10-Q 1 c65892e10-q.txt QUARTERLY REPORT -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-12387 TENNECO AUTOMOTIVE INC. (Exact name of registrant as specified in its charter) 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common Stock, par value $.01 per share: 39,088,702 shares as of October 31, 2001. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I--FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Tenneco Automotive Inc. and Consolidated Subsidiaries-- Report of Independent Public Accountants............. 4 Statements of Income (Loss).......................... 5 Balance Sheets....................................... 6 Statements of Cash Flows............................. 7 Statements of Changes in Shareholders' Equity........ 8 Statements of Comprehensive Income (Loss)............ 9 Notes to Financial Statements........................ 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 38 PART II--OTHER INFORMATION Item 1. Legal Proceedings................................. * Item 2. Changes in Securities and Use of Proceeds......... * Item 3. Defaults Upon Senior Securities................... * Item 4. Submission of Matters to a Vote of Security Holders................................................ * Item 5. Other Information................................. * Item 6. Exhibits and Reports on Form 8-K.................. 39
--------------- * No response to this item is included herein for the reason that it is inapplicable or the answer to such item is negative. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-Q contains forward-looking statements regarding, among other things, our prospects and business strategies. The words "will," "believes," "should," "plans," "expects," "anticipate," and "estimates," and similar expressions (and variations thereof), identify these forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, these expectations may not prove to be correct. Because these forward-looking statements are also subject to risks and uncertainties, actual results may differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include: - general economic, business and market conditions; - the impact of consolidation among automotive parts suppliers and customers on our ability to compete; - operating hazards associated with our business; - changes in consumer demand and preferences for automobiles and automotive parts, as well as changes in automobile manufacturers' actual and forecasted requirements for our products; - changes in distribution channels or competitive conditions in the markets and countries where we operate, including the impact of changes in distribution channels for aftermarket products on our ability to increase or maintain aftermarket sales; - cyclicality of automotive production and sales; - material substitution; - labor disruptions at our facilities or at any of our significant customers or suppliers; 2 - economic, exchange rate and political conditions in the foreign countries where we operate or sell our products; - customer acceptance of new products; - new technologies that reduce the demand for certain of our products or otherwise render them obsolete; - our ability to realize our business strategy of improving operating performance; - capital availability or costs, including changes in interest rates, market perceptions of the industries in which we operate or ratings of securities; - changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies; - the impact of changes in and compliance with laws and regulations, including environmental laws and regulations, and environmental liabilities in excess of the amount reserved; - terrorism, acts of war and similar events, and their resultant impact on economic and political conditions, and - the occurrence or non-occurrence of other circumstances beyond our control. 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO TENNECO AUTOMOTIVE INC.: We have reviewed the consolidated balance sheet of Tenneco Automotive Inc. and consolidated subsidiaries as of September 30, 2001, and the related consolidated statements of income and cash flows for the three and nine-month periods ended September 30, 2001. These financial statements are the responsibility of Tenneco Automotive Inc.'s management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Chicago, Illinois October 22, 2001 4 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) REVENUES Net sales and operating revenues........ $ 817 $ 865 $ 2,606 $ 2,685 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)......................... 638 678 2,076 2,062 Engineering, research, and development.......................... 11 14 36 44 Selling, general, and administrative.... 91 84 287 301 Depreciation and amortization........... 39 40 115 116 ----------- ----------- ----------- ----------- 779 816 2,514 2,523 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE).................... (1) (2) (2) -- ----------- ----------- ----------- ----------- INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST............ 37 47 90 162 Interest expense (net of interest capitalized)......................... 42 46 132 139 Income tax expense (benefit)............ (3) (5) (12) (1) Minority interest....................... -- -- 1 2 ----------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS......... (2) 6 (31) 22 ----------- ----------- ----------- ----------- Extraordinary loss, net of income tax..... -- (1) -- (1) ----------- ----------- ----------- ----------- NET INCOME (LOSS)......................... $ (2) $ 5 $ (31) $ 21 =========== =========== =========== =========== EARNINGS (LOSS) PER SHARE Average shares of common stock outstanding-- Basic................................... 38,065,590 35,054,961 37,343,303 34,392,126 Diluted................................. 38,247,202 35,217,995 37,503,759 34,584,516 Basic earnings (loss) per share of common stock-- Continuing operations................... $ (.06) $ .17 $ (.83) $ .62 Extraordinary loss...................... -- (.01) -- (.01) ----------- ----------- ----------- ----------- $ (.06) $ .16 $ (.83) $ .61 =========== =========== =========== =========== Diluted earnings (loss) per share of common stock-- Continuing operations................... $ (.06) $ .16 $ (.83) $ .61 Extraordinary loss...................... -- (.01) -- (.01) ----------- ----------- ----------- ----------- $ (.06) $ .15 $ (.83) $ .60 =========== =========== =========== =========== Cash dividends per share of common stock................................... $ -- $ .05 $ -- $ .15 =========== =========== =========== ===========
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)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (MILLIONS) ASSETS Current assets: Cash and temporary cash investments....................... $ 92 $ 35 Receivables-- Customer notes and accounts, net....................... 439 457 Other.................................................. 22 30 Inventories-- Finished goods......................................... 163 197 Work in process........................................ 88 83 Raw materials.......................................... 65 103 Materials and supplies................................. 38 39 Deferred income taxes..................................... 76 76 Prepayments and other..................................... 92 89 ------- ------- 1,075 1,109 Other assets: Long-term notes receivable, net........................... 27 24 Goodwill and intangibles, net............................. 443 463 Deferred income taxes..................................... 114 94 Pension assets............................................ 50 41 Other..................................................... 141 150 ------- ------- 775 772 ------- ------- Plant, property, and equipment, at cost..................... 1,818 1,852 Less--Reserves for depreciation and amortization.......... 869 847 ------- ------- 949 1,005 ------- ------- $ 2,799 $ 2,886 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt).................................................. $ 142 $ 92 Trade payables............................................ 464 464 Accrued taxes............................................. 16 16 Accrued interest.......................................... 44 35 Accrued liabilities....................................... 148 134 Other..................................................... 72 68 ------- ------- 886 809 ------- ------- Long-term debt.............................................. 1,359 1,435 ------- ------- Deferred income taxes....................................... 136 144 ------- ------- Postretirement benefits..................................... 131 128 ------- ------- Deferred credits and other liabilities...................... 30 26 ------- ------- Commitments and contingencies Minority interest........................................... 15 14 ------- ------- Shareholders' equity: Common stock.............................................. -- -- Premium on common stock and other capital surplus......... 2,745 2,738 Accumulated other comprehensive income (loss)............. (303) (239) Retained earnings (accumulated deficit)................... (1,960) (1,929) ------- ------- 482 570 Less--Shares held as treasury stock, at cost.............. 240 240 ------- ------- 242 330 ------- ------- $ 2,799 $ 2,886 ======= =======
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)
NINE MONTHS ENDED SEPTEMBER 30, ------------------ 2001 2000 ---- ---- (MILLIONS) OPERATING ACTIVITIES Net income (loss)........................................... $(31) $ 22 Adjustments to reconcile income to cash provided (used) by operating activities Depreciation and amortization........ 115 116 Deferred income taxes..................................... (28) (15) (Gain) loss on sale of assets, net........................ 4 1 Changes in components of working capital-- (Increase) decrease in receivables..................... 5 (44) (Increase) decrease in inventories..................... 52 (11) (Increase) decrease in prepayments and other current assets................................................ (9) (15) Increase (decrease) in payables........................ 7 123 Increase (decrease) in accrued taxes................... 2 7 Increase (decrease) in accrued interest................ 10 20 Increase (decrease) in other current liabilities....... 6 (5) Other..................................................... 16 4 ---- ----- Net cash provided (used) by operating activities............ 149 203 ---- ----- INVESTING ACTIVITIES Net proceeds from sale of assets............................ 3 7 Expenditures for plant, property, and equipment............. (74) (108) Acquisitions of businesses.................................. -- (5) Investments and other....................................... (10) (15) ---- ----- Net cash provided (used) by investing activities............ (81) (121) ---- ----- NET CASH PROVIDED (USED) BEFORE FINANCING ACTIVITIES........ 68 82 FINANCING ACTIVITIES Issuance of common and treasury stock....................... 8 13 Proceeds from subsidiary equity issued...................... -- 1 Issuance of long-term debt.................................. -- 1 Retirement of long-term debt................................ (8) (67) Net increase (decrease) in short-term debt excluding current maturities of long-term debt.............................. (13) (25) Dividends (common).......................................... -- (5) Other....................................................... -- (11) ---- ----- Net cash provided (used) by financing activities............ (13) (93) ---- ----- Effect of foreign exchange rate changes on cash and temporary cash investments................................ 2 (5) ---- ----- Increase (decrease) in cash and temporary cash investments............................................... 57 (16) Cash and temporary cash investments, January 1.............. 35 84 ---- ----- Cash and temporary cash investments, September 30 (Note).... $ 92 $ 68 ==== ===== Cash paid during the period for interest.................... $121 $ 125 Cash paid during the period for income taxes (net of refunds).................................................. $ 10 $ 8
NOTE: Cash and temporary cash investments include highly liquid investments with a maturity of three months or less at the date of purchase. The accompanying notes to financial statements are an integral part of these statements of cash flows. 7 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------- 2001 2000 --------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT ------ ------- ------ ------ (MILLIONS EXCEPT SHARE AMOUNTS) COMMON STOCK Balance January 1................................. 37,797,256 $ -- 34,970,485 $ -- Issued pursuant to benefit plans................ 2,167,417 -- 1,987,641 -- ---------- ----------- Balance September 30.............................. 39,964,673 -- 36,958,126 -- ========== =========== PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS Balance January 1................................. 2,738 2,721 Premium on common stock issued pursuant to benefit plans.............................. 7 13 ------- ------- Balance September 30.............................. 2,745 2,734 ------- ------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance January 1................................. (239) (179) Other comprehensive income (loss)............... (64) (88) ------- ------- Balance September 30.............................. (303) (267) ------- ------- RETAINED EARNINGS (ACCUMULATED DEFICIT) Balance January 1................................. (1,929) (1,880) Net income (loss)............................... (31) 21 Dividends on common stock....................... -- (5) ------- ------- Balance September 30.............................. (1,960) (1,864) ------- ------- LESS--COMMON STOCK HELD AS TREASURY STOCK, AT COST Balance January 1................................. 1,298,498 240 1,298,373 240 Shares issued................................... 3,806 -- -- Shares acquired................................. -- -- 125 -- ---------- ------- ----------- ------- Balance September 30.............................. 1,294,692 240 1,298,498 240 ========== ------- =========== ------- Total...................................... $ 242 $ 363 ======= =======
The accompanying notes to financial statements are an integral part of these statements of changes in shareholders' equity. 8 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------- 2001 2000 ----------------------------- ----------------------------- ACCUMULATED ACCUMULATED OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME INCOME INCOME INCOME ------------- ------------- ------------- ------------- (MILLIONS) NET INCOME (LOSS)............................. $(2) $ 5 --- ---- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CUMULATIVE TRANSLATION ADJUSTMENT Balance July 1.............................. $(300) $(218) Translation of foreign currency statements............................. 17 17 (46) (46) ----- ----- Balance September 30........................ (283) (264) ----- ----- FAIR VALUE OF INTEREST RATE SWAPS Balance July 1.............................. $ (13) $ -- Translation of foreign currency statements............................. (5) (5) -- -- ----- ----- Balance September 30........................ (18) -- ----- ----- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance July 1 and September 30............. (2) (3) ----- ----- Balance September 30.......................... $(303) $(267) ===== --- ===== Other comprehensive income (loss)............. 12 (46) --- ---- COMPREHENSIVE INCOME (LOSS)................... $10 $(41) === ====
