannot determine the impact of this
reconciliation. The results of this reconciliation of deferred tax
balances will be reflected in Tenneco's restated financial statements
that it expects to file in August 2007.
CONFERENCE CALL
The company will discuss this press release and the 8-K during its
second quarter 2007 financial results conference call on Thursday,
July 26, 2007 at 10:30 am EDT. The dial-in number is 888-790-1408
(domestic) or 773-756-0157(international). The passcode is TENNECO.
Tenneco is a $4.7 billion manufacturing company with headquarters in
Lake Forest, Illinois and approximately 19,000 employees worldwide.
Tenneco is one of the world's largest designers, manufacturers and
marketers of emission control and ride control products and systems
for the automotive original equipment market and the aftermarket.
Tenneco markets its products principally under the Monroe(R),
Walker(R), Gillet(TM) and Clevite(R)Elastomer brand names. Among its
products are Sensa-Trac(R) and Monroe Reflex(R) shocks and struts,
Rancho(R) shock absorbers, Walker(R) Quiet-Flow(R) mufflers,
Dynomax(R) performance exhaust products, and Clevite(R)Elastomer
noise, vibration and harshness control components.
This press release contains forward-looking statements. Words such as
"estimates" and "will" and similar expressions identify forward-looking
statements. These forward-looking statements are based on the current
expectations of the company. Because these forward-looking statements involve
risks and uncertainties, the
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company's actual results could differ materially. Specifically, the impact of
the change in accounting for the interest rate swaps and the other accounting
adjustments on the company's financial results are preliminary results. The
final adjustments will be included in the restated financial statements that the
company will file with the Securities and Exchange Commission.
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