-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A8R+lq9SnR95Kd5IUNxrVDZ0HbtJ7snK142QwxtQOsRByWGja+iCFNj3sBTWpXlm CkoWylPXDextQm+VMcV4FA== 0000950137-02-004487.txt : 20020814 0000950137-02-004487.hdr.sgml : 20020814 20020814155100 ACCESSION NUMBER: 0000950137-02-004487 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENNECO AUTOMOTIVE INC CENTRAL INDEX KEY: 0001024725 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 760515284 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12387 FILM NUMBER: 02736263 BUSINESS ADDRESS: STREET 1: 500 NORTH FIELD DRIVE CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 847-482-50 MAIL ADDRESS: STREET 1: 500 N FIELD DR STREET 2: ROOM T 2560B CITY: LAKE FOREST STATE: IL ZIP: 60045 FORMER COMPANY: FORMER CONFORMED NAME: NEW TENNECO INC DATE OF NAME CHANGE: 19961011 10-Q 1 c71168e10vq.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 June 30, 2002 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: 40,058,837 shares as of July 31, 2002. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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............... 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 44 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................................................ 45 Item 5. Other Information................................. * Item 6. Exhibits and Reports on Form 8-K.................. 45
- --------------- * No response to this item is included herein for the reason that it is inapplicable or the answer to such item is negative. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-Q contains forward-looking statements regarding, among other things, our prospects and business strategies. The words "may," "will," "believes," "should," "could," "plans," "expects," "anticipate," "intends," "estimates," and similar expressions (and variations thereof), identify these forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, these expectations may not prove to be correct. Because these forward-looking statements are also subject to risks and uncertainties, actual results may differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include: - 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; 2 - labor disruptions at our facilities or at any of our significant customers or suppliers; - economic, exchange rate and political conditions in the foreign countries where we operate or sell our products; - customer acceptance of new products; - new technologies that reduce the demand for certain of our products or otherwise render them obsolete; - our ability to realize our business strategy of improving operating performance; - capital availability or costs, including changes in interest rates, market perceptions of the industries in which we operate or ratings of securities; - changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies; - the impact of changes in and compliance with laws and regulations, including environmental laws and regulations, and environmental liabilities in excess of the amount reserved; - the impact of product warranty claims and liabilities in respect thereof 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) INDEPENDENT ACCOUNTANTS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TENNECO AUTOMOTIVE INC. We have reviewed the accompanying consolidated balance sheet of Tenneco Automotive Inc. and consolidated subsidiaries as of June 30, 2002, and the related consolidated statements of income (loss) and comprehensive income (loss) for the three-month and six-month periods then ended, and the consolidated statements of cash flows and changes in shareholders' equity for the six-month period ended June 30, 2002. 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 of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Chicago, Illinois July 22, 2002 4 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) REVENUES Net sales and operating revenues........ $ 948 $ 925 $ 1,757 $ 1,789 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)......................... 743 732 1,383 1,438 Engineering, research, and development.......................... 12 12 22 25 Selling, general, and administrative.... 98 95 195 196 Depreciation and amortization of other intangibles.......................... 35 35 69 68 Amortization of goodwill................ -- 4 -- 8 ----------- ----------- ----------- ----------- 888 878 1,669 1,735 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Gain (loss) on sale of assets........... 11 -- 11 -- Gain (loss) on sale of receivables...... -- (1) (1) (3) Other income (loss)..................... -- 1 -- 2 ----------- ----------- ----------- ----------- 11 -- 10 (1) ----------- ----------- ----------- ----------- Income before interest expense, income taxes, and minority interest............ 71 47 98 53 Interest expense (net of interest capitalized)......................... 36 43 72 90 Income tax expense (benefit)............ 16 1 8 (9) Minority interest....................... -- 1 1 1 ----------- ----------- ----------- ----------- NET INCOME (LOSS)......................... $ 19 $ 2 $ 17 $ (29) =========== =========== =========== =========== EARNINGS (LOSS) PER SHARE Average shares of common stock outstanding Basic................................... 39,746,401 37,396,712 39,748,370 36,994,973 Diluted................................. 41,812,025 37,556,085 41,422,775 37,154,129 Earnings (loss) per share of common stock Basic................................... $ .48 $ .06 $ .42 $ (.77) Diluted................................. $ .45 $ .06 $ .41 $ (.77) PRO FORMA EARNINGS (LOSS) PER SHARE EXCLUDING GOODWILL AMORTIZATION Net income (loss)......................... $ 19 $ 5 $ 17 $ (22) Earnings (loss) per share of common stock Basic................................... $ .48 $ .15 $ .42 $ (.59) Diluted................................. $ .45 $ .15 $ .41 $ (.59)
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)
JUNE 30, DECEMBER 31, 2002 2001 -------- ------------ (MILLIONS) ASSETS Current assets: Cash and temporary cash investments....................... $ 52 $ 53 Receivables-- Customer notes and accounts, net........................ 446 380 Other................................................... 11 15 Inventories-- Finished goods.......................................... 152 149 Work in process......................................... 74 69 Raw materials........................................... 70 71 Materials and supplies.................................. 37 37 Deferred income taxes..................................... 70 66 Prepayments and other..................................... 112 101 ------- ------- 1,024 941 Other assets: Long-term notes receivable, net........................... 12 40 Goodwill, net............................................. 411 423 Intangibles, net.......................................... 18 18 Deferred income taxes..................................... 146 128 Pension assets............................................ 35 28 Other..................................................... 137 136 ------- ------- 759 773 ------- ------- Plant, property, and equipment, at cost..................... 1,915 1,835 Less--Reserves for depreciation and amortization.......... 933 868 ------- ------- 982 967 ------- ------- $ 2,765 $ 2,681 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt)................................................... $ 160 $ 191 Trade payables............................................ 500 401 Accrued taxes............................................. 40 35 Accrued interest.......................................... 26 25 Accrued liabilities....................................... 70 76 Other..................................................... 179 148 ------- ------- 975 876 ------- ------- Long-term debt.............................................. 1,261 1,324 ------- ------- Deferred income taxes....................................... 184 166 ------- ------- Postretirement benefits..................................... 186 174 ------- ------- Deferred credits and other liabilities...................... 33 52 ------- ------- Minority interest........................................... 16 15 ------- ------- Commitments and contingencies Shareholders' equity: Common stock.............................................. -- -- Premium on common stock and other capital surplus......... 2,749 2,748 Accumulated other comprehensive loss...................... (357) (375) Retained earnings (accumulated deficit)................... (2,042) (2,059) ------- ------- 350 314 Less--Shares held as treasury stock, at cost.............. 240 240 ------- ------- 110 74 ------- ------- $ 2,765 $ 2,681 ======= =======
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)