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------- 2001 2000 ----------------------------- ----------------------------- ACCUMULATED ACCUMULATED OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME INCOME INCOME INCOME ------------- ------------- ------------- ------------- (MILLIONS) NET INCOME (LOSS)............................. $ (31) $ 21 ------- ---- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CUMULATIVE TRANSLATION ADJUSTMENT Balance January 1........................... $(237) $(176) Translation of foreign currency statements............................. (46) (46) (88) (88) ----- ----- Balance September 30........................ (283) (264) ----- ----- FAIR VALUE OF INTEREST RATE SWAPS Balance January 1........................... $ -- $ -- Translation of foreign currency statements............................. (18) (18) -- -- ----- ----- Balance September 30........................ (18) -- ----- ----- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance January 1 and September 30.......... (2) (3) ----- ----- Balance September 30.......................... $(303) $(267) ===== ------- ===== Other comprehensive income (loss)............. (64) (88) ------- ---- COMPREHENSIVE INCOME (LOSS)................... $ (95) $(67) ======= ====
The accompanying notes to financial statements are an integral part of these statements of comprehensive income (loss). 9 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) In our opinion, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly Tenneco's financial position, results of operations, cash flows, changes in shareholders' equity, and comprehensive income for the periods indicated. The unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. Our consolidated financial statements include all majority-owned subsidiaries. We carry investments in 20 percent to 50 percent owned companies at cost plus equity in undistributed earnings and cumulative translation adjustments from date of acquisition since we have the ability to exert significant influence over operating and financial policies. We have reclassified prior year's financial statements where appropriate to conform to 2001 presentations. (2) Over the past several years we have adopted plans to restructure portions of our operations. These plans were approved by the Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. Charges to income related to these plans are recorded in the period in which the plans are finalized and approved, while actions necessary to affect these restructuring plans occur over future periods in accordance with established plans. We have substantially completed the restructuring actions related to the 1999 plan. The 1999 plan involved closing a ride control manufacturing facility and an exhaust plant in Europe, closing or downsizing four European aftermarket distribution centers, closing a North American exhaust manufacturing facility plus employee reductions of approximately 780. Over 750 employees have been terminated under the 1999 plan with the remainder of the planned reductions achieved through normal activities. The timing of closing one European aftermarket distribution location has changed as a result of customer requirements. Actions necessary to complete closing this location are in process, and we expect to complete those actions and close the location in 2002. In the fourth quarter of 2000, our Board of Directors approved a restructuring plan to further reduce administrative and operational overhead costs. We recorded a pre-tax charge related to the plan of $46 million, $32 million after tax, or $.92 per diluted common share. Within the statement of income, $13 million of the pre-tax charge is reflected in cost of sales, while $33 million is included in selling, general, and administrative expenses. The charge is comprised of $24 million of severance and related costs for salaried employment reductions worldwide and $22 million for the reduction of manufacturing and distribution capacity in response to long-term market trends. The 2000 plan involved closing a North American aftermarket exhaust distribution facility and ride control manufacturing plant in our Asian market, as well as the consolidation of some exhaust manufacturing facilities in Europe. In addition, the plan involves the elimination of up to 700 positions, including temporary employees. We wrote down the assets at the locations to be closed to their fair value, less costs to sell. We estimated the market value of buildings using external real estate appraisals. As a result of the single purpose nature of the machinery and equipment to be disposed of, fair value was estimated to be scrap value less costs to dispose in most cases. We do not expect that cash proceeds on the sale of these assets will be significant. As of September 30, 2001, approximately 550 employees have been terminated under the 2000 plan primarily in North America and Europe. Additionally, 57 temporary employees have been terminated. All restructuring actions are being completed in accordance with our established plan. We expect to complete all restructuring activities related to this plan by the end of the first quarter of 2002. Also in the fourth quarter of 2000, we recorded other charges of $15 million, $10 million after tax, or $.29 per diluted common share. These charges relate to a strategic decision to reduce some of the aftermarket parts we offer and to relocation expenses incurred associated with the restructuring plans. The aftermarket parts were written down to their estimated scrap value less costs to sell. 10 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) In the first quarter of 2001, our Board of Directors approved a restructuring plan in response to increasingly difficult industry conditions. On January 31, 2001, we announced plans to eliminate up to 405 salaried positions worldwide. We recorded pre-tax charges related to the restructuring of $11 million, $8 million after tax, or $.21 per diluted common share. Within the statement of income, $2 million of the pre-tax charge is reflected in cost of sales, while $9 million is included in selling, general, and administrative expenses. These charges are comprised of $8 million for severance and related costs for salaried employment reductions worldwide and $3 million for costs related to closing a testing facility in North America. As of September 30, 2001, we have eliminated about 290 positions in connection with this plan. We also incurred $4 million for other restructuring related costs and expenses such as relocation and moving costs that could not be accrued as part of the restructuring reserve. We estimate that we will complete these restructuring activities no later than the first quarter 2002. All workforce reductions are being done in compliance with all legal and contractual requirements including obligations to consult with worker committees, union representatives and others. In the second quarter of 2001, our Board of Directors approved a separate restructuring plan related to closing a North American ride control production line. We recorded pre-tax charges related to the plan of $8 million, $6 million after tax, or $.16 per diluted common share. Within the statement of income, the $8 million charge is included in cost of sales and relates primarily to impairing the assets related to the production line to their fair value, less costs to sell. As a result of the single purpose nature of the machinery and equipment to be disposed of, fair value was estimated to be scrap value less costs to dispose in most cases. We do not expect that cash proceeds on the sale of these assets will be significant. We expect to complete all restructuring activities related to this plan by the end of 2001. Amounts related to activities that are part of the restructuring plans are as follows:
DECEMBER 31, 2000 2001 2001 CHARGED TO IMPACT OF SEPTEMBER 30, 2001 RESTRUCTURING RESTRUCTURING CASH ASSET EXCHANGE RESTRUCTURING RESERVE CHARGES PAYMENTS ACCOUNTS RATES RESERVE ----------------- ------------- -------- ---------- --------- ------------------ Severance............ $23 $ 8 $(18) $ -- $ (1) $12 Asset Impairment..... -- 9 -- (9) -- -- Facility exit costs.............. 3 2 (1) -- (1) 3 --- --- ---- ---- ---- --- $26 $19 $(19) $ (9) $ (2) $15 === === ==== ==== ==== ===
In addition to the actions taken through the end of the third quarter, we are evaluating additional opportunities to initiate actions that will reduce our costs through implementing the most appropriate and efficient logistics, distribution, and manufacturing footprint for the future. Any actions that we take will require the approval of our Board of Directors and any workforce reductions that result will be done in compliance with all legal and contractual requirements including obligations to consult with worker committees, union representatives, and others. While the actions we expect to initiate in the fourth quarter of 2001 are still being developed, we expect to record a significant restructuring charge in the fourth quarter that could range up to $32 million. Also, we currently estimate that we will incur about $2 million of expense during the remainder of 2001 with respect to restructuring-related costs and expenses for actions that have already been announced that could not be accrued as part of the restructuring reserve. (3) We are party to various legal proceedings arising from our operations. We believe that the outcome of these proceedings, individually and in the aggregate, will have no material adverse effect on our financial position or results of operations. An OE customer has cancelled a platform for which we had a contract to supply a ride control system. We are currently working with the customer to recover our investment in development costs and related equipment for this platform, as well as other related claims. We are currently negotiating with our customer 11 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) for reimbursement of all our costs. Although no assurances can be given, we believe the resolution of this issue will not have a material adverse effect on our financial position or results of operations. (4) We and some of our subsidiaries and affiliates are parties to environmental proceedings. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation. We record liabilities when environmental assessments indicate that remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. We consider all available evidence including prior experience in remediation of contaminated sites, other companies' cleanup experience and data released by the United States Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. Where future cash flows are fixed or reliably determinable, we have discounted the liabilities. All other environmental liabilities are recorded at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our financial statements. As of September 30, 2001, we continue to be designated as a potentially responsible party in three Superfund sites. We have estimated our share of the remediation costs for these sites to be approximately $1 million in the aggregate. In addition to the Superfund sites, we may be obligated to remediate current or former facilities, and we estimate our share of remediation costs at these facilities to be approximately $24 million. For both the Superfund sites and the current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties has been considered, where appropriate, in our determination of our estimated liability. As we previously disclosed, we undertook a third-party evaluation of estimated environmental remediation costs at one of our facilities beginning in 2000. The evaluation was initiated as a result of testing that indicated the potential underground migration of some contaminants beyond our facility property. We have completed and analyzed the results of our evaluation of off-site contamination migration from that facility and as a result we have increased the environmental remediation reserve we had for this facility by $5 million through a charge to income in the first quarter 2001. We also increased our estimate of environmental remediation reserves for three other locations by a total of $1 million in the first quarter of 2001. Additionally, in the first quarter of 2001, we reached an agreement with a third party to assume responsibility for remediation of a location at which we previously shared responsibility. In exchange, we received cash and a note for a total of $4 million, the estimate of the third party's share of the total remediation liability. We increased our environmental liability estimate for this location by $4 million as a result. These amounts are reflected in our estimation of remediation costs described above. We believe that these potential costs, as well as the costs associated with our current status as a potentially responsible party in the Superfund sites, or as a liable party at our current or former facilities, will not be material to our consolidated financial position or results of operations. (5) In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." 12 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) This statement establishes new accounting and reporting standards requiring that all derivative instruments, including derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at their fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. This statement cannot be applied retroactively and is effective for all fiscal years beginning after June 15, 2000. We adopted this statement effective January 1, 2001, and it did not have a significant impact on our financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101,"Revenue Recognition." This SAB provides guidance on the recognition, presentation, and disclosure of revenue in the financial statements and is effective no later than the fourth quarter of fiscal years beginning after December 15, 1999. The SAB draws on the existing accounting rules and defines the basic criteria that must be met before we can record revenue. The impact of adopting SAB 101 did not have a significant effect on our results of operations or financial position. In May 2000, the FASB's Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-14, Accounting for Certain Sales Incentives. This issue addresses the recognition, measurement, and income statement classification of various types of sales incentives, including discounts, coupons, rebates, and free products. Consequently, beginning January 1, 2001, we classified some incentives that were previously shown in selling, general, and administrative expense as a reduction in revenues. As a result of the change, revenue was $12 million lower for the first nine months of 2001, with an offsetting decline in selling, general, and administrative expenses. We have restated prior year results for comparability, resulting in a reduction in net sales of $15 million for the nine months ended September 30, 2000, with an offsetting reduction in selling, general, and administrative expense. In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for purchased goodwill from an amortization method to an impairment-only approach. Therefore amortization of all purchased goodwill, including amortization of goodwill recorded in past business combinations, will cease upon adoption of SFAS No. 142. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early adoption of the SFAS No. 142 is not permitted nor is retroactive application to prior period (interim or annual) financial statements. At the end of the third quarter, the balance of unamortized goodwill was $439 million. Goodwill is being amortized at the rate of $4 million each quarter. We are currently evaluating the effect that this statement may have on our financial position and results of operations. In April 2001, the EITF reached a consensus on Issue No. 00-25, Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products. This consensus requires that consideration provided by a vendor to a purchaser of the vendor's products be recognized as a reduction of sales, except in those instances where an identifiable and measurable benefit is or will be received by the vendor from the purchaser. Issue No. 00-25 requires effective with the fourth quarter of 2001 that certain expenses that historically have been included in selling, general, and administrative costs be reclassified as deductions from sales. We do not believe adopting this statement will have a significant impact on our financial position or results of operations. (6) We entered into an agreement during the third quarter of 2000 to sell an interest in some of our trade accounts receivable to a third party. As of September 2001, we had sold accounts receivable of $144 million. In 2001, we recognized a loss of $4 million in the first nine months on these sales of trade accounts, representing the discount from book values at which these receivables were sold to the third party. The 13 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) discount rate varies based on funding cost incurred by the third party. The average rate for the nine months ended September 30, 2001, was 6 percent. We retained ownership of the remaining interest in the pool of receivables not sold to the third party. We valued this retained interest based on the recoverable value of the receivable pool, which approximated book value. (7) Earnings (loss) per share of common stock outstanding were computed as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2001 2000 2001 2001 ---- ---- ---- ---- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) Basic Earnings Per Share-- Net income (loss) from continuing operations........................... $ (2) $ 6 $ (31) $ 22 =========== =========== =========== =========== Average shares of common stock outstanding.......................... 38,065,590 35,054,961 37,343,303 34,392,126 =========== =========== =========== =========== Earnings from continuing operations per average share of common stock........ $ (.06) $ .17 $ (.83) $ .62 =========== =========== =========== =========== Diluted Earnings Per Share-- Net income (loss) from continuing operations........................... $ (2) $ 6 $ (31) $ 22 =========== =========== =========== =========== Average shares of common stock outstanding.......................... 38,065,590 35,054,961 37,343,303 34,392,126 Effect of dilutive securities: Restricted stock................... -- 4,862 -- 35,053 Stock options...................... 20,020 140 474 143 Performance shares................. 161,592 158,032 159,982 157,194 ----------- ----------- ----------- ----------- Average shares of common stock outstanding including dilutive securities........................... 38,247,202 35,217,995 37,503,759 34,584,516 =========== =========== =========== =========== Earnings (loss) from continuing operations per average share of common stock......................... $ (.06) $ .16 $ (.83) $ .61 =========== =========== =========== ===========