SIX MONTHS ENDED JUNE 30, -------------- 2002 2001 ---- ---- (MILLIONS) OPERATING ACTIVITIES Net income (loss)........................................... $ 17 $(29) Adjustments to reconcile income to cash provided (used) by operating activities Depreciation and amortization........ 69 76 Deferred income taxes..................................... (8) (23) (Gain) loss on sale of assets, net........................ (10) 3 Changes in components of working capital-- (Increase) decrease in receivables..................... (50) (61) (Increase) decrease in inventories..................... 9 28 (Increase) decrease in prepayments and other current assets................................................ (4) (20) Increase (decrease) in payables........................ 76 15 Increase (decrease) in accrued taxes................... 2 1 Increase (decrease) in accrued interest................ -- (4) Increase (decrease) in other current liabilities....... 26 12 Other..................................................... (3) 8 ---- ---- Net cash provided by operating activities................... 124 6 ---- ---- INVESTING ACTIVITIES Net proceeds from sale of fixed assets...................... 18 3 Expenditures for plant, property, and equipment............. (52) (47) Investments and other....................................... 13 (4) ---- ---- Net cash provided (used) by investing activities............ (21) (48) ---- ---- NET CASH USED BEFORE FINANCING ACTIVITIES................... 103 (42) FINANCING ACTIVITIES Issuance of common and treasury stock....................... -- 5 Retirement of long-term debt................................ (25) (8) Net increase (decrease) in short-term debt excluding current maturities of long-term debt.............................. (71) 76 ---- ---- Net cash provided (used) by financing activities............ (96) 73 ---- ---- Effect of foreign exchange rate changes on cash and temporary cash investments................................ (8) 4 ---- ---- Increase (decrease) in cash and temporary cash investments............................................... (1) 35 Cash and temporary cash investments, January 1.............. 53 35 ---- ---- Cash and temporary cash investments, June 30 (Note)......... $ 52 $ 70 ==== ==== Cash paid during the period for interest.................... $ 72 $ 93 Cash paid during the period for income taxes (net of refunds).................................................. $ 16 $ 19
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)
SIX MONTHS ENDED JUNE 30, ------------------------------------------- 2002 2001 -------------------- -------------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ (MILLIONS EXCEPT SHARE AMOUNTS) COMMON STOCK Balance January 1................................. 41,355,074 $ -- 37,797,256 $ -- Issued (Reacquired) pursuant to benefit plans... (14,003) -- 1,586,742 -- Stock options exercised......................... (2,711) -- -- -- ---------- ------- ---------- ------- Balance June 30................................... 41,338,360 -- 39,383,998 -- ========== ========== PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS Balance January 1................................. 2,748 2,738 Premium on common stock issued pursuant to benefit plans.............................. 1 5 ------- ------- Balance June 30................................... 2,749 2,743 ACCUMULATED OTHER COMPREHENSIVE LOSS Balance January 1................................. (375) (239) Other comprehensive income (loss)............... 18 (76) ------- ------- Balance June 30................................... (357) (315) ------- ------- RETAINED EARNINGS (ACCUMULATED DEFICIT) Balance January 1................................. (2,059) (1,929) Net income (loss)............................... 17 (29) ------- ------- Balance June 30................................. (2,042) (1,958) ------- ------- LESS--COMMON STOCK HELD AS TREASURY STOCK, AT COST Balance January 1................................. 1,294,692 240 1,298,498 240 Shares issued................................... -- -- 5,670 -- ---------- ---------- Balance June 30................................... 1,294,692 240 1,292,828 240 ========== ------- ========== ------- Total........................................ $ 110 $ 230 ======= =======
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 JUNE 30, ------------------------------------------------------------- 2002 2001 ----------------------------- ----------------------------- ACCUMULATED ACCUMULATED OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME (LOSS) INCOME (LOSS) INCOME (LOSS) INCOME (LOSS) ------------- ------------- ------------- ------------- (MILLIONS) NET INCOME (LOSS)............................. $ 19 $ 2 ---- ---- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CUMULATIVE TRANSLATION ADJUSTMENT Balance April 1............................. $(350) $(291) Translation of foreign currency statements............................. 47 47 (9) (9) ----- ----- Balance June 30............................. (303) (300) ----- ----- FAIR VALUE OF INTEREST RATE SWAPS Balance April 1............................. $ (13) $ (13) Fair value adjustment..................... 1 1 -- (13) ----- ----- Balance June 30............................. (12) (13) ----- ----- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance April 1 and June 30................. (42) (2) ----- ----- Balance June 30............................... $(357) $(315) ===== ---- ===== ---- Other comprehensive income (loss)............. 48 (22) ---- ---- COMPREHENSIVE INCOME (LOSS)................... $ 67 $(20) ==== ====
SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------- 2002 2001 ----------------------------- ----------------------------- ACCUMULATED ACCUMULATED OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME (LOSS) INCOME (LOSS) INCOME (LOSS) INCOME (LOSS) ------------- ------------- ------------- ------------- (MILLIONS) NET INCOME (LOSS)............................. $ 17 $ (29) ---- ----- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CUMULATIVE TRANSLATION ADJUSTMENT Balance January 1........................... $(316) $(237) Translation of foreign currency statements............................. 13 13 (63) (63) ----- ----- Balance June 30............................. (303) (300) ----- ----- FAIR VALUE OF INTEREST RATE SWAPS Balance January 1........................... $ (17) $ (13) Fair value adjustment..................... 5 5 -- (13) ----- ----- Balance June 30............................. (12) (13) ----- ----- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance January 1 and June 30............... (42) (2) ----- ----- Balance June 30............................... $(357) $(315) ===== ---- ===== ----- Other comprehensive income (loss)............. 18 (76) ---- ----- COMPREHENSIVE INCOME (LOSS)................... $ 35 $(105) ==== =====
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) As you read the accompanying financial statements and Management's Discussion and Analysis you should also read our Annual Report on Form 10-K for the year ended December 31, 2001. 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 2002 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. We recorded charges to income for costs related to these plans that do not benefit future activities 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. In the fourth quarter of 2000, our Board of Directors approved a restructuring plan to reduce administrative and operational overhead costs. We recorded, in the fourth quarter of 2000, 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 a 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 700 positions, including temporary employees. We wrote down the assets at the locations to be closed to their estimated 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 June 30, 2002, 610 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 third quarter of 2002. We are conducting all workforce reductions in compliance with all legal and contractual requirements including obligations to consult with worker committees, union representatives and others. 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 related 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 405 salaried positions worldwide. We recorded pre-tax charges related to this restructuring of $11 million, $8 million after 10 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 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 June 30, 2002, we have eliminated 329 positions in connection with the first quarter 2001 plan. We expect to complete these restructuring activities in the third quarter of 2002. We are conducting all workforce reductions 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. We wrote down the assets to their fair market 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. Cash proceeds from the sale of these assets were not significant. All restructuring activities related to this plan have been completed. In the fourth quarter of 2001, our Board of Directors approved a restructuring plan, the first phase of a project known as Project Genesis, designed to lower our fixed costs, improve efficiency and utilization, and better optimize our global footprint. The first phase of Project Genesis involves closing eight facilities, improving the process flow and efficiency through value mapping and plant arrangement at 20 facilities, relocating production among facilities, and centralizing some functional areas. The facilities include an aftermarket plant and an aftermarket distribution operation in Europe, an engineering center in Europe, one building at an emissions control plant complex in North America, a technology facility in North America, an exhaust manufacturing facility in North America, and our London-based treasury office. We expect to eliminate 900 employees as a result of these actions. In the fourth quarter of 2001, we recorded pre-tax charges related to Project Genesis of $27 million. Within the statement of income, $23 million of the pre-tax charge is reflected in cost of sales, while $4 million is included in selling, general and administrative expenses. These charges are comprised of $18 million in severance and $9 million for equipment lease cancellation, asset impairment, and other restructuring costs to close the eight facilities. We wrote down the assets at locations to be closed to their estimated 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 also recorded a pre-tax charge of $4 million in cost of sales related to a strategic decision to adjust some product offerings and our customer supply strategy in the European aftermarket. The aftermarket parts were written down to their estimated scrap value, less cost to sell. Finally, we also incurred $1 million in other restructuring related costs during the fourth quarter for the value mapping and rearrangement of one of our emissions control plants in North America. Since these costs relate to ongoing operations, they could not be accrued as part of the restructuring charge. The total of all these restructuring and other costs recorded in the fourth quarter of 2001 was $32 million before tax, $31 million after tax, or $.81 per diluted common share. As of June 30, 2002, we have eliminated 87 positions in connection with the first phase of Project Genesis. We expect to complete all restructuring activities related to the first phase of Project Genesis by early 2003. We are conducting all workforce reductions in compliance with all legal and contractual requirements including obligations to consult with worker committees, union representatives and others. In addition to the fourth quarter 2001 charges, we are incurring other costs during 2002 for moving and rearrangement costs related to Project Genesis that could not be accrued as part of the restructuring charge. We estimate these costs will be about $15 million in aggregate, and they are being expensed as they are incurred. 11 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) During the first six months of 2002, we incurred $3 million for other restructuring related costs and expenses such as rearrangement and moving costs that could not be accrued as part of our earlier restructuring reserves. When complete, we expect that the series of restructuring actions initiated in the fourth quarter of 2001 will generate annualized savings of $30 million. Amounts related to activities that are part of the restructuring plans are as follows:
DECEMBER 31, 2001 2002 CHARGED TO IMPACT OF JUNE 30, 2002 RESTRUCTURING CASH ASSET EXCHANGE RESTRUCTURING RESERVE PAYMENTS ACCOUNTS RATES RESERVE ----------------- -------- ---------- --------- ------------- (MILLIONS) Severance.......................... $23 $(3) $ -- $ 1 $21 Asset Impairment................... 4 -- (4) -- -- Other.............................. 6 (1) 2 -- 7 --- --- ---- ---- --- $33 $(4) $ (2) $ 1 $28 === === ==== ==== ===
In the second quarter of 2002, we sold a manufacturing facility in the U.K. that we closed in an earlier restructuring plan. Included in Charged to Asset Accounts in the preceding table is an adjustment to the assumptions made in the recording of the U.K. facility's restructuring reserve. The proceeds of $17 million exceeded our original estimates of the market value of the property. Consequently, after the adjustment, we recorded a pre-tax gain of $11 million on the sale in the second quarter. This gain is shown in the income statement as a gain on sale of assets. Under the terms of an amendment to our senior credit agreement that took effect on March 13, 2002, we are allowed to exclude up to $60 million of cash charges and expenses, before taxes, related to potential future cost reduction initiatives over the 2002-2004 period from the calculation of the financial covenant ratios we are required to maintain under our senior credit agreement. In addition to the announced actions, we continue to evaluate additional opportunities, including additional phases of Project Genesis, to initiate actions that will reduce our costs through implementing the most appropriate and efficient logistics, distribution, and manufacturing footprint for the future. There can be no assurances however, that we will undertake additional phases of Project Genesis or other additional restructuring actions. Actions that we take, if any, will require the approval of our Board of Directors and, if the costs of the plans exceed the amount previously approved by our senior lenders, could require approval by our senior lenders. See "Liquidity and Capital Resources." We plan to conduct any workforce reductions that result in compliance with all legal and contractual requirements including obligations to consult with worker committees, union representatives and others. (3) We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation. We record liabilities when environmental assessments indicate that remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. We consider all available evidence including prior experience in remediation of contaminated sites, other companies' cleanup experiences and data released by the United States Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. Where future cash flows are fixed or reliably determinable, we have discounted the liabilities. All other environmental liabilities are recorded at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they 12 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) are assured, recoveries are recorded and reported separately from the associated liability in our financial statements. As of June 30, 2002, we continue to be designated as a potentially responsible party in two Superfund sites. We have estimated our share of the remediation costs for these sites to be less than $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 $15 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 at the Superfund sites, and of other liable parties at our current and former facilities, 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 completed and analyzed the results of our evaluation of contamination and migration from that facility. We initially increased the reserve by $3 million in the fourth quarter of 2000 related to on-site remediation activities and $5 million in the first quarter of 2001 following evaluation of needed off-site remediation activities. However, after further investigation of alternative remediation technologies, we were able to identify a more efficient technology and thereby reduce the reserve by $4 million in the fourth quarter of 2001. We believe that any potential 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 results of operations or consolidated financial position. As previously disclosed, from time to time we are subject to product warranty claims whereby we are required to bear costs of repair or replacement of certain of our products. Warranty claims may range from individual customer claims to full recalls of all products in the field. In the second quarter 2002, based on currently available facts and data, we increased our warranty reserve in the amount of $1 million for recently identified warranty issues. We are continuing to investigate and pursue commercial and other resolutions of these issues. We presently believe that it is reasonably possible that we could incur additional costs and charges related to these issues after the second quarter in amounts that could be material to our income statement in the periods when we are required to record the costs and charges. We cannot predict with certainty the ultimate amount or timing of any such future costs or charges. However, we believe that these amounts will not be material to our consolidated financial position or impact our ability to meet our debt covenants. We also from time to time are involved in legal proceedings or claims that are incidental to the operation of our businesses. Some of these proceedings or claims allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warnings issues, asbestos exposure, or other product liability related matters), employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. We will continue to vigorously defend ourself against all of these claims. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our 13 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our consolidated financial condition or results of operations. During the second quarter of 2002, we reached an agreement with an OE customer to recover our investment in development costs and related equipment, as well as amounts owed to some of our suppliers, for a platform cancelled by the customer. We collected $30 million, net of the amounts we owed to suppliers, during the second quarter pursuant to this agreement. The agreement had no effect on our results of operations. (4) 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 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 standard, as amended by SFAS No. 138, effective January 1, 2001 and it did not have a significant impact on our financial position or results of operations. 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, ceased upon adoption of SFAS No. 142 in January 2002. SFAS No. 142 was effective for fiscal years beginning after December 15, 2001. At the end of the second quarter of 2002, the balance of unamortized goodwill was $411 million. Goodwill was amortized at the rate of approximately $17 million each year prior to adopting the new standard. Under the transitional provisions of SFAS No. 142 we have performed step one of a two-step impairment analysis. The fair value of our reporting units used in determining any potential goodwill impairment was computed using the present value of expected future cash flows. As a result of this analysis, we have determined that we will be required to record a charge to reflect an impairment of goodwill associated with certain of these reporting units. The second step of the impairment analysis requires us to allocate the fair value of these reporting units to the assets and liabilities of the reporting units in order to determine if there has been an impairment of the goodwill. Based upon the results of the second step of the analysis, which we expect to complete during the third quarter of 2002, we expect to record an impairment charge of approximately $175 million to $220 million, net of tax. Any impairment loss that results from the analysis will be recorded as a cumulative effect of a change in accounting principles. We will also be required to reflect this charge in our results for the first quarter of 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We will be required to adopt the new standard by January 1, 2003. We are currently evaluating the effect that this statement may have on our financial position and results of operations, but do not believe it will have a material impact. 