(8) We are a global manufacturer with two geographic reportable segments: North America and Europe. Each segment manufactures and distributes ride control and emission control products primarily for the automotive industry. We have not aggregated individual operating segments within these reportable segments. We evaluate segment performance based primarily on income before interest expense, income taxes, and minority interest. Products are transferred between segments and geographic areas on a basis intended to reflect as nearly as possible the "market value" of the products. 14 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) The following table summarizes certain Tenneco segment information:
SEGMENT ------------------------------------------------------- RECLASS NORTH AMERICA EUROPE OTHER & ELIMS CONSOLIDATED ------------- ------ ----- ------- ------------ (MILLIONS) FOR THE THREE MONTHS THEN ENDED SEPTEMBER 30, 2001 Revenues from external customers................... $ 440 $302 $ 75 $ -- $ 817 Intersegment revenues.............................. 2 9 2 (13) -- Income before interest, income taxes, and minority interest............................ 23 9 5 -- 37 FOR THE THREE MONTHS THEN ENDED SEPTEMBER 30, 2000 Revenues from external customers................... $ 464 $311 $ 90 $ -- $ 865 Intersegment revenues.............................. 3 14 4 (21) -- Income before interest, income taxes, and minority interest............................ 29 14 4 -- 47 AT SEPTEMBER 30, 2001, AND FOR THE NINE MONTHS THEN ENDED Revenues from external customers................... $1,368 $998 $240 $ -- $2,606 Intersegment revenues.............................. 7 32 6 (45) -- Income before interest, income taxes, and minority interest............................ 40 39 11 -- 90 Total Assets................................ 1,108 951 684 56 2,799 AT SEPTEMBER 30, 2000, AND FOR THE NINE MONTHS THEN ENDED Revenues from external customers................... $1,507 $927 $251 $ -- $2,685 Intersegment revenues.............................. 8 33 10 (51) -- Income before interest, income taxes, and minority interest............................ 103 48 11 -- 162 Total Assets................................ 1,449 922 561 (20) 2,912
(9) Supplemental guarantor condensed financial statements are presented below: Basis of Presentation We issued senior subordinated notes due 2009 as a component of a plan to realign our debt in connection with the 1999 spin-off of our packaging business. All of our existing and future material domestic wholly-owned subsidiaries (the "Guarantor Subsidiaries") fully and unconditionally guarantee the notes on a joint and several basis. We have not presented separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries because management has determined that such information is not material to the holders of the notes. Therefore, the Guarantor Subsidiaries are combined in the presentation below. These condensed consolidating financial statements are presented on the equity method. Under this method our investments are recorded at cost and adjusted for our ownership share of a subsidiary's cumulative results of operations, capital contributions and distributions, and other equity changes. You should read the condensed consolidating financial statements of the Guarantor Subsidiaries in connection with our consolidated financial statements and related notes of which this note is an integral part. Distributions There are no significant restrictions on the ability of the Guarantor Subsidiaries to make distributions to us. 15 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 --------------------------------------------------------------------------- TENNECO AUTOMOTIVE, INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ---------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External....................... $359 $458 $ -- $ -- $817 Affiliated companies........... 11 16 -- (27) -- ---- ---- ---- ---- ---- 370 474 -- (27) 817 ---- ---- ---- ---- ---- COSTS AND EXPENSES-- Cost of sales (exclusive of depreciation shown below)...... 277 388 -- (27) 638 Engineering, research, and development.................... 4 7 -- -- 11 Selling, general, and administrative................. 50 41 -- -- 91 Depreciation and amortization..... 21 18 -- -- 39 ---- ---- ---- ---- ---- 352 454 -- (27) 779 ---- ---- ---- ---- ---- OTHER INCOME (EXPENSE).............. 5 (6) -- -- (1) INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME OF AFFILIATED COMPANIES........... 23 14 -- -- 37 Interest expense-- External (net of interest capitalized)................. 1 2 39 -- 42 Affiliated companies (net of interest income)............. 25 (1) (24) -- -- Income tax expense (benefit)...... (2) 4 (12) 7 (3) Minority interest................. -- -- -- -- -- ---- ---- ---- ---- ---- (1) 9 (3) (7) (2) Equity in net income (loss) of affiliated companies........... 4 -- 1 (5) -- ---- ---- ---- ---- ---- INCOME (LOSS) FROM CONTINUING OPERATIONS........................ 3 9 (2) (12) (2) Extraordinary loss, net of income tax............................... -- -- -- -- -- ---- ---- ---- ---- ---- NET INCOME (LOSS)................... $ 3 $ 9 $ (2) $(12) $ (2) ==== ==== ==== ==== ====
16 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 --------------------------------------------------------------------------- TENNECO AUTOMOTIVE, INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ---------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External....................... $378 $487 $ -- $ -- $865 Affiliated companies........... 19 18 -- (37) -- ---- ---- ---- ---- ---- 397 505 -- (37) 865 ---- ---- ---- ---- ---- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)...... 314 401 -- (37) 678 Engineering, research, and development.................... 7 7 -- -- 14 Selling, general, and administrative................. 44 40 -- -- 84 Depreciation and amortization..... 22 18 -- -- 40 ---- ---- ---- ---- ---- 387 466 -- (37) 816 ---- ---- ---- ---- ---- OTHER INCOME (EXPENSE).............. 3 (5) -- -- (2) ---- ---- ---- ---- ---- INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME OF AFFILIATED COMPANIES........... 13 34 -- -- 47 Interest expense-- External (net of interest capitalized)................. -- 2 44 -- 46 Affiliated companies (net of interest income)............. 28 2 (30) -- -- Income tax expense (benefit)...... (14) 5 1 3 (5) Minority interest................. -- -- -- -- -- ---- ---- ---- ---- ---- (1) 25 (15) (3) 6 Equity in net income (loss) of affiliated companies........... 26 -- 21 (47) -- ---- ---- ---- ---- ---- INCOME (LOSS) FROM CONTINUING OPERATIONS........................ 25 25 6 (50) 6 Extraordinary loss, net of income tax............................... -- -- (1) -- (1) ---- ---- ---- ---- ---- NET INCOME (LOSS)................... $ 25 $ 25 $ 5 $(50) $ 5 ==== ==== ==== ==== ====
17 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 ---------------------------------------------------------------------- TENNECO AUTOMOTIVE, INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ----------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External.......................... $1,073 $1,533 $ -- $ -- $2,606 Affiliated companies.............. 44 44 -- (88) -- ------ ------ ---- ---- ------ 1,117 1,577 -- (88) 2,606 ------ ------ ---- ---- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)......... 886 1,278 -- (88) 2,076 Engineering, research, and development....................... 16 20 -- -- 36 Selling, general, and administrative.................... 159 128 -- -- 287 Depreciation and amortization........ 62 53 -- -- 115 ------ ------ ---- ---- ------ 1,123 1,479 -- (88) 2,514 ------ ------ ---- ---- ------ OTHER INCOME (EXPENSE)................. 25 (27) -- -- (2) ------ ------ ---- ---- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME OF AFFILIATED COMPANIES............................ 19 71 -- -- 90 Interest expense-- External (net of interest capitalized).................... -- 7 125 -- 132 Affiliated companies (net of interest income)................ 84 1 (85) -- -- Income tax expense (benefit)......... (23) 25 (14) -- (12) Minority interest.................... -- 1 -- -- 1 ------ ------ ---- ---- ------ (42) 37 (26) -- (31) Equity in net income (loss) of affiliated companies.............. 27 -- (5) (22) -- ------ ------ ---- ---- ------ INCOME (LOSS) FROM CONTINUING OPERATIONS........................... (15) 37 (31) (22) (31) Extraordinary loss, net of income tax.................................. -- -- -- -- -- ------ ------ ---- ---- ------ NET INCOME (LOSS)...................... $ (15) $ 37 $(31) $(22) $ (31) ====== ====== ==== ==== ======
18 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 --------------------------------------------------------------------------- TENNECO AUTOMOTIVE, INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ---------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External....................... $1,230 $1,455 $ -- $ -- $2,685 Affiliated companies........... 57 55 -- (112) -- ------ ------ ---- ----- ------ 1,287 1,510 -- (112) 2,685 ------ ------ ---- ----- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)...... 996 1,178 -- (112) 2,062 Engineering, research, and development.................... 21 23 -- -- 44 Selling, general, and administrative................. 164 137 -- -- 301 Depreciation and amortization..... 61 55 -- -- 116 ------ ------ ---- ----- ------ 1,242 1,393 -- (112) 2,523 ------ ------ ---- ----- ------ OTHER INCOME (EXPENSE).............. 3 (3) -- -- -- ------ ------ ---- ----- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOMETAXES, MINORITY INTEREST, AND EQUITY IN NETINCOME OF AFFILIATED COMPANIES........... 48 114 -- -- 162 Interest expense-- External (net of interest capitalized)................. -- 8 131 -- 139 Affiliated companies (net of interest income)............. 78 8 (86) -- -- Income tax expense (benefit)...... (13) 26 (12) (2) (1) Minority interest................. -- 2 -- -- 2 ------ ------ ---- ----- ------ (17) 70 (33) 2 22 Equity in net income (loss) of affiliated companies........... 54 -- 55 (109) -- ------ ------ ---- ----- ------ INCOME (LOSS) FROM CONTINUING OPERATIONS........................ 37 70 22 (107) 22 Extraordinary loss, net of income tax............................... -- -- (1) -- (1) ------ ------ ---- ----- ------ NET INCOME (LOSS)................... $ 37 $ 70 $ 21 $(107) $ 21 ====== ====== ==== ===== ======
19 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) BALANCE SHEET
SEPTEMBER 30, 2001 ----------------------------------------------------------------------- TENNECO AUTOMOTIVE, INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ---------------- ------- ------------ (MILLIONS) ASSETS Current assets: Cash and temporary cash investments..................... $ 27 $ 65 $ 0 $ -- $ 92 Receivables........................ 194 414 19 (166) 461 Inventories........................ 125 229 -- -- 354 Deferred income taxes.............. 73 2 106 (105) 76 Prepayments and other.............. 40 52 -- -- 92 ------ ------ ------ ------- ------ 459 762 125 (271) 1,075 ------ ------ ------ ------- ------ Other assets: Investment in affiliated companies....................... 329 0 2,222 (2,551) -- Notes and advances receivable from affiliates...................... 2,469 41 3,299 (5,809) -- Long-term notes receivable, net.... 15 12 -- -- 27 Goodwill and intangibles, net...... 313 130 -- -- 443 Deferred income taxes.............. 106 8 -- -- 114 Pension assets..................... 30 20 -- -- 50 Other.............................. 57 57 27 -- 141 ------ ------ ------ ------- ------ 3,319 268 5,548 (8,360) 775 ------ ------ ------ ------- ------ Plant, property, and equipment, at cost............................... 838 980 -- -- 1,818 Less--Reserves for depreciation and amortization.................... 439 430 -- -- 869 ------ ------ ------ ------- ------ 399 550 -- -- 949 ------ ------ ------ ------- ------ $4,177 $1,580 $5,673 $(8,631) $2,799 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt): Short-term debt--non-affiliated....... $ -- $ 23 $ 119 $ -- $ 142 Short-term debt--affiliated... 80 1 10 (91) -- Trade payables..................... 146 374 -- (56) 464 Accrued taxes...................... 52 22 -- (58) 16 Other.............................. 120 95 61 (12) 264 ------ ------ ------ ------- ------ 398 515 190 (217) 886 Long-term debt--non-affiliated....... -- 16 1,343 -- 1,359 Long-term debt--affiliated........... 1,865 7 3,937 (5,809) -- Deferred income taxes................ 164 58 (39) (47) 136 Postretirement benefits and other liabilities........................ 131 31 -- (1) 161 Commitments and contingencies........ -- -- -- -- -- Minority interest.................... -- 15 -- -- 15 Shareholders' equity................. 1,619 938 242 (2,557) 242 ------ ------ ------ ------- ------ $4,177 $1,580 $5,673 $(8,631) $2,799 ====== ====== ====== ======= ======
20 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) BALANCE SHEET