14 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses recognition, presentation and disclosure of impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed of" and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for the Disposal of a Segment of a Business." SFAS No. 144 was effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption encouraged. The impact of adopting SFAS No. 144 did not have a material impact on our financial position or results of operations. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS No. 145 makes changes to several areas, including the classification of gains and losses from extinguishment of debt and accounting for certain lease modifications. The statement is effective for fiscal years beginning after May 15, 2002. We will be required to adopt the new statement by January 1, 2003. We do not believe that this statement will have a material impact on our financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 changes the definition of the date at which a liability exists for exit or disposal activities also referred to as restructuring activities. Previously, we recognized a liability for restructuring activities when we committed to a plan of restructuring and announced this plan to the employees. The new statement will generally require that these costs be recognized at a later date and over time, rather than in a single charge. We will be required to apply the new standard prospectively to new exit or disposal activities initiated after December 31, 2002. We are currently evaluating the impact that this new statement may have on our financial position and results of operations. (5) 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. Under this agreement, as well as individual agreements with third parties in Europe, we had sold accounts receivable of $140 million and $149 million at June 30, 2002 and 2001, respectively. We recognized a loss of $1 million in the six months ended June 30, 2002, on these sales of trade accounts, representing the discount from book values at which these receivables were sold to the third party. The discount rate varies based on funding cost incurred by the third party, and it averaged 3.3 percent during the time period in 2002 when we sold receivables. 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. 15 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (6) Earnings (loss) per share of common stock outstanding were computed as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------- ------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) Basic Earnings (loss) per share Net income (loss)............................ $ 19 $ 2 $ 17 $ (29) ========== ========== ========== ========== Average shares of common stock outstanding... 39,746,401 37,396,712 39,748,370 36,994,973 ========== ========== ========== ========== Net income (loss) per average share of common stock..................................... $ .48 $ .06 $ .42 $ (.77) ========== ========== ========== ========== Diluted Earnings (loss) per share Net income (loss)............................ $ 19 $ 2 $ 17 $ (29) ========== ========== ========== ========== Average shares of common stock outstanding... 39,746,401 37,396,712 39,748,370 36,994,973 Effect of dilutive securities: Restricted stock........................ 167,193 -- 100,085 -- Stock options........................... 1,425,324 -- 1,145,235 -- Performance shares...................... 473,107 159,373 429,085 159,156 ---------- ---------- ---------- ---------- Average shares of common stock outstanding including dilutive shares................. 41,812,025 37,356,085 41,422,775 37,154,129 ========== ========== ========== ========== Earnings (loss) per average share of common stock..................................... $ .45 $ .06 $ .41 $ (.77) ========== ========== ========== ==========
(7) 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. 16 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 ENDED JUNE 30, 2002 Revenues from external customers............. $ 539 $ 321 $ 88 $ -- $ 948 Intersegment revenues........................ 2 9 4 (15) -- Income before interest, income taxes, and minority interest.......................... 53 11 7 2 73 FOR THE THREE MONTHS ENDED JUNE 30, 2001 Revenues from external customers............. $ 493 $ 347 $ 85 $ -- $ 925 Intersegment revenues........................ 2 12 2 (16) -- Income before interest, income taxes, and minority interest.......................... 20 22 5 -- 47 AT JUNE 30, 2002, AND FOR THE SIX MONTHS THEN ENDED Revenues from external customers............. $1,006 $ 593 $158 $ -- $1,757 Intersegment revenues........................ 4 16 6 (26) -- Income before interest, income taxes, and minority interest.......................... 72 16 10 5 103 Total Assets................................. 1,027 1,018 608 112 2,765 AT JUNE 30, 2001, AND FOR THE SIX MONTHS THEN ENDED Revenues from external customers............. $ 928 $ 696 $165 $ -- $1,789 Intersegment revenues........................ 5 23 4 (32) -- Income before interest, income taxes, and minority interest.......................... 17 30 6 -- 53 Total Assets................................. 1,145 955 690 55 2,845
(8) 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 prior to the spin-off. All of our existing and future material domestic wholly owned subsidiaries (which comprise 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 17 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 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. 18 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 2002 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External....................... $438 $510 $ -- $ -- $948 Affiliated companies........... 13 24 -- (37) -- ---- ---- ---- ---- ---- 451 534 -- (37) 948 ---- ---- ---- ---- ---- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)...... 345 435 -- (37) 743 Engineering, research, and development.................... 5 7 -- -- 12 Selling, general, and administrative................. 51 47 -- -- 98 Depreciation and amortization of other intangibles.............. 17 18 -- -- 35 Amortization of goodwill.......... -- -- -- -- -- ---- ---- ---- ---- ---- 418 507 -- (37) 888 ---- ---- ---- ---- ---- OTHER INCOME (EXPENSE) Gain (loss) on sale of assets..... -- 11 -- -- 11 Gain (loss) on sale of receivables.................... -- -- -- -- -- Other income (loss)............... 7 (7) -- -- -- ---- ---- ---- ---- ---- 7 4 -- -- 11 ---- ---- ---- ---- ---- INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES......... 40 31 -- -- 71 Interest expense-- External (net of interest capitalized)................. -- 1 35 -- 36 Affiliated companies (net of interest income)............. 18 1 (19) -- -- Income tax expense (benefit)...... (1) 14 (6) 9 16 Minority interest................. -- -- -- -- -- ---- ---- ---- ---- ---- 23 15 (10) (9) 19 Equity in net income (loss) from affiliated companies........... 7 -- 29 (36) -- ---- ---- ---- ---- ---- NET INCOME (LOSS)................... $ 30 $ 15 $ 19 $(45) $ 19 ==== ==== ==== ==== ====
19 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. RECLASS GUARANTOR NONGUARANTOR (PARENT & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External........................ $387 $538 $ -- $ -- $925 Affiliated companies............ 15 14 -- (29) -- ---- ---- ---- ---- ---- 402 552 -- (29) 925 ---- ---- ---- ---- ---- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)....... 323 438 -- (29) 732 Engineering, research, and development..................... 6 6 -- -- 12 Selling, general, and administrative.................. 48 47 -- -- 95 Depreciation and amortization of other intangibles............... 18 17 -- -- 35 Amortization of goodwill........... 3 1 -- -- 4 ---- ---- ---- ---- ---- 398 509 -- (29) 878 ---- ---- ---- ---- ---- OTHER INCOME (EXPENSE) Gain (loss) on sale of assets...... -- -- -- -- -- Gain (loss) on sale of receivables..................... (1) -- -- -- (1) Other income (loss)................ 15 (14) -- -- 1 ---- ---- ---- ---- ---- 14 (14) -- -- -- ---- ---- ---- ---- ---- INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES.......... 18 29 -- -- 47 Interest expense-- External (net of interest capitalized).................. (1) 2 42 -- 43 Affiliated companies (net of interest income).............. 27 1 (28) -- -- Income tax expense (benefit)....... (10) 11 (2) 2 1 Minority interest.................. -- 1 -- -- 1 ---- ---- ---- ---- ---- 2 14 (12) (2) 2 ---- ---- ---- ---- ---- Equity in net income (loss) from affiliated companies............ 15 -- 14 (29) -- ---- ---- ---- ---- ---- NET INCOME (LOSS).................... $ 17 $ 14 $ 2 $(31) $ 2 ==== ==== ==== ==== ====
20 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. RECLASS GUARANTOR NONGUARANTOR (PARENT & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External........................ $812 $945 $ -- $ -- $1,757 Affiliated companies............ 24 42 -- (66) -- ---- ---- ---- ----- ------ 836 987 -- (66) 1,757 ---- ---- ---- ----- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)....... 645 804 -- (66) 1,383 Engineering, research, and development..................... 9 13 -- -- 22 Selling, general, and administrative.................. 107 88 -- -- 195 Depreciation and amortization of other intangibles............... 35 34 -- -- 69 Amortization of goodwill........... -- -- -- -- -- ---- ---- ---- ----- ------ 796 939 -- (66) 1,669 ---- ---- ---- ----- ------ OTHER INCOME (EXPENSE) Gain (loss) on sale of assets...... -- 11 -- -- 11 Gain (loss) on sale of receivables..................... (1) -- -- -- (1) Other income (loss)................ 87 (7) 98 (178) -- ---- ---- ---- ----- ------ 86 4 98 (178) 10 ---- ---- ---- ----- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES.......... 126 52 98 (178) 98 Interest expense-- External (net of interest capitalized).................. -- 2 70 -- 72 Affiliated companies (net of interest income).............. 36 2 (38) -- -- Income tax expense (benefit)....... 32 20 23 (67) 8 Minority interest.................. -- 1 -- -- 1 ---- ---- ---- ----- ------ 58 27 43 (111) 17 Equity in net income (loss) from affiliated companies............ 19 (1) (26) 8 -- ---- ---- ---- ----- ------ NET INCOME (LOSS).................... $ 77 $ 26 $ 17 $(103) $ 17 ==== ==== ==== ===== ======