DECEMBER 31, 2000 ---------------------------------------------------------------------- TENNECO AUTOMOTIVE, INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ----------- ------- ------------ ASSETS Current assets: Cash and temporary cash investments....................... $ 8 $ 27 $ -- $ -- $ 35 Receivables.......................... 199 379 21 (112) 487 Inventories.......................... 158 264 -- -- 422 Deferred income taxes................ 73 3 -- -- 76 Prepayments and other................ 36 53 -- -- 89 ------ ------ ------ ------- ------ 474 726 21 (112) 1,109 ------ ------ ------ ------- ------ Other assets: Investment in affiliated companies... 324 -- 2,306 (2,630) -- Notes and advances receivable from affiliates........................ 2,343 14 3,469 (5,826) -- Long-term notes receivable, net...... 11 13 -- -- 24 Goodwill and intangibles, net........ 321 142 -- -- 463 Deferred income taxes................ 75 18 22 (21) 94 Pension assets....................... 22 19 -- -- 41 Other................................ 65 60 25 -- 150 ------ ------ ------ ------- ------ 3,161 266 5,822 (8,477) 772 ------ ------ ------ ------- ------ Plant, property, and equipment, at cost................................. 854 998 -- -- 1,852 Less--Reserves for depreciation and amortization...................... 423 424 -- -- 847 ------ ------ ------ ------- ------ 431 574 -- -- 1,005 ------ ------ ------ ------- ------ $4,066 $1,566 $5,843 $(8,589) $2,886 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt): Short-term debt--non-affiliated......... $ -- $ 28 $ 64 $ -- 92 Short-term debt--affiliated..... -- 1 10 (11) -- Trade payables....................... 179 369 1 (85) 464 Accrued taxes........................ 26 12 -- (22) 16 Other................................ 109 104 33 (9) 237 ------ ------ ------ ------- ------ 314 514 108 (127) 809 Long-term debt--non-affiliated......... -- 20 1,415 -- 1,435 Long-term debt--affiliated............. 1,753 4 4,069 (5,826) -- Deferred income taxes.................. 159 63 (78) -- 144 Postretirement benefits and other liabilities.......................... 126 30 (1) (1) 154 Commitments and contingencies Minority interest............................. -- 14 -- -- 14 Shareholders' equity................... 1,714 921 330 (2,635) 330 ------ ------ ------ ------- ------ $4,066 $1,566 $5,843 $(8,589) $2,886 ====== ====== ====== ======= ======
21 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE, INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities.............. $ (2) $143 $ 8 $-- $149 ---- ---- ---- -- ---- INVESTING ACTIVITIES Net proceeds from sale of assets.... 2 1 -- -- 3 Expenditures for plant, property, and equipment..................... (21) (53) -- -- (74) Investments and other............... (6) (4) -- -- (10) ---- ---- ---- -- ---- Net cash provided (used) by investing activities.............. (25) (56) -- -- (81) ---- ---- ---- -- ---- FINANCING ACTIVITIES Issuance of common and treasury stock............................. -- -- 8 -- 8 Retirement of long-term debt........ -- (3) (5) -- (8) Net increase (decrease) in short-term debt excluding current maturities of long-term debt...... -- -- (13) -- (13) Intercompany dividends and net increase (decrease) in intercompany obligations.......... 46 (48) 2 -- -- Dividends (common).................. -- -- -- -- -- ---- ---- ---- -- ---- Net cash provided (used) by financing activities.............. 46 (51) (8) -- (13) ---- ---- ---- -- ---- Effect of foreign exchange rate changes on cash and temporary cash investments....................... -- 2 -- -- 2 ---- ---- ---- -- ---- Increase (decrease) in cash and temporary cash investments........ 19 38 -- -- 57 Cash and temporary cash investments, January 1......................... 8 27 -- -- 35 ---- ---- ---- -- ---- Cash and temporary cash investments, September 30 (Note)............... $ 27 $ 65 $ -- $-- $ 92 ==== ==== ==== == ====
NOTE: Cash and temporary cash investments include highly liquid investments with a maturity of three months or less at the date of purchase. 22 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 --------------------------------------------------------------------------- TENNECO AUTOMOTIVE, INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ ---------------- ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities.......................... $ 380 $ 62 $(239) $-- $ 203 ----- ---- ----- --- ----- INVESTING ACTIVITIES Net proceeds from sale of assets...... 4 3 -- -- 7 Expenditures for plant, property, and equipment........................... (37) (71) -- -- (108) Acquisitions of Businesses............ (1) (4) -- -- (5) Investments and other................. (13) (2) -- -- (15) ----- ---- ----- --- ----- Net cash provided (used) by investing activities.......................... (47) (74) -- -- (121) ----- ---- ----- --- ----- FINANCING ACTIVITIES Issuance of common and treasury stock............................... -- -- 13 -- 13 Proceeds from subsidiary equity issue............................... -- 1 -- -- 1 Issuance of long-term debt............ -- 1 -- -- 1 Retirement of long-term debt.......... -- (2) (65) -- (67) Net increase (decrease) in short-term debt excluding current maturities of long-term debt...................... -- (25) -- -- (25) Intercompany dividends and net increase (decrease) in intercompany obligations......................... (316) 19 297 -- -- Dividends (common).................... -- -- (5) -- (5) Other................................. (10) -- (1) -- (11) ----- ---- ----- --- ----- Net cash provided (used) by financing activities.......................... (326) (6) 239 -- (93) ----- ---- ----- --- ----- Effect of foreign exchange rate changes on cash and temporary cash investments......................... -- (5) -- -- (5) ----- ---- ----- --- ----- Increase (decrease) in cash and temporary cash investments.......... 7 (23) -- -- (16) Cash and temporary cash investments, January 1........................... 28 56 -- -- 84 ----- ---- ----- --- ----- Cash and temporary cash investments, September 30 (Note)................. $ 35 $ 33 $ -- $-- $ 68 ===== ==== ===== === =====
NOTE:Cash and temporary cash investments include highly liquid investments with a maturity of three months or less at the date of purchase. (The preceding notes are an integral part of the foregoing financial statements.) 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 NET SALES AND OPERATING REVENUES
THREE MONTHS ENDED SEPTEMBER 30, -------------- 2001 2000 CHANGE ---- ---- ------ (MILLIONS) North America............................................... $440 $464 (5)% Europe...................................................... 302 311 (3)% Rest of World............................................... 75 90 (17)% ---- ---- $817 $865 (6)% ==== ====
Results for 2000 have been reclassified for comparability to reflect the reclassification of certain sales incentives. This reclassification is made in accordance with the provisions of the FASB's Emerging Issues Task Force May 2000 consensus on Issue No. 00-14, Accounting for Certain Sales Incentives. Effective January 1, 2001, we changed the way we classify some sales incentives in accordance with the consensus reached by the EITF. The impact of this reclassification on third quarter 2000 results was a reduction in net sales of $5 million with an offsetting reduction in selling, general, and administrative expense. Our North American revenues decreased $24 million in the third quarter of 2001 compared to last year's third quarter reflecting lower sales generated from both the original equipment and aftermarket businesses. OE revenues declined 6 percent to $295 million in the third quarter of this year due to significant OE production cut backs in both the light and heavy-duty vehicle segments as vehicle manufacturers adjusted production levels in the face of a slowing economy. OE ride control revenues were down 14 percent for the quarter. OE emissions control revenues declined 3 percent which is attributable to a $27 million decline in volume partially offset by a $19 million increase in catalytic converter revenues due to increased cost of precious metals that are passed through to our customers. Lower ride control volumes, especially in our heavy-duty elastomer business, resulted in the decline in OE ride control revenues. Aftermarket revenues for North America were $145 million in the third quarter of 2001, representing a decline of 3 percent compared to the same period in the prior year. Excluding this increase in pass through catalytic converter revenues, OE emissions control revenues declined 15 percent. Lower industry volumes continue to impact our North American aftermarket business. Aftermarket emissions control revenues declined 15 percent in the quarter primarily due to lower volumes. Ride control revenues increased 8 percent compared to a year ago due to price increases implemented in the first quarter and early second quarter as well as increased volumes due to the initial order with a new ride control customer. Our European segment's revenues declined $9 million in the third quarter of 2001 compared to last year due primarily to a 15 percent decline in aftermarket revenues, which were $81 million for the quarter compared to $95 million in the same period a year ago. The decline resulted from the continued softness of the aftermarket industry combined with declining exhaust replacement rates due primarily to the increasing use of longer lasting stainless steel on OE vehicles. Price increases that relate to our global aftermarket pricing strategy continued to show favorable results in the third quarter of 2001 contributing some positive revenue growth and helping to partially offset the impact from lower volumes. OE revenues increased 2 percent to $221 million in the third quarter. The increase was driven by $17 million of pass through converter sales which came as a result of rising precious metal prices that we have passed through to our OE customers. Excluding the increase in pass through converter sales, revenues decreased 7 percent largely due to lower volumes and the retirement of a platform. The devaluation of European currencies compared to the U.S. dollar resulted in a reduction in OE revenues of $1 million in the third quarter of this year. Revenues from our operations in the rest of the world, specifically South America, Australia and Asia, decreased $15 million in the quarter primarily due to $12 million of negative foreign currency adjustments 24 impacting the quarter's results. Excluding these currency impacts, total revenues for the rest of the world would have decreased 3 percent compared to the same quarter last year. The impact of foreign currency was $8 million in South America and $4 million in Australia. South America results were also impacted by economic softness in the region, while Australia volumes were down due to a labor strike at another auto component supplier which shut down OE production for one week. In Asia, OE volumes increased for the quarter due to new platforms in production at our exhaust manufacturing facility in Shanghai. EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")
THREE MONTHS ENDED SEPTEMBER 30, -------------------- 2001 2000 REPORTED REPORTED RESULTS RESULTS CHANGE -------- -------- ------ (MILLIONS) North America............................................... $23 $29 (21)% Europe...................................................... 9 14 (36)% Rest of World............................................... 5 8 (38)% Other expenses.............................................. -- (4) NA --- --- $37 $47 (21)% === ===
We reported EBIT of $37 million for the third quarter of 2001, compared to $47 million for the same quarter last year. In the preceding table other expenses in the third quarter of 2000 include a $13 million pre-tax charge for a stock option buy-back program and a $9 million reversal of a reserve for transaction costs related to the November 1999 spin-off of Pactiv Corporation. The combination of these two one-time, non-operational items reduced our EBIT by $4 million for the third quarter 2000. EBIT for North American operations declined to $23 million in the third quarter 2001 from $29 million one year ago as weaker sales volumes in our OE segment impacted earnings in the third quarter. A drop in both the light and heavy-duty vehicle production volumes and a decline in the higher margin elastomer business combined to reduce EBIT for the North American OE business by $3 million. Further contributing to the decline in EBIT in North American OE operations were unfavorable pricing impacts and foreign currency impacts. North American aftermarket EBIT increased $7 million year over year. Lower selling, general, and administrative expenses; cost savings generated from our restructuring efforts; and price increases more than offset foreign currency impacts and aftermarket industry weakness which resulted in lower volumes and reduced EBIT by $9 million. We also incurred increased customer changeover costs this quarter of $7 million compared to last year, primarily associated with a new ride control customer. Our European segment's EBIT declined by $5 million to $9 million in the third quarter of 2001. Our OE business was negatively impacted by higher engineering expenses related to new platforms as well as inventory shrinkage at one location. Our European aftermarket operations had improved results despite continued weaknesses in the overall industry. Lower selling, general and administrative expenses, cost savings generated from our restructuring efforts and price increases helped offset the industry weakness. Foreign currency movements in Europe impacted EBIT by $1 million in the quarter. EBIT for the company's operations in the rest of the world declined in the third quarter of 2001 compared to the same quarter one year ago. The impact of foreign currency was $1 million, primarily in our Australian operations. Further impacting EBIT was lower volume in South America and Australia. South America volumes have declined due to economic softness primarily in Argentina and Brazil. Australian volumes were down due to a labor strike at another auto component supplier which shut down OE production for one week. 25 EBIT AS A PERCENTAGE OF REVENUE
THREE MONTHS ENDED SEPTEMBER 30, -------------------- 2001 2000 ---- ---- North America............................................... 5% 6% Europe...................................................... 3% 5% Rest of World............................................... 7% 9% Total Tenneco Automotive............................. 5% 5%
In North America, EBIT as a percentage of revenue decreased by 1 percent. Production cuts by vehicle manufacturers, declines in higher margin elastomer sales and pricing pressure from vehicle manufacturers contributed to the lower margins. In the North America aftermarket EBIT as a percentage of revenue improved due to lower SG&A expenses and increased prices. In Europe, EBIT margins declined in the third quarter primarily due to lower margins in our OE operations. OE exhaust margins are being impacted by increased precious metals prices that are passed through to our customers. The impact of precious metals on sales for the quarter was $17 million. Our European aftermarket operations had improved margins due to price increases, lower selling, general and administrative expenses, and cost savings generated from our restructuring efforts. EBIT as a percentage of revenue for the rest of the world decreased over the prior year. The decrease in volumes has resulted in a poorer mix in the rest of the world. INTEREST EXPENSE, NET OF INTEREST CAPITALIZED We reported interest expense of $42 million for the quarter ended September 30, 2001, compared to $46 million during the same period in 2000. The decrease in total interest expense is primarily due to lower interest rates on our variable rate debt. See more detailed explanations on our debt structure in "Liquidity and Capital Resources--Capitalization" later in this Management's Discussion and Analysis. INCOME TAXES Income taxes were a $3 million benefit for the quarter ended September 30, 2001, compared to $5 million benefit for the quarter ended September 30, 2000. The effective tax rate was 29 percent for the third quarter of 2001 and 31 percent for 2000. Third quarter 2001 tax benefit includes a $1 million benefit for the cumulative catch up of the effective rate for the first 6 months of 2001 where the effective rate was 25 percent. EARNINGS PER SHARE We reported a loss in earnings per diluted common share of $.06 for the quarter ended September 30, 2001, compared to earnings of $.16 per diluted common share for the same period in the prior year. You should also read Note 7 in the "Notes to Financial Statements" for more detailed information on earnings per share. RESTRUCTURING CHARGES Over the past several years we have adopted plans to restructure portions of our operations. These plans were approved by the Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. Charges to income related to these plans are recorded in the period in which the plans are finalized and approved, while actions necessary to affect these restructuring plans occur over future periods in accordance with established plans. We have substantially completed the restructuring actions related to the 1999 plan. The 1999 plan involved closing a ride control manufacturing facility and an exhaust plant in Europe, closing or downsizing 26 four European aftermarket distribution centers, closing a North American exhaust manufacturing facility plus employee reductions of approximately 780. Over 750 employees have been terminated under the 1999 plan with the remainder of the planned reductions achieved through normal activities. The timing of the closing one European aftermarket distribution location has changed as a result of customer requirements. Actions necessary to complete closing this location are in process, and we expect to complete those actions and close the location in 2002. In the fourth quarter of 2000, our Board of Directors approved a restructuring plan to further reduce administrative and operational overhead costs. We recorded a pre-tax charge related to the plan of $46 million, $32 million after tax, or $.92 per diluted common share. Within the statement of income, $13 million of the pre-tax charge is reflected in cost of sales, while $33 million is included in selling, general, and administrative expenses. The charge is comprised of $24 million of severance and related costs for salaried employment reductions worldwide and $22 million for the reduction of manufacturing and distribution capacity in response to long-term market trends. The 2000 plan involved closing a North American aftermarket exhaust distribution facility and ride control manufacturing plant in our Asian market, as well as the consolidation of some exhaust manufacturing facilities in Europe. In addition, the plan involves the elimination of up to 700 positions, including temporary employees. We wrote down the assets at the locations to be closed to their fair value, less costs to sell. We estimated the market value of buildings using external real estate appraisals. As a result of the single purpose nature of the machinery and equipment to be disposed of, fair value was estimated to be scrap value less costs to dispose in most cases. We do not expect that cash proceeds on the sale of these assets will be significant. As of September 30, 2001, approximately 550 employees have been terminated under the 2000 plan primarily in North America and Europe. Additionally, 57 temporary employees have been terminated. All restructuring actions are being completed in accordance with our established plan. We expect to complete all restructuring activities related to this plan by the end of the first quarter of 2002. Also in the fourth quarter of 2000, we recorded other charges of $15 million, $10 million after tax, or $.29 per diluted common share. These charges relate to a strategic decision to reduce some of the aftermarket parts we offer and to relocation expenses incurred associated with the restructuring plans. The aftermarket parts were written down to their estimated scrap value less costs to sell. In the first quarter of 2001, our Board of Directors approved a restructuring plan in response to increasingly difficult industry conditions. On January 31, 2001, we announced plans to eliminate up to 405 salaried positions worldwide. We recorded pre-tax charges related to the restructuring of $11 million, $8 million after tax, or $.21 per diluted common share. Within the statement of income, $2 million of the pre-tax charge is reflected in cost of sales, while $9 million is included in selling, general, and administrative expenses. These charges are comprised of $8 million for severance and related costs for salaried employment reductions worldwide and $3 million for costs related to closing a testing facility in North America. As of September 30, 2001, we have eliminated about 290 positions in connection with this plan. We also incurred $4 million for other restructuring related costs and expenses such as relocation and moving costs that could not be accrued as part of the restructuring reserve. We estimate that we will complete these restructuring activities no later than the first quarter 2002. All workforce reductions are being done in compliance with all legal and contractual requirements including obligations to consult with worker committees, union representatives and others. In the second quarter of 2001, our Board of Directors approved a separate restructuring plan related to closing a North American ride control production line. We recorded pre-tax charges related to the plan of $8 million, $6 million after tax, or $.16 per diluted common share. Within the statement of income, the $8 million charge is included in cost of sales and relates primarily to impairing the assets related to the production line to their fair value, less costs to sell. As a result of the single purpose nature of the machinery and equipment to be disposed of, fair value was estimated to be scrap value less costs to dispose in most cases. We do not expect that cash proceeds on the sale of these assets will be significant. We expect to complete all restructuring activities related to this plan by the end of 2001. 27 Amounts related to activities that are part of the restructuring plans are as follows:
DECEMBER 31, 2000 2001 2001 CHARGED TO IMPACT OF SEPTEMBER 30, 2001 RESTRUCTURING RESTRUCTURING CASH ASSET EXCHANGE RESTRUCTURING RESERVE CHARGES PAYMENTS ACCOUNTS RATES RESERVE ----------------- ------------- -------- ---------- --------- ------------------ Severance............ $23 $ 8 $(18) $-- $(1) $12 Asset Impairment..... -- 9 -- (9) -- -- Facility exit costs.............. 3 2 (1) -- (1) 3 --- --- ---- --- --- --- $26 $19 $(19) $(9) $(2) $15 === === ==== === === ===
In addition to the actions taken through the end of the third quarter, we are evaluating additional opportunities to initiate actions that will reduce our costs through implementing the most appropriate and efficient logistics, distribution, and manufacturing footprint for the future. Any actions that we take will require the approval of our Board of Directors and any workforce reductions that result will be done in compliance with all legal and contractual requirements including obligations to consult with worker committees, union representatives, and others. While the actions we expect to initiate the fourth quarter of 2001 are still being developed, we expect to record a significant restructuring charge in the fourth quarter that could range up to $32 million. Also, we currently estimate that we will incur about $2 million of expense during the remainder of 2001 with respect to restructuring-related costs and expenses for actions that have already been announced that could not be accrued as part of the restructuring reserve. CHANGES IN ACCOUNTING PRINCIPLES In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes new accounting and reporting standards requiring that all derivative instruments, including derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. This statement cannot be applied retroactively and is effective for all fiscal years beginning after June 15, 2000. We adopted this statement effective January 1, 2001 and it did not have a significant impact on our financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." This SAB provides guidance on the recognition, presentation, and disclosure of revenue in the financial statements and is effective no later than the fourth quarter of fiscal years beginning after December 15, 1999. The SAB draws on the existing accounting rules and defines the basic criteria that must be met before we can record revenue. The impact of adopting SAB 101 did not have a significant effect on our results of operations or financial position. In May 2000, the FASB's Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-14, Accounting for Certain Sales Incentives. This issue addresses the recognition, measurement, and income statement classification of various types of sales incentives, including discounts, coupons, rebates, and free products. Consequently, beginning January 1, 2001, we classified some incentives that were previously shown in selling, general, and administrative expense as a reduction in revenues. As a result of the change, revenue was $12 million lower for the first nine months of 2001, with an offsetting decline in selling, general, and administrative expenses. We have restated prior year results for comparability, resulting in a reduction in net sales of $15 million for the nine months ended September 30, 2000, with an offsetting reduction in selling, general, and administrative expense. In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for purchased 28 goodwill from an amortization method to an impairment-only approach. Therefore amortization of all purchased goodwill, including amortization of goodwill recorded in past business combinations, will cease upon adoption of SFAS No. 142. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early adoption of the SFAS No. 142 is not permitted nor is retroactive application to prior period (interim or annual) financial statements. At the end of the third quarter, the balance of unamortized goodwill was $439 million. Goodwill is being amortized at the rate of $4 million each quarter. We are currently evaluating the effect that this statement may have on our financial position and results of operations. In April 2001, the EITF reached a consensus on Issue No. 00-25, Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products. This consensus requires that consideration provided by a vendor to a purchaser of the vendor's products be recognized as a reduction of sales, except in those instances where an identifiable and measurable benefit is or will be received by the vendor from the purchaser. Issue No. 00-25 requires effective with the fourth quarter of 2001 that certain expenses that historically have been included in selling, general and administrative costs be reclassified as deductions from sales. We do not believe adopting this statement will have a significant impact on our financial position or results of operations. RESULTS FROM OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 NET SALES AND OPERATING REVENUES
NINE MONTHS ENDED SEPTEMBER 30, ---------------- 2001 2000 CHANGE ---- ---- ------ (MILLIONS) North America............................................... $1,368 $1,507 (9)% Europe...................................................... 998 927 8% Rest of World............................................... 240 251 (4)% ------ ------ $2,606 $2,685 (3)% ====== ======
Results for 2000 have been reclassified for comparability to reflect the reclassification of certain sales incentives. This reclassification is made in accordance with the provisions of the FASB's Emerging Issues Task Force May 2000 consensus on Issue No. 00-14, Accounting for Certain Sales Incentives. Effective January 1, 2001, we changed the way we classify some sales incentives in accordance with the consensus reached by the EITF. The impact of this reclassification on third quarter 2000 results was a reduction in net sales of $15 million with an offsetting reduction in selling, general, and administrative expense. Our North American revenues decreased $139 million in the first nine months of 2001 compared to the same period in the prior year reflecting lower sales generated from both our original equipment and aftermarket businesses. OE revenues declined 10 percent to $969 million in the current year due to significant OE production cut backs in both the light and heavy-duty vehicle segments as vehicle manufacturers adjusted production levels in the face of a slowing economy. OE ride control revenues were down 19 percent for the nine months ended September 30, 2001. OE emissions control revenues declined 6 percent which is attributable to the $91 million decline in volume partially offset by the $54 million increase in catalytic converter revenues due to increased cost of precious metals that are passed through to our customers. Lower ride control volumes, especially in our heavy-duty elastomer business, resulted in the decline in OE ride control revenues. Aftermarket revenues for North America were $399 million in the first nine months of 2001, representing a decline of 8 percent compared to the same period in the prior year. Excluding this increase in pass through customer revenues, OE emissions control revenues declined 16 percent. Lower industry volumes continue to impact our North American aftermarket business. Aftermarket emissions control revenues declined 14 percent in the first nine months, while our aftermarket ride control revenues dropped 5 percent compared to a year ago. Lower volumes accounted for $46 million of the reduction in aftermarket revenues. This was partially offset by the initial order with a new ride control customer in the third quarter of 2001. Price 29 increases implemented on some products in North America in the first and second quarters of 2001 have taken hold and have more than offset negative price adjustments that were initiated during 2000. Our European segment's revenues increased $71 million in the first nine months of 2001 compared to last year due primarily to a 20 percent increase in OE revenues, which were $755 million for the nine months. Contributing to the OE revenue increase were stronger exhaust volumes in both our new and existing programs, which added $166 million of additional revenue in the half. Of that increase, $88 million came as a result of rising precious metal prices that we have passed through to our OE exhaust customers. The devaluation of European currencies compared to the U.S. dollar resulted in a reduction in OE revenues of $39 million in the nine months ended September 30, 2001. Excluding these currency impacts, European OE revenues would have increased 26 percent in the first nine months of 2001 compared to the first nine months of 2000. European aftermarket sales were $243 million in the first nine months of this year compared to $296 million in the prior year. This 18 percent decline resulted from the continued softness of the aftermarket industry combined with declining exhaust replacement rates due primarily to the increasing use of longer lasting stainless steel. Price increases that relate to our global aftermarket pricing strategy provided favorable results in the first nine months of 2001 contributing some positive revenue growth and helping to partially offset the impact from lower volumes. Negatively impacting European aftermarket revenue growth was the depreciation of European currencies, which reduced revenues by $10 million. Revenues from our operations in the rest of the world, specifically South America, Australia and Asia, decreased $11 million in the nine months ended September 30, 2001 primarily due to $31 million of negative foreign currency adjustments impacting the results for the first nine months. Excluding these currency impacts, total revenues for the rest of the world would have increased 3 percent compared to the same period last year. The impact of foreign currency was $18 million in South America and $13 million in Australia. This was offset by strong volume growth in South America and Asia. The South America volume growth is attributable to several new OE programs. In Asia, OE volumes increased for the first nine months due to the new platforms in production at our exhaust manufacturing facility in Shanghai. EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT") We reported EBIT of $90 million for the first nine months of 2001, compared to $162 million for the same period last year. Reported results for 2001 include restructuring and other charges that have an effect on comparability of EBIT results between the years. To provide enhanced comparability, we have separately identified these costs and charges by segment in the following table, and will discuss our results in the following section using a comparison of "2001 Operating Units Results" to the "2000 Reported Results" for each segment.