21 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. RECLASS GUARANTOR NONGUARANTOR (PARENT & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External........................ $714 $1,075 $ -- $ -- $1,789 Affiliated companies............ 33 28 -- (61) -- ---- ------ ---- ---- ------ 747 1,103 -- (61) 1,789 ---- ------ ---- ---- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)....... 609 890 -- (61) 1,438 Engineering, research, and development..................... 12 13 -- -- 25 Selling, general, and administrative.................. 109 87 -- -- 196 Depreciation and amortization of other intangibles............... 36 32 -- -- 68 Amortization of goodwill........... 5 3 -- -- 8 ---- ------ ---- ---- ------ 771 1,025 -- (61) 1,735 ---- ------ ---- ---- ------ OTHER INCOME (EXPENSE) Gain (loss) on sale of assets...... -- -- -- -- -- Gain (loss) on sale of receivables..................... -- (3) -- -- (3) Other income (loss)................ 20 (18) -- -- 2 ---- ------ ---- ---- ------ 20 (21) -- -- (1) ---- ------ ---- ---- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES.......... (4) 57 -- -- 53 Interest expense-- External (net of interest capitalized).................. (1) 5 86 -- 90 Affiliated companies (net of interest income).............. 59 2 (61) -- -- Income tax expense (benefit)....... (21) 21 (2) (7) (9) Minority interest.................. -- 1 -- -- 1 ---- ------ ---- ---- ------ (41) 28 (23) 7 (29) ---- ------ ---- ---- ------ Equity in net income (loss) from affiliated companies............ 23 -- (6) (17) -- ---- ------ ---- ---- ------ NET INCOME (LOSS).................... $(18) $ 28 $(29) $(10) $ (29) ==== ====== ==== ==== ======
22 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) BALANCE SHEET
JUNE 30, 2002 ---------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) ASSETS Current assets: Cash and temporary cash investments...................... $ 7 $ 45 $ -- $ -- $ 52 Receivables......................... 188 331 19 (81) 457 Inventories......................... 109 224 -- -- 333 Deferred income taxes............... 59 11 31 (31) 70 Prepayments and other............... 38 74 -- -- 112 ------ ------ ------ ------- ------ 401 685 50 (112) 1,024 ------ ------ ------ ------- ------ Other assets: Investment in affiliated companies........................ 201 -- 2,067 (2,268) -- Notes and advances receivable from affiliates....................... 2,646 10 3,270 (5,926) -- Long-term notes receivable, net..... 2 10 -- -- 12 Goodwill, net....................... 306 105 -- -- 411 Intangibles, net.................... 13 5 -- -- 18 Deferred income taxes............... 141 5 78 (78) 146 Pension assets...................... 13 22 -- -- 35 Other............................... 51 58 28 -- 137 ------ ------ ------ ------- ------ 3,373 215 5,443 (8,272) 759 ------ ------ ------ ------- ------ Plant, property, and equipment, at cost................................ 843 1,072 -- -- 1,915 Less--Reserves for depreciation and amortization..................... 457 476 -- -- 933 ------ ------ ------ ------- ------ 386 596 -- -- 982 ------ ------ ------ ------- ------ $4,160 $1,496 $5,493 $(8,384) $2,765 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt): Short-term debt--non-affiliated........ $ -- $ 13 $ 147 $ -- $ 160 Short-term debt--affiliated.... 2 1 10 (13) -- Trade payables...................... 175 386 -- (61) 500 Accrued taxes....................... 65 21 -- (46) 40 Other............................... 137 104 37 (3) 275 ------ ------ ------ ------- ------ 379 525 194 (123) 975 Long-term debt--non-affiliated........ -- 16 1,245 -- 1,261 Long-term debt--affiliated............ 1,899 82 3,945 (5,926) -- Deferred income taxes................. 226 89 -- (131) 184 Postretirement benefits and other liabilities......................... 157 60 (1) 3 219 Minority interest..................... -- 16 -- -- 16 Shareholders' equity.................. 1,499 708 110 (2,207) 110 ------ ------ ------ ------- ------ $4,160 $1,496 $5,493 $(8,384) $2,765 ====== ====== ====== ======= ======
23 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) BALANCE SHEET
DECEMBER 31, 2001 ---------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) ASSETS Current assets: Cash and temporary cash investments...................... $ 2 $ 51 $ -- $ -- $ 53 Receivables......................... 188 420 77 (290) 395 Inventories......................... 111 215 -- -- 326 Deferred income taxes............... 61 5 41 (41) 66 Prepayments and other............... 41 60 -- -- 101 ------ ------ ------ ------- ------ 403 751 118 (331) 941 ------ ------ ------ ------- ------ Other assets: Investment in affiliated companies........................ 312 -- 2,034 (2,346) -- Notes and advances receivable from affiliates....................... 2,510 12 3,291 (5,813) -- Long-term notes receivable, net..... 31 9 -- -- 40 Goodwill, net....................... 307 116 -- -- 423 Intangibles, net.................... 12 6 -- -- 18 Deferred income taxes............... 128 -- -- -- 128 Pension assets...................... 8 20 -- -- 28 Other............................... 54 55 27 -- 136 ------ ------ ------ ------- ------ 3,362 218 5,352 (8,159) 773 ------ ------ ------ ------- ------ Plant, property, and equipment, at cost................................ 840 995 -- -- 1,835 Less--Reserves for depreciation and amortization..................... 443 425 -- -- 868 ------ ------ ------ ------- ------ 397 570 -- -- 967 ------ ------ ------ ------- ------ $4,162 $1,539 $5,470 $(8,490) $2,681 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt): Short-term debt--non-affiliated........ $ -- $ 17 $ 174 $ -- $ 191 Short-term debt--affiliated.... 150 60 10 (220) -- Trade payables...................... 130 336 -- (65) 401 Accrued taxes....................... 53 23 -- (41) 35 Other............................... 115 95 41 (2) 249 ------ ------ ------ ------- ------ 448 531 225 (328) 876 Long-term debt--non-affiliated........ -- 15 1,309 -- 1,324 Long-term debt--affiliated............ 1,870 3 3,940 (5,813) -- Deferred income taxes................. 181 63 (78) -- 166 Postretirement benefits and other liabilities......................... 163 59 -- 4 226 Minority interest..................... -- 15 -- -- 15 Shareholders' equity.................. 1,500 853 74 (2,353) 74 ------ ------ ------ ------- ------ $4,162 $1,539 $5,470 $(8,490) $2,681 ====== ====== ====== ======= ======
24 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities.............. $ 54 $179 $(109) $-- $124 ---- ---- ----- -- ---- INVESTING ACTIVITIES Net proceeds from the sale of fixed assets............................ -- 18 -- -- 18 Expenditures for plant, property, and equipment..................... (22) (30) -- -- (52) Investments and other............... 18 (5) -- -- 13 ---- ---- ----- -- ---- Net cash used by investing activities........................ (4) (17) -- -- (21) ---- ---- ----- -- ---- FINANCING ACTIVITIES Issuance of common and treasury stock............................. -- -- -- -- -- Retirement of long-term debt........ -- -- (25) -- (25) Net increase (decrease) in short-term debt excluding current maturities of long-term debt...... -- (5) (66) -- (71) Intercompany dividends and net increase (decrease) in intercompany obligations.......... (126) 72 102 (48) -- Dividends (common).................. 138 (187) 98 (49) -- ---- ---- ----- -- ---- Net cash provided (used) by financing activities.............. 12 (120) 109 (97) (96) ---- ---- ----- -- ---- Effect of foreign exchange rate changes on cash and temporary cash investments....................... -- (8) -- -- (8) ---- ---- ----- -- ---- Increase (decrease) in cash and temporary cash investments........ 62 34 -- (97) (1) Cash and temporary cash investments, January 1......................... 2 51 -- -- 53 ---- ---- ----- -- ---- Cash and temporary cash investments, June 30 (Note).................... $ 64 $ 85 $ -- (97) $ 52 ==== ==== ===== == ====
NOTE: Cash and temporary cash investments include highly liquid investments with a maturity of three months or less at the date of purchase. 25 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities......................... $(104) $ 114 $ (4) $ -- $ 6 ----- ----- ----- ---- ---- INVESTING ACTIVITIES Net proceeds from the sale of fixed assets............................. 2 1 -- -- 3 Expenditures for plant, property, and equipment.......................... (12) (35) -- -- (47) Investments and other................ (3) (1) -- -- (4) ----- ----- ----- ---- ---- Net cash used by investing activities......................... (13) (35) -- -- (48) ----- ----- ----- ---- ---- FINANCING ACTIVITIES Issuance of common and treasury stock.............................. -- -- 5 -- 5 Retirement of long-term debt......... -- (3) (5) -- (8) Net increase (decrease) in short-term debt excluding current maturities of long-term debt.................. -- -- 76 -- 76 Intercompany dividends and net increase (decrease) in intercompany obligations........................ 118 (46) (72) -- -- Dividends (common)................... -- -- -- -- -- ----- ----- ----- ---- ---- Net cash provided (used) by financing activities......................... 118 (49) 4 -- 73 ----- ----- ----- ---- ---- Effect of foreign exchange rate changes on cash and temporary cash investments........................ -- 4 -- -- 4 ----- ----- ----- ---- ---- Increase in cash and temporary cash investments........................ 1 34 -- -- 35 Cash and temporary cash investments, January 1.......................... 8 27 -- -- 35 ----- ----- ----- ---- ---- Cash and temporary cash investments, June 30 (Note)..................... $ 9 $ 61 $ -- -- $ 70 ===== ===== ===== ==== ====
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.) 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001 NET SALES AND OPERATING REVENUES
THREE MONTHS ENDED JUNE 30, ------------ 2002 2001 CHANGE ---- ---- ------ (MILLIONS) North America............................................... $539 $493 9% Europe...................................................... 321 347 (7)% Rest of World............................................... 88 85 4% ---- ---- $948 $925 2% ==== ====
Revenues from our North American operations increased $46 million in the second quarter of 2002 compared to last year's second quarter reflecting higher sales generated from both the original equipment and aftermarket businesses. Total North American OE revenues increased 12 percent to $391 million in the second quarter of this year due primarily to increased volumes and catalytic converter revenues that are passed through to our customers. These "pass-through" catalytic converter sales occur when, at the direction of our OE customers, we purchase catalytic converters or components from suppliers, use them in our manufacturing process, and sell them as part of the completed system. OE exhaust revenues were up 12 percent in the quarter. OE ride control revenues increased 11 percent, driven by increased volumes in both the light vehicle and heavy-duty market. Total OE revenues, excluding $90 million of pass through sales, increased 9 percent in the second quarter, while the North American light vehicle production increased approximately 8 percent from the second quarter a year ago. Our revenue increase was greater than the build rate as a result of new platform production, on which we are a supplier, and which was delayed in the first quarter, ramping up and outpacing the overall build rate. Aftermarket revenues for North America were $148 million in the second quarter of 2002, representing an increase of 4 percent compared to the same period in the prior year. Aftermarket ride control revenues increased $5 million in the second quarter, primarily as a result of new customer additions in the second half of last year and the first quarter of 2002. Aftermarket exhaust revenues remained relatively flat with the prior year. We still see a continued market decline in the exhaust business. Price increases implemented in 2001 and a shift toward premium products, primarily in ride control, positively impacted revenues in the second quarter by $3 million. We expect to maintain our majority share of the North American ride control aftermarket, which was 58 percent at the end of the first quarter of 2002. Our European segment's revenues decreased $26 million or 7 percent in the second quarter of 2002 compared to last year's second quarter. Overall European OE industry production levels were flat from last year. Our total OE revenues were $231 million for the quarter. OE exhaust revenues declined 14 percent to $182 million from $212 million the prior year. Excluding a $25 million decrease in pass-through sales and a $12 million benefit from currency appreciation, OE exhaust revenues declined 13 percent due primarily to timing issues between several expiring programs and the launch of their successors. OE ride control revenues increased 4 percent to $49 million, from $47 million a year ago. Excluding a $4 million benefit from currency appreciation, OE ride control revenues declined 4 percent. European aftermarket sales were $90 million in the second quarter of this year compared to $88 million in last year's second quarter. Excluding a $7 million benefit from currency appreciation, aftermarket sales were down 6 percent. This decline resulted from the continued decline in exhaust replacement rates due primarily to the increasing use of stainless steel. This decline was partially offset by the launch of Reflex(TM), our premium ride control product, in the second quarter. Revenues from our operations in the rest of the world, specifically South America, Australia and Asia, increased $3 million to $88 million in the second quarter of 2002 as compared to $85 million in the prior year. Asia revenues increased by $8 million primarily driven by pass-through sales to OE customers. The continued poor economic conditions in South America led to $9 million decrease in revenues year over year. The net currency impact to our rest of world operations was a $6 million decrease. 27 EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT") We reported EBIT of $71 million for the second quarter of 2002, compared to $47 million for the same quarter last year. Reported results include restructuring and other charges and gains that have an effect on comparability of EBIT results between the years. To provide enhanced comparability, we have separately identified these costs, charges and gains by segment in the following table.
THREE MONTHS ENDED JUNE 30, 2002 -------------------------------------------------------- RESTRUCTURING GAIN ON OPERATING REPORTED AND OTHER SALE OF YORK, UNIT RESULTS CHARGES U.K. FACILITY RESULTS -------- ------------- ------------- --------- (MILLIONS) North America..................................... $53 $1 $ -- $54 Europe............................................ 11 1 (11) 1 Rest of World..................................... 7 -- -- 7 --- -- ---- --- $71 $2 $(11) $62 === == ==== ===
THREE MONTHS ENDED JUNE 30, 2001 -------------------------------------- RESTRUCTURING OPERATING REPORTED AND OTHER UNIT RESULTS CHARGES RESULTS -------- ------------- --------- (MILLIONS) North America............................................... $20 $10 $30 Europe...................................................... 22 -- 22 Rest of World............................................... 5 -- 5 --- --- --- $47 $10 $57 === === ===
In the preceding table, amounts reported as restructuring and other charges for 2002 include $2 million for other restructuring related costs and expenses, such as relocation and moving costs, that could not be accrued as part of our restructuring reserve. Amounts reported as restructuring and other charges for 2001 include $8 million related to the second quarter 2001 restructuring plan and $2 million for other restructuring related costs and expenses, such as relocation and moving costs, that could not be accrued as part of our restructuring reserve. For further details of these costs and the gain on the sale of our York, U.K. facility shown above, see the sections listed as "Restructuring Charges" and "Liquidity and Capital Resources -- Cash Flows", later in this Management's Discussion and Analysis. The following discussion of EBIT results compares the columns titled "Operating Unit Results" in the table above. EBIT for North American operations increased to $54 million in the second quarter 2002 from $30 million one year ago as higher sales volumes in both our OE and aftermarket segments improved our earnings in the second quarter of the year. The elimination of goodwill amortization, discussed later in this Management's Discussion and Analysis under the section "Changes in Accounting Principles", contributed $3 million to the EBIT increase additionally, manufacturing efficiencies and lower spending in selling, general and administrative costs year over year also contributed to OE profitability. The North American aftermarket was primarily driven by strong ride control volumes from both new and existing customers that generated approximately $3 million in increased EBIT in the quarter. Pricing increases instituted in 2001 increased EBIT by $3 million. Manufacturing efficiencies as a result of increased volumes increased also increased EBIT. Increased promotional spending and higher changeover costs to convert new customers recorded as selling, general and administrative expense partially offset these increases. Our European segment's EBIT declined to $1 million in the second quarter of 2002 down from $22 million the previous year. Volume decreases and related operating inefficiencies in both the OE and aftermarket operations negatively impacted EBIT by $18 million. European EBIT for the second quarter was also reduced by $1 million due to an increase in reserves for recently identified warranty issues. See "Environmental and Other Matters". The elimination of goodwill amortization partially offset these decreases by $1 million. Currency was not a significant EBIT driver because the positive impact of the strengthening 28 Euro was offset by negative currency movements relating to our supply chain activity between South Africa and Germany. EBIT for the company's operations in the rest of the world increased by $2 million in the second quarter of 2002 compared to the same quarter a year ago. Improved operating performance in South America more than offset the impact of a labor dispute at our Australian emission control facility in late April of 2002. EBIT AS A PERCENTAGE OF REVENUE The following table shows EBIT as a percentage of revenue by segment. The EBIT percentage is calculated after excluding the "restructuring and other charges" and gain on the sale of our York, U.K. facility described previously.