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------- 2001 2000 -------------------------------------- -------- RESTRUCTURING OPERATING REPORTED AND OTHER UNITS REPORTED RESULTS CHARGES RESULTS RESULTS CHANGE -------- ------------- --------- -------- ------ (MILLIONS) North America................................. $40 $19 $ 59 $103 (43)% Europe........................................ 39 8 47 48 (2)% Rest of World................................. 11 3 14 15 (7)% Other......................................... -- -- -- (4) NA --- --- ---- ---- $90 $30 $120 $162 (26)% === === ==== ====
In the preceding table, amounts reported as restructuring and other charges for 2001 include: $19 million related to the 2001 restructuring plans; $3 million for other restructuring related costs and expenses such as relocation and moving costs that could not be accrued as part of the restructuring reserve; $6 million for environmental remediation activity, principally in Europe; and $2 million related to costs associated with the amendment of certain terms of our senior credit facility. For further details of these costs see the sections 30 entitled "Restructuring Charges," and "Liquidity and Capital Resources -- Capitalization" elsewhere in this Management's Discussion and Analysis. EBIT for North American operations declined to $59 million in the first nine months of 2001 from $103 million one year ago as weaker sales volumes in both our OE and aftermarket segments impacted our earnings in the first nine months of 2001. A drop in both the light and heavy-duty vehicle production volumes and a decline in the higher margin elastomer business combined to reduce EBIT for the North American OE business by over $19 million. Further contributing to the decline in EBIT in North American OE operations were unfavorable pricing impacts, volume related operating inefficiencies, inventory shrinkage, and foreign currency impacts. North American aftermarket EBIT increased over the prior year. Lower selling, general and administrative expenses and cost savings generated from our restructuring efforts of $23 million were partially offset by aftermarket industry weaknesses, which affected volumes and bad debt. Also contributing to the aftermarket EBIT increase were price increases implemented in the first and second quarters of 2001 which have more than offset negative price adjustments implemented during 2000. Lower volumes resulted in reduced EBIT of $21 million. We also incurred increased customer changeover costs of $6 million compared to last year, primarily associated with a new ride control customer. Our European segment's EBIT declined $1 million to $47 million during the first nine months of 2001 versus the prior year. Foreign currency movements in Europe impacted EBIT by $4 million in the period. Our European OE business posted improved results. The OE exhaust business benefited from higher volumes and savings from restructuring initiatives. Our European aftermarket operations had mixed results despite continued weaknesses in the overall industry, as the aftermarket exhaust business had improved EBIT while ride control EBIT declined consistent with the trends in the industry. Lower selling, general and administrative expenses, cost savings generated from our restructuring efforts and price increases helped offset the industry weakness. EBIT for the company's operations in the rest of the world declined by $1 million in the nine months ended September 30, 2001 compared to the same period one year ago. Included in the rest of world results were the impact of foreign currency devaluation of $2 million. This was partially offset by our Asia operations where EBIT improved in the first 9 months primarily due to stronger volumes in our OE exhaust operations in Shanghai. EBIT AS A PERCENTAGE OF REVENUE The following table shows EBIT as a percentage of revenue by segment. The EBIT percentage for the nine months ended September 30, 2001 is calculated after excluding the "restructuring and other charges" described previously.
NINE MONTHS ENDED SEPTEMBER 30, --------------- 2001 2000 ---- ---- North America............................................... 4% 7% Europe...................................................... 5% 5% Rest of World............................................... 6% 6% Total Tenneco Automotive............................. 5% 6%
In North America, EBIT as a percentage of revenue decreased by 3 percent. Production cuts by vehicle manufacturers, declines in higher margin elastomer sales and pricing pressure from vehicle manufacturers contributed to the lower margins in our OE business. In the North America aftermarket, EBIT as a percentage of revenue improved due to lower SG&A expenses and increased prices. In Europe, EBIT margins were even in the first nine months. Our OE exhaust margins are being impacted by increased precious metals prices that are passed through to our customers with marginal EBIT associated. The impact of precious metals on sales for the first nine months of this year was $88 million. Significant improvements in OE exhaust operations and were offset by costs associated with the Polish ride control plant start-up, reserves for bad debt, currency impacts and lower aftermarket volumes. EBIT as a percentage of revenue for the rest of the world 31 were even in the first nine months of 2001 despite the impact of foreign currency devaluation. Stronger volumes and improved mix offset the foreign currency devaluation. INTEREST EXPENSE, NET OF INTEREST CAPITALIZED We reported interest expense of $132 million during the nine months ended September 30, 2001, compared to $139 million during the same period in 2000. The decrease in total interest expense is primarily due to lower interest rates on our variable rate debt. See more detailed explanations on our debt structure in "Liquidity and Capital Resources--Capitalization" later in this Management's Discussion and Analysis. INCOME TAXES Income taxes were a $12 million benefit at September 30, 2001. For the same period in 2000, income taxes were $1 million benefit. The effective tax during the nine months ended September 30, 2001, was 29 percent compared to 31 percent for the same period in 2000. The prior year effective rate benefitted from a strategic decision to consolidate all of our Mexican operations into one tax entity, allowing us to utilize additional tax losses. EARNINGS PER SHARE We reported a loss in earnings per diluted common share of $.83 for the nine months ended September 30, 2001, compared to a loss of $.77 per diluted common share for June 30, 2001. In the nine months ended September 30, 2000, earnings per diluted common share were at $.61. Included in results for the first nine months of 2001 are the impacts from charges related to our restructuring plans, environmental remediation activities and the costs related to the amendment of certain terms of the senior credit facility. The cumulative negative effect of these items on earnings per diluted common share was a reduction of $.56 for the first nine months of this year. The majority of the impact was comprised of the restructuring charges taken in the first and second quarters of 2001 and the environmental costs which negatively impacted earnings per share by $.41 and $.11, respectively. You should also read Note 7 in the "Notes to Financial Statements" for more detailed information on earnings per share. LIQUIDITY AND CAPITAL RESOURCES CAPITALIZATION
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ Short-term debt and current portion of long-term debt....... $ 142 $ 92 Long-term debt.............................................. 1,359 1,435 ------ ------ Total debt.................................................. 1,501 1,527 ------ ------ Total minority interest..................................... 15 14 Common shareholders' equity................................. 242 330 ------ ------ Total capitalization........................................ $1,758 $1,871 ====== ======
The company's debt to capitalization ratio was 85 percent at September 30, 2001 and 82 percent as of December 31, 2000. The increase in the ratio was attributable to a decline in shareholders' equity, partially offset by a decline in total debt. The year-to-date decline in shareholders' equity results from the translation of foreign balance sheets into U.S. dollars, where the strength of the dollar resulted in translation adjustments of $46 million, the fair market value adjustment of interest rate swaps of $18 million and our recorded net loss of $31 million. Short-term debt, which includes the current portion of long-term obligations and borrowings by foreign subsidiaries as well as our revolving credit facility, increased by $50 million during the first nine months of 2001. This increase resulted from a $62 million increase in the amount of long-term debt that will mature in one year or less offset by lower borrowings of $12 million at September 30, 2001, under our revolving credit facility. There were no borrowings outstanding under our revolving credit facility as of September 30, 2001, and $12 million as of December 31, 2000. Long-term debt includes borrowings under financing arrangements 32 entered into to facilitate the debt realignment described below, approximately $16 million of debt that was not retired in the cash tender and exchange offers associated with the 1999 spin-off of our packaging business and other long term obligations such as capitalized leases. As part of the realignment of debt that was required in order to complete the spin-off of the packaging business in 1999, we entered into a $1.55 billion committed senior secured financing arrangement with a syndicate of banks and other financial institutions. The company entered into an agreement to amend this facility on October 20, 2000 to (i) relax the financial covenant ratios beginning in the fourth quarter of 2000, (ii) exclude up to $80 million of cash charges and expenses related to cost reduction initiatives from the calculation of consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") used in our financial covenant ratios through 2001 and (iii) make certain other technical changes. In exchange for these amendments, we agreed to certain interest rate increases, lowered our capital expenditure limits and paid an aggregate fee of about $3 million. As a result of significant reductions in North American vehicle production levels announced by our original equipment customers since the fourth quarter of last year, as well as an accelerated weakening of the global aftermarket, we entered into a second amendment of our senior credit facility on March 22, 2001. The second amendment revised the financial covenant ratios we are required to maintain for each of the fiscal quarters ending in 2001. The second amendment also reduced the limitation on 2001 capital expenditures from $225 million to $150 million, and required that net cash proceeds from all significant, non-ordinary course asset sales be used to prepay the senior term loans. In exchange for these amendments, we agreed to a 25 basis point increase in interest rates on the senior term loans and borrowings under our revolving credit facility and paid an aggregate fee of about $3 million to consenting lenders. We incurred legal, advisory and other costs related to the amendment process of approximately $2 million. The amendment also provides for the continued availability of the full amount of the $500 million revolving credit facility. Excluding the $57 million of letters of credit, we had $443 million available for borrowing under the revolving credit facility at September 30, 2001. Based on our current projections for 2001, we believe that we will be able to meet the revised financial covenant ratios and adhere to the limitation on capital expenditures. The senior secured credit facility, as amended on March 22, 2001, consists of: (i) a $500 million revolving credit facility with a final maturity date of November 4, 2005; (ii) a $406 million term loan with a final maturity date of November 4, 2005; (iii) a $270 million term loan with a final maturity date of November 4, 2007; and (iv) a $270 million term loan with a final maturity date of May 4, 2008. A portion of each term loan is payable in quarterly installments beginning October 1, 2001. Borrowings under the facility bear interest at an annual rate equal to, at the borrower's option, either (i) the London Interbank Offering Rate plus a margin of 325 basis points for the revolving credit facility and the term loan maturing November 4, 2005, 375 basis points for the term loan maturing November 4, 2007 and 400 basis points for the term loan maturing May 4, 2008; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 225 basis points for the revolving credit facility and the term loan maturing November 4, 2005, 275 basis points for the term loan maturing November 4, 2007 and 300 basis points for the term loan maturing May 4, 2008. Under the provisions of the senior credit facility agreement, the interest margins for borrowings under the revolving credit facility and the term loan maturing November 4, 2005 may be adjusted based on the consolidated leverage ratio (consolidated indebtedness divided by consolidated EBITDA as defined in the senior credit facility agreement) measured at the end of each quarter. The amended senior credit facility agreement requires that the company maintain: (i) a consolidated leverage ratio (consolidated indebtedness divided by consolidated EBITDA) not greater than 6.00 at the end of the first quarter of 2001 and not greater than 6.25, 6.00 and 5.50 at the end of the second, third and fourth quarters of 2001, respectively: (ii) a consolidated interest coverage ratio (consolidated EBITDA divided by consolidated cash interest paid) of at least 1.40 for the first quarter of 2001 and at least 1.35, 1.40 and 1.55 for the second, third and fourth quarters of 2001, respectively; and (iii) a fixed charge coverage ratio (consolidated EBITDA less consolidated capital expenditures, divided by consolidated cash interest paid) greater than .60 for the first quarter of 2001 and greater than .55, .65 and .80 for the second, third and fourth 33 quarters of 2001, respectively. As of September 30, 2001 we were in compliance with the financial covenant ratios required under the amended senior credit facility. The senior credit facility agreement also contains restrictions on our operations that are customary for similar facilities, including limitations on: (a) incurring additional liens; (b) sale and leaseback transactions; (c) liquidations and dissolutions (d) incurring additional indebtedness or guarantees; (e) capital expenditures; (f) dividends; (g) mergers and consolidations; and (h) prepayments and modifications of subordinated and other debt instruments. Compliance with these requirements and restrictions is a condition for any incremental borrowings under the senior credit facility agreement and failure to meet these requirements enables the lenders to require repayment of any outstanding loans. As of September 30, 2001, we were in compliance with these requirements. The company's outstanding debt also includes $500 million of 11 5/8 percent Senior Subordinated Notes due 2009. The senior subordinated debt indenture requires that we, as a condition to incurring certain types of indebtedness not otherwise permitted, initially maintain an interest coverage ratio of not less than 