THREE MONTHS ENDED JUNE 30, --------------- 2002 2001 ---- ---- North America............................................... 10% 6% Europe...................................................... --% 6% Rest of World............................................... 8% 6% Total Tenneco Automotive............................. 7% 6%
In North America, EBIT as a percentage of revenue increased by 4 percent. This increase was driven by stronger OE and aftermarket volumes and price increases in the aftermarket. Additionally, manufacturing efficiencies and the elimination of goodwill contributed to the increase. In Europe, EBIT margins declined in the second quarter due primarily to significant decreases in both OE and aftermarket volumes and volume related manufacturing inefficiencies. EBIT as a percentage of revenue for the rest of the world increased two percent in the second quarter of this year as a result of improved operating performance. INTEREST EXPENSE, NET OF INTEREST CAPITALIZED We reported interest expense of $36 million during the second quarter of 2002 compared to $43 million during the same period in 2001. The decrease in total interest expense is due to lower interest rates on our variable interest debt and overall lower debt balances. Capitalized interest for the quarter was $1 million in both 2002 and 2001. 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 $16 million expense for the quarter ended June 30, 2002, compared to a $1 million expense for the quarter ended June 30, 2001. The effective tax rate was 45 percent for the second quarter of 2002 compared to 25 percent for the second quarter 2001. In 2001, we had a pre-tax book loss. Consequently, non-tax deductible book expenses, primarily goodwill amortization, reduced the overall effective tax rate. In 2002, that goodwill amortization has been eliminated. EARNINGS PER SHARE We reported earnings per diluted common share of $.45 for the quarter ended June 30, 2002, compared to $.06 for the same period of 2001. Included in results for the second quarter 2002 are the negative impacts from expenses related to our restructuring plans of $.02 per share, offset by the gain on the sale of our York, U.K. facility which added $.13 per share. Net, these items increased earnings per diluted common share by $.11. Included in results for the second quarter 2001 are the impacts of a restructuring charge and other restructuring related costs. These items reduced earnings per diluted common share by $.20. You should also read Note 6 in the "Notes to Financial Statements" for more detailed information on earnings per share. 29 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. We recorded charges to income for costs related to these plans that do not benefit future activities 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. In the fourth quarter of 2000, our Board of Directors approved a restructuring plan to reduce administrative and operational overhead costs. We recorded, in the fourth quarter of 2000, 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 a 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 700 positions, including temporary employees. We wrote down the assets at the locations to be closed to their estimated 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 June 30, 2002, 610 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 third quarter of 2002. We are conducting all workforce reductions in compliance with all legal and contractual requirements including obligations to consult with worker committees, union representatives and others. 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 related 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 405 salaried positions worldwide. We recorded pre-tax charges related to this 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 June 30, 2002, we have eliminated 329 positions in connection with the first quarter 2001 plan. We expect to complete these restructuring activities in the third quarter of 2002. We are conducting all workforce reductions 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. We wrote down the assets to their fair market 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. Cash proceeds from the sale of these assets were not significant. All restructuring activities related to this plan have been completed. In the fourth quarter of 2001, our Board of Directors approved a restructuring plan, the first phase of a project known as Project Genesis, designed to lower our fixed costs, improve efficiency and utilization, and 30 better optimize our global footprint. The first phase of Project Genesis involves closing eight facilities, improving the process flow and efficiency through value mapping and plant arrangement at 20 facilities, relocating production among facilities, and centralizing some functional areas. The facilities include an aftermarket plant and an aftermarket distribution operation in Europe, an engineering center in Europe, one building at an emissions control plant complex in North America, a technology facility in North America, an exhaust manufacturing facility in North America, and our London-based treasury office. We expect to eliminate 900 employees as a result of these actions. In the fourth quarter of 2001, we recorded pre-tax charges related to Project Genesis of $27 million. Within the statement of income, $23 million of the pre-tax charge is reflected in cost of sales, while $4 million is included in selling, general and administrative expenses. These charges are comprised of $18 million in severance and $9 million for equipment lease cancellation, asset impairment, and other restructuring costs to close the eight facilities. We wrote down the assets at locations to be closed to their estimated 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 also recorded a pre-tax charge of $4 million in cost of sales related to a strategic decision to adjust some product offerings and our customer supply strategy in the European aftermarket. The aftermarket parts were written down to their estimated scrap value, less cost to sell. Finally, we also incurred $1 million in other restructuring related costs during the fourth quarter for the value mapping and rearrangement of one of our emissions control plants in North America. Since these costs relate to ongoing operations, they could not be accrued as part of the restructuring charge. The total of all these restructuring and other costs recorded in the fourth quarter of 2001 was $32 million before tax, $31 million after tax, or $.81 per diluted common share. As of June 30, 2002, we have eliminated 87 positions in connection with the first phase of Project Genesis. We expect to complete all restructuring activities related to the first phase of Project Genesis by early 2003. We are conducting all workforce reductions in compliance with all legal and contractual requirements including obligations to consult with worker committees, union representatives and others. In addition to the fourth quarter 2001 charges, we are incurring other costs during 2002 for moving and rearrangement costs related to Project Genesis that could not be accrued as part of the restructuring charge. We estimate these costs will be about $15 million in aggregate, and they are being expensed as they are incurred. During the first six months of 2002, we incurred $3 million for other restructuring related costs and expenses such as rearrangement and moving costs that could not be accrued as part of our earlier restructuring reserves. When complete, we expect that the series of restructuring actions initiated in the fourth quarter of 2001 will generate annualized savings of $30 million. Amounts related to activities that are part of the restructuring plans are as follows:
DECEMBER 31, 2001 2002 CHARGED TO IMPACT OF JUNE 30, 2002 RESTRUCTURING CASH ASSET EXCHANGE RESTRUCTURING RESERVE PAYMENTS ACCOUNTS RATES RESERVE ----------------- -------- ---------- --------- ------------- (MILLIONS) Severance......................... $23 $(3) $-- $1 $21 Asset Impairment.................. 4 -- (4) -- -- Other............................. 6 (1) 2 -- 7 --- --- --- -- --- $33 $(4) $(2) $1 $28 === === === == ===
In the second quarter of 2002, we sold a manufacturing facility in the U.K. that we closed in an earlier restructuring plan. Included in Charged to Asset Accounts in the preceding table is an adjustment to the assumptions made in the recording of the U.K. facility's restructuring reserve. The proceeds of $17 million exceeded our original estimates of the market value of the property. Consequently, after the adjustment, we recorded a pre-tax gain of $11 million on the sale in the second quarter. This gain is shown in the income statement as a gain on sale of assets. Under the terms of an amendment to our senior credit agreement that took effect on March 13, 2002, we are allowed to exclude up to $60 million of cash charges and expenses, before taxes, related to potential future 31 cost reduction initiatives over the 2002-2004 period from the calculation of the financial covenant ratios we are required to maintain under our senior credit agreement. In addition to the announced actions, we continue to evaluate additional opportunities, including additional phases of Project Genesis, to initiate actions that will reduce our costs through implementing the most appropriate and efficient logistics, distribution, and manufacturing footprint for the future. There can be no assurances however, that we will undertake additional phases of Project Genesis or other additional restructuring actions. Actions that we take, if any, will require the approval of our Board of Directors and, if the costs of the plans exceed the amount previously approved by our senior lenders, could require approval by our senior lenders. See "Liquidity and Capital Resources." We plan to conduct any workforce reductions that result in compliance with all legal and contractual requirements including obligations to consult with worker committees, union representatives and others. CRITICAL ACCOUNTING POLICIES We prepare our financial statements in accordance