2.00. Under the terms of the indenture, the minimum interest coverage ratio increases to 2.25 beginning on October 15, 2001. The indenture also contains restrictions on our operations, including limitations on: (1) incurring additional indebtedness or liens; (2) dividends; (3) distributions and stock repurchases; (4) investments; and (5) mergers and consolidations. All of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee these notes on a joint and several basis. There are no significant restrictions on the ability of the subsidiaries that have guaranteed these notes to make distributions to us. We expect to maintain compliance with the financial covenants and other requirements of our loan agreements through the end of 2001. In order to maintain compliance with financial covenants in our senior loan agreement beyond 2001, we currently believe it will be necessary to further amend these covenants. While no assurances can be given, we believe we can negotiate these amendments at a reasonable cost. We believe that cash flows from operations, combined with available borrowing capacity described above and assuming that we maintain compliance with the financial covenants and other requirements of our senior loan agreement, as they may be amended, will generally be sufficient to meet our future capital requirements for the following year. Our ability to meet the financial covenants in 2001 and beyond depends upon a number of operational and economic factors, many of which are beyond our control. Factors that could impact our compliance with the financial covenants include the rate at which consumers continue to buy new vehicles and the rate at which they continue to repair vehicles already in service. Persistently lower North American vehicle production levels, further weakening in the global aftermarket beyond our expectation, or a reduction in vehicle production levels in Europe, could impact our ability to meet our financial covenant ratios. In the event that we are unable to meet these revised financial covenants, we would consider several options to meet our cash flow needs. These options could include further renegotiations with our senior credit lenders, additional cost reduction or restructuring initiatives, sales of assets or capital stock, or other alternatives to enhance our financial and operating position. DIVIDENDS ON COMMON STOCK During 2000, the company paid quarterly dividends of $.05 per common share. These dividend payments totaled $5 million for the nine months ended September 30, 2000, and $7 million for the entire year. On January 10, 2001, the Company announced that the Board of Directors had eliminated the quarterly regular dividend on the company's common stock. The board took the action in response to current industry conditions, significantly greater than anticipated production volume reductions by original equipment manufacturers and continued softness in the global light vehicle aftermarket. 34 CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 2001 2000 ---- ---- Cash provided (used) by: Operating activities...................................... $149 $203 Investing activities...................................... (81) (121) Financing activities...................................... (13) (93)
OPERATING ACTIVITIES For the nine months ended September 30, 2001 and September 30, 2000 cash provided from operating activities represented $149 million and $203 million, respectively. Lower earnings in the first nine months of 2001 was a key driver of the decreased cash provided. This was partially offset by our continued focus on working capital that allowed us to use $75 million less cash on working capital before factoring of accounts receivable during the first nine months of 2001 compared with the same period in the prior year. Reduced accounts receivable and inventory made a favorable impact on cash flows in the current period compared to last year. Working capital, adjusted for receivables that were sold as of September 30, 2001, was $152 million lower than it was as of September 30, 2000. During the first nine months of this year, we increased the size of the U.S. receivables securitization program by $3 million and our European program by $3 million. In the same period in the prior year our factoring programs in Europe and North America provided $76 million of cash. We have also entered into arrangements with two major OE customers in North America under which payments to Tenneco Automotive for product sales are made earlier then otherwise required under existing payment terms. These arrangements reduced accounts receivable by $26 million as of September 30, 2001. Included in our 2001 results is a $7 million pension plan contribution. No contribution was made in the prior year period. INVESTING ACTIVITIES Cash used for investing activities was $40 million lower for the nine months ended September 30, 2001, compared to the same period a year ago due to lower expenditures for property, plant and equipment. Capital expenditures were $74 million for the nine months ended September 30, 2001, down from $108 million in the first nine months of last year. FINANCING ACTIVITIES Cash used by financing activities was $13 million for the first nine months of 2001 compared to $93 million of cash used for the first nine months of 2000. The decrease in the first nine months of this year is attributable to a prepayment of long term debt in 2000. The first nine months of 2000 includes a $25 million decrease in short-term debt and $5 million of dividend payments to our common shareholders. INTEREST RATE RISK Financial instruments that are sensitive to market risk for changes in interest rates are our debt securities. We primarily use a revolving credit facility to finance our short-term capital requirements and pay a current market rate of interest on these borrowings. Longer-term capital requirements were financed with long-term obligations with original maturity dates ranging from six to ten years. Under the terms of the senior credit facility agreement, we were required to hedge our exposure to floating interest rates within 180 days following the 1999 spin-off of the packaging business so that at least 50 percent of the long-term debt would be fixed for a period of at least three years. In February 2000, $250 million of floating rate long-term debt was hedged with three-year, floating to fixed interest rate swaps. In April 2000, an additional $50 million of floating rate long-term debt was hedged with three-year, floating to fixed interest rate swaps. The hedges that were executed fully satisfied the interest rate-hedging requirement of 35 the senior credit facility agreement. These swaps are accounted for as cash flow hedges, with changes in value recorded as a component of accumulated comprehensive income on the balance sheet. As of September 30, 2001, $18 million of deferred net losses on derivative instruments has been accumulated in other comprehensive income. At September 30, 2001, we had approximately $542 million in long-term debt obligations that have fixed interest rates and approximately $817 million in long-term debt obligations that have variable interest rates based on a current market rate of interest. We estimate that the fair value of the company's long-term debt at September 30, 2001 was about 59 percent of its book value. A one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense that is recognized in the income statement and the cash that is paid for interest costs by about $8 million, or approximately $5 million on an after-tax basis. OUTLOOK In late fourth quarter 2000, several of the company's major North American original equipment customers began announcing significant reductions in scheduled vehicle production levels. Based on these reductions, we anticipate that the North American original equipment manufacturer build rate for light vehicles in 2001 will be down from 2000 levels in the range of 10 percent to 12 percent and that weaknesses in the heavy-duty truck market will continue through 2001 and into 2002. While we originally expected that the European original equipment build rate would be approximately 20 million units, expected weakness in Europe during the second half of 2001 could lower that build rate. The global aftermarket exhibited a further weakening of demand for replacement parts during the latter portion of last year. We anticipate that there will be further declines in the global aftermarket industry in the range of 6 percent to 10 percent in 2001. In addition, we anticipate continuing negative impacts in 2001 due to the uncertain economic outlook in South America and currency translation in Europe and Australia. Based on anticipated vehicle production levels our global original equipment customer book of business is currently $2,305 million, $2,533 million, and $2,583 million for 2002, 2003, and 2004, respectively. When we refer to our book of business, we mean revenues for original equipment manufacturer programs that have been formally awarded to us as well as programs which we are highly confident will result in revenues based on either informal customer indications consistent with past practices and/or our status as supplier for the existing program and relationship with the customer. This book of business is subject to increase or decrease due to changes in customer requirements, customer and consumer preferences, and the number of vehicles actually produced by our customers. In addition, it is based on our anticipated pricing for the applicable program over its life. However, we are under continuing pricing pressure from our OE customers. See "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995". EURO CONVERSION The European Monetary Union resulted in the adoption of a common currency, the "euro," among eleven European nations. The euro is being adopted over a three-year transition period beginning January 1, 1999. In October 1997, we established a cross-functional Euro Committee, comprised of representatives of the Company's operational divisions as well as its corporate offices. That Committee had two principal objectives: (1) to determine the impact of the euro on our business operations, and (2) to recommend and facilitate implementation of those steps necessary to ensure that the company would be fully prepared for the euro's introduction. As of January 1, 1999, we implemented those euro conversion procedures that we had determined to be necessary and prudent to adopt by that date, and we are on track to becoming fully "euro ready" on or before the conclusion of the three-year euro transition period. We believe that the costs associated with transitioning to the euro will not be material to our financial position or results of operations. ENVIRONMENTAL AND OTHER MATTERS We and some of our subsidiaries and affiliates are parties to environmental proceedings. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to 36 current operations. We expense expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation. We record liabilities when environmental assessments indicate that remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. We consider all available evidence including prior experience in remediation of contaminated sites, other companies' cleanup experience and data released by the United States Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. Where future cash flows are fixed or reliably determinable, we have discounted the liabilities. All other environmental liabilities are recorded at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our financial statements. As of September 30, 2001, the company continues to be designated as a potentially responsible party in three Superfund sites. We have estimated our share of the remediation costs for these sites to be approximately $1 million in the aggregate. In addition to the Superfund sites, we may have the obligation to remediate current or former facilities, and we estimate our share of remediation costs at these facilities to be approximately $24 million. For both the Superfund sites and the current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision, as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties has been considered, where appropriate, in our determination of our estimated liability. As we previously disclosed, we undertook a third-party evaluation of estimated environmental remediation costs at one of our facilities beginning in 2000. The evaluation was initiated as a result of testing that indicated the potential underground migration of some contaminants beyond our facility property. We have completed and analyzed the results of our evaluation of off-site contamination migration from that facility and as a result we have increased the environmental remediation reserve we had for this facility by $5 million through a charge to income in the first quarter 2001. We also increased our estimate of environmental remediation reserves for three other locations by a total of $1 million in the first quarter of 2001. Additionally, in the first quarter of 2001 we reached an agreement with a third party to assume responsibility for remediation of a location at which we previously shared responsibility. In exchange, we received cash and a note for a total of $4 million, the estimate of the third party's share of the total remediation liability. We increased our environmental liability estimate for this location by $4 million as a result. These amounts are reflected in our estimation of remediation costs described above. We believe that these potential costs, as well as the costs associated with our current status as a potentially responsible party in the Superfund sites, or as a liable party at our current or former facilities, will not be material to our consolidated financial position or results of operations. EMPLOYEE STOCK OWNERSHIP PLANS We have established Employee Stock Ownership Plans (401(k) Plans) for the benefit of our employees. Under the plans, participants may elect to defer up to 16 percent of their salary through contributions to the plan, which are invested in selected mutual funds or used to buy our common stock. Through December 31, 2000, the company matched qualified employee contributions of up to 8 percent of the employee's salary with a contribution matching 100 percent of each employee's contribution. Beginning January 1, 2001 this match was reduced to 75 percent of each employee's contribution up to 8 percent of the employee's salary. These matching contributions are made in common stock and vest immediately. We incurred costs for these matching contributions of approximately $7 million and $11 million for the nine months ended September 30, 2001 and 2000, respectively. 37 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding our exposure to interest rate risk, see the caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated herein by reference. 38 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The exhibits filed with this report are listed on the Exhibit Index following the signature page of this report, which is incorporated herein by reference. (b) Reports on Form 8-K. We filed the following Current Reports on Form 8-K during the quarter ended September 30, 2001: Current Report on Form 8-K dated July 24, 2001, including pursuant to Item 5 certain information pertaining to the results of our operations for the second quarter 2001. 39 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, Tenneco Automotive Inc. has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TENNECO AUTOMOTIVE INC. By: /s/ MARK A. MCCOLLUM ------------------------------------ Mark A. McCollum Senior Vice President and Chief Financial Officer Dated: November 14, 2001 40 INDEX TO EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2 -- None. 3.1(a) -- Restated Certificate of Incorporation of the registrant dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(a) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(b) -- Certificate of Amendment, dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(c) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(c) -- Certificate of Ownership and Merger, dated July 8, 1997 (incorporated herein by reference from Exhibit 3.1(d) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(d) -- Certificate of Designation of Series B Junior Participating Preferred Stock dated September 9, 1998 (incorporated herein by reference from Exhibit 3.1(d) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 3.1(e) -- Certificate of Elimination of the Series A Participating Junior Preferred Stock of the registrant dated September 11, 1998 (incorporated herein by reference from Exhibit 3.1(e) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 3.1(f) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(f) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(g) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(g) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(h) -- Certificate of Ownership and Merger merging Tenneco Automotive Merger Sub Inc. with and into the registrant, dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(h) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(i) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated May 9, 2000 (incorporated herein by reference from Exhibit 3.1(i) of the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 1-12387). 3.2(a) -- By-laws of the registrant, as amended March 14, 2000 (incorporated herein by reference from Exhibit 3.2(a) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 1-12387). 3.3 -- Certificate of Incorporation of Tenneco Global Holdings Inc. ("Global"), as amended (incorporated herein by reference to Exhibit 3.3 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.4 -- By-laws of Global (incorporated herein by reference to Exhibit 3.4 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.5 -- Certificate of Incorporation of TMC Texas Inc. ("TMC") (incorporated herein by reference to Exhibit 3.5 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.6 -- By-laws of TMC (incorporated herein by reference to Exhibit 3.6 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.7 -- Amended and Restate Certificate of Incorporation of Tenneco International Holding Corp. ("TIHC") (incorporated herein by reference to Exhibit 3.7 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.8 -- Amended and Restated By-laws of TIHC (incorporated herein by reference to Exhibit 3.8 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.9 -- Certificate of Incorporation of Clevite Industries Inc. ("Clevite"), as amended (incorporated herein by reference to Exhibit 3.9 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.10 -- By-laws of Clevite (incorporated herein by reference to Exhibit 3.10 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.11 -- Amended and Restated Certificate of Incorporation of the Pullman Company ("Pullman") (incorporated herein by reference to Exhibit 3.11 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.12 -- By-laws of Pullman (incorporated herein by reference to Exhibit 3.12 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.13 -- Certificate of Incorporation of Tenneco Automotive Operating Company Inc. ("Operating") (incorporated herein by reference to Exhibit 3.13 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.14 -- By-laws of Operating (incorporated herein by reference to Exhibit 3.14 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 4.1(a) -- Rights Agreement dated as of September 8, 1998, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.1 of the registrant's Current Report on Form 8-K dated September 24, 1998, File No. 1-12387). 4.1(b) -- Amendment No. 1 to Rights Agreement, dated March 14, 2000, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.1(b) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 1-12387). 4.1(c) -- Amendment No. 2 to Rights Agreement, dated February 5, 2001, by and between the registrant and First Union National Bank, as Rights Agent (incorporated herein by reference from Exhibit 4.1(b) of the registrant's Post-Effective Amendment No. 3 dated February 26, 2001, to its Registration Statement on Form 8-A dated September 17, 1998). 4.2(a) -- Indenture, dated as of November 1, 1996, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of the registrant's Registration Statement on Form S-4, Registration No. 333-14003). 4.2(b) -- First Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(b) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(c) -- Second Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(c) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(d) -- Third Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(d) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.2(e) -- Fourth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(e) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(f) -- Fifth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(f) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(g) -- Sixth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(g) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(h) -- Seventh Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(h) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(i) -- Eighth Supplemental Indenture, dated as of April 28, 1997, to Indenture, dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of the registrant's Current Report on Form 8-K dated April 23, 1997, File No. 1-12387). 4.2(j) -- Ninth Supplemental Indenture, dated as of April 28, 1997, to Indenture, dated as of November 1, 1996, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.2 of the registrant's Current Report on Form 8-K dated April 23, 1997, File No. 1-12387). 4.2(k) -- Tenth Supplemental Indenture, dated as of July 16, 1997, to Indenture, dated as of November 1, 1996, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of the registrant's Current Report on Form 8-K dated June 11, 1997, File No. 1-12387). 4.2(l) -- Eleventh Supplemental Indenture, dated October 21, 1999, to Indenture dated November 1, 1996 between The Chase Manhattan Bank, as Trustee, and the registrant (incorporated herein by reference from Exhibit 4.2(l) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 1-12387). 4.3 -- Specimen stock certificate for Tenneco Automotive Inc. common stock (incorporated herein by reference from Exhibit 4.3 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.4(a) -- Indenture dated October 14, 1999 by and between the registrant and The Bank of New York, as trustee (incorporated herein by reference from Exhibit 4.4(a) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.4(b) -- Supplemental Indenture dated November 4, 1999 among Tenneco Automotive Operating Subsidiary Inc. (formerly Tenneco Automotive Inc.), Tenneco International Holding Corp., Tenneco Global Holdings Inc., the Pullman Company and Clevite Industries Inc. in favor of The Bank of New York, as trustee (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.4(c) -- Subsidiary Guarantee dated as of October 14, 1999 from Tenneco Automotive Operating Subsidiary Inc. (formerly Tenneco Automotive Inc.), Tenneco International Holding Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite Industries Inc. and TMC Texas Inc. in favor of The Bank of New York, as trustee (incorporated herein by reference to Exhibit 4.4(c) to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 4.5(a) -- Credit Agreement, dated as of September 30, 1999, among the registrant, the Lenders named therein, Commerzbank and Bank of America, N.A., Citicorp USA, Inc. and The Chase Manhattan Bank (incorporated herein by reference from Exhibit 4.5(a) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.5(b) -- First Amendment to the Credit Agreement, dated October 20, 2000, among the registrant, The Chase Manhattan Bank and Citicorp USA, Inc. (incorporated herein by reference from Exhibit 4.1 to the registrant's Current Report on Form 8-K dated October 24, 2000, File No. 1-12387). 4.5(c) -- Second Amendment to Credit Agreement, dated as of March 22, 2001, among the registrant, the lenders party thereto and The Chase Manhattan Bank (incorporated by reference to Exhibit 4.1 to the registrant's current report on Form 8-K dated March 22, 2001, File No. 1-12387). 9 -- None. 10.1 -- Distribution Agreement, dated November 1, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 2 of the registrant's Form 10, File No. 1-12387). 10.2 -- Amendment No. 1 to Distribution Agreement, dated as of December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.2 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.3 -- Debt and Cash Allocation Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.3 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.4 -- Benefits Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.4 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.5 -- Insurance Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.5 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.6 -- Tax Sharing Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), Newport News Shipbuilding Inc., the registrant, and El Paso Natural Gas Company (incorporated herein by reference from Exhibit 10.6 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.7 -- First Amendment to Tax Sharing Agreement, dated as of December 11, 1996, among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.7 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.8 -- Tenneco Automotive Inc. Executive Incentive Compensation Plan (incorporated herein by reference from Exhibit 10.8 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.9 -- Tenneco Automotive Inc. Change of Control Severance Benefits Plan for Key Executives (incorporated herein by reference from Exhibit 10.13 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 10.10 -- Tenneco Automotive Inc. Stock Ownership Plan (incorporated herein by reference from Exhibit 10.10 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 10.11 -- Tenneco Automotive Inc. Key Executive Pension Plan (incorporated herein by reference from Exhibit 10.15 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 10.12 -- Tenneco Automotive Inc. Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.16 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 10.13 -- Tenneco Automotive Inc. Supplemental Executive Retirement Plan (incorporated herein by reference from Exhibit 10.17 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 10.14 -- Release Agreement dated as of October 18, 1999 by and between Dana G. Mead and Tenneco Management Company and Modification of Release Agreement dated as of October 18, 1999 among Dana G. Mead, Tenneco Automotive Inc. and Tenneco Management Company (incorporated herein by reference from Exhibit 10.18 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 10.15 -- Release Agreement dated as of September 17, 1999 by and between Robert T. Blakely and Tenneco Management Company and Modification of Release Agreement dated as of September 17, 1999 among Robert T. Blakely, Tenneco Automotive Inc. and Tenneco Management Company (incorporated herein by reference from Exhibit 10.15 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 1-12387). 10.16 -- Agreement, dated as of April 12, 1999, among the registrant, Tenneco Management Company, Tenneco Packaging Inc. and Paul T. Stecko (incorporated herein by reference from Exhibit 10.30 of the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File No. 1-12387). 10.17 -- Human Resources Agreement by and between Tenneco Automotive Inc. and Tenneco Packaging Inc. dated November 4, 1999 (incorporated herein by reference to Exhibit 99.1 to the registrant's Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 10.18 -- Tax Sharing Agreement by and between Tenneco Automotive Inc. and Tenneco Packaging Inc. dated November 3, 1999 (incorporated herein by reference to Exhibit 99.2 to the registrant's Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 10.19 -- Amended and Restated Transition Services Agreement by and between Tenneco Automotive Inc. and Tenneco Packaging Inc. dated as of November 4, 1999 (incorporated herein by reference from Exhibit 10.21 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 10.20 -- Purchase Agreement among Salomon Smith Barney Inc., the other Initial Purchasers as named therein and Tenneco Inc. dated October 8, 1999 (incorporated herein by reference from Exhibit 10.18 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 10.21 -- Registration Rights Agreement among Tenneco Inc., the Guarantors named therein, Salomon Smith Barney Inc. and the other Initial Purchasers named therein dated October 14, 1999 (incorporated herein by reference from Exhibit 10.19 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.22 -- Assumption Agreement among Tenneco Automotive Operating Company Inc., Tenneco International Holding Corp., Tenneco Global Holdings Inc., The Pullman Company, Clevite Industries Inc., TMC Texas Inc., Salomon Smith Barney Inc. and the other Initial Purchasers listed in the Purchase Agreement dated as of November 4, 1999 (incorporated herein by reference from Exhibit 10.20 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 10.23 -- Amendment No. 1 to Change in Control Severance Benefits Plan for Key Executives (incorporated herein by reference from Exhibit 10.23 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.24 -- Letter Agreement dated July 27, 2000 between the registrant and Mark P. Frissora (incorporated herein by reference from Exhibit 10.24 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.25 -- Letter Agreement dated July 27, 2000 between the registrant and Mark A. McCollum (incorporated herein by reference from Exhibit 10.25 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.26 -- Letter Agreement dated July 27, 2000 between the registrant and Richard P. Schneider (incorporated herein by reference from Exhibit 10.26 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.27 -- Letter Agreement dated July 27, 2000 between the registrant and Richard P. Sloan (incorporated herein by reference from Exhibit 10.27 to the registrant's report on Form 10-K for the year ended December 31, 2000, File No. 1-12387). 10.28 -- Letter Agreement dated July 27, 2000 between the registrant and Timothy R. Donovan (incorporated herein by reference from Exhibit 10.28 to the registrant's report on Form 10-K for the year ended December 31, 2000, File No. 1-12387). 10.29 -- Distribution Agreement by and between the registrant and Tenneco Packaging Inc. dated November 3, 1999 (incorporated herein by reference to Exhibit 2 to the registrant's Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 11 -- None. *12 -- Computation of Ratio of Earnings to Fixed Charges. *15 -- Letter Regarding Unaudited Interim Financial Information. 18 -- None. 19 -- None. 22 -- None. 23 -- None. 24 -- None. 99 -- None.
--------------- * Filed herewith 46