with accounting principles generally accepted in the United States. Preparing our financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following paragraphs include a discussion of some critical areas where estimates are required. We recognize revenue for sales to our original equipment and aftermarket customers under the terms of our arrangements with those customers, generally at the time of shipment from our plants or distribution centers. For our aftermarket customers, we provide for promotional incentives and returns at the time of sale. Estimates are based upon the terms of the incentives and historical experience with returns. Where we have offered product warranty, we also provide for warranty costs. Those estimates are based upon historical experience and upon specific warranty issues as they arise. We have not experienced any material differences between these estimates and our actual costs. We expense pre-production design and development costs incurred for our original equipment customers unless we have a contractual guarantee for reimbursement of those costs from the customer. At June 30, 2002, we had $7 million recorded as a long-term receivable from original equipment customers for guaranteed pre-production design and development arrangements. While we believe that the vehicle programs behind these arrangements will enter production, these arrangements allow us to recover our pre-production design and development costs in the event that the programs are cancelled or do not reach expected production levels. We have a U.S. Federal tax net operating loss carryforward at June 30, 2002, of $489 million, which will expire in varying amounts from 2012 to 2022. The federal tax effect of that NOL is $171 million, and is recorded as an asset on our balance sheet at June 30, 2002. We estimate, based on available evidence, that it is more likely than not that we will utilize the NOL within the prescribed carryforward period. That estimate is based upon our expectations regarding future taxable income of our US operations and upon strategies available to accelerate usage of the NOL. Circumstances that could change that estimate include future U.S. earnings at lower than expected levels or a majority ownership change as defined in the rules of the U.S. tax law. If that estimate changed, we would be required to cease recognizing an income tax benefit for any new NOL and could be required to record a reserve for some or all of the asset currently recorded on our balance sheet. As of June 30, 2002, we believe that there has been a significant change in our ownership, but not a majority change, since the 1999 spin-off of Pactiv. 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 their fair value. The statement requires that changes in the derivative's fair value 32 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 standard, as amended by SFAS No. 138, effective January 1, 2001 and it did not have a significant impact on our financial position or results of operations. 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, ceased upon adoption of SFAS No. 142 in January 2002. SFAS No. 142 was effective for fiscal years beginning after December 15, 2001. At the end of the second quarter of 2002, the balance of unamortized goodwill was $411 million. Goodwill was amortized at the rate of approximately $17 million each year prior to adopting the new standard. Under the transitional provisions of SFAS No. 142 we have performed step one of a two-step impairment analysis. The fair value of our reporting units used in determining any potential goodwill impairment was computed using the present value of expected future cash flows. As a result of this analysis, we have determined that we will be required to record a charge to reflect an impairment of goodwill associated with certain of these reporting units. The second step of the impairment analysis requires us to allocate the fair value of these reporting units to the assets and liabilities of the reporting units in order to determine if there has been an impairment of the goodwill. Based upon the results of the second step of the analysis, which we expect to complete during the third quarter of 2002, we expect to record an impairment charge of approximately $175 million to $220 million, net of tax. Any impairment loss that results from the analysis will be recorded as a cumulative effect of a change in accounting principles. We will also be required to reflect this charge in our results for the first quarter of 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We will be required to adopt the new standard by January 1, 2003. We are currently evaluating the effect that this statement may have on our financial position and results of operations, but do not believe it will have a material impact. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses recognition, presentation and disclosure of impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed of" and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for the Disposal of a Segment of a Business." SFAS No. 144 was effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption encouraged. The impact of adopting SFAS No. 144 did not have a material impact on our financial position or results of operations. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64. Amendment of FASB Statement No. 13 and Technical Corrections." SFAS No. 145 makes changes to several areas, including the classification of gains and losses from extinguishment of debt and accounting for certain lease modifications. The statement is effective for fiscal years beginning after May 15, 2002. We will be required to adopt the new statement by January 1, 2003. We do not believe that this statement will have a material impact on our financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 changes the definition of the date at which a liability exists for exit or disposal 33 activities also referred to as restructuring activities. Previously, we recognized a liability for restructuring activities when we committed to a plan of restructuring and announced this plan to the employees. The new statement will generally require that these costs be recognized at a later date and over time, rather than in a single charge. We will be required to apply the new standard prospectively to new exit or disposal activities initiated after December 31, 2002. We are currently evaluating the impact that this new statement may have on our financial position and results of operations. RESULTS FROM OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 NET SALES AND OPERATING REVENUES
SIX MONTHS ENDED JUNE 30, ----------------- 2002 2001 CHANGE ------- ------- ------ (MILLIONS) North America............................................... $1,006 $ 928 8 % Europe...................................................... 593 696 (15)% Rest of World............................................... 158 165 (4)% ------ ------ $1,757 $1,789 (2)% ====== ======
Revenues from our North American operations increased $78 million in the first six months of 2002 compared to the same period last year reflecting higher sales generated from both the original equipment and aftermarket businesses. Total North American OE revenues increased 9 percent to $732 million in the first six months of the year due primarily to increased catalytic converter revenues that are passed through to our customers. OE exhaust revenues were up 9 percent in the first six months primarily due to increased volumes and high pass-through sales. OE ride control revenues, for the first six months, increased 7 percent, driven by increased volumes in both the light vehicle and heavy-duty market. Total OE revenues, excluding $175 million of pass-through sales, increased 4 percent in the first six months of the year, while North American light vehicle production increased approximately 6 percent from the same period a year ago. In the first quarter our OE revenue was lower than the overall build rate due to timing associated with the retirement of various platforms that were scheduled to be replaced by new platform production that was delayed. In the second quarter our OE revenues were greater than the overall build rate as delayed new platform production ramped up and outpaced the overall build rate. Aftermarket revenues for North America were $274 million in the first six months of 2002, representing an increase of 8 percent compared to the same period in the prior year. Aftermarket ride control revenues increased $23 million in the first six months of the year, primarily as a result of new customer additions in the second half of last year and the first quarter of 2002. Aftermarket exhaust revenues declined 4 percent in the first six months of the year reflecting an overall market decline in the exhaust business. Price increases implemented in 2001 and a shift toward premium products, primarily in ride control, positively impacted revenues by $8 million in the first six months of 2002. Our European segment's revenues decreased $103 million or 15 percent in the first six months of 2002 compared to the same period last year. Total OE revenues were $438 million for the first six months of 2002. OE exhaust revenues declined 20 percent to $348 million from $436 million the prior year. Excluding a $66 million decrease in pass-through sales and a $1 million net decrease due to currency devaluation, OE exhaust revenues declined 8 percent. OE ride control revenues decreased to $90 million or 8 percent from $98 million for the first six months of 2002. Excluding a $2 million net benefit from currency appreciation, OE ride control revenues declined 10 percent. Light vehicle production by European OE's was down about 4 percent for the first six months. Our decline was greater than the market primarily due to launch delays and platform retirements. European aftermarket sales were $155 million in the first six months of 2002 compared to $162 million in the same period last year. Excluding a $4 million currency appreciation, aftermarket revenues declined 7 percent. This decline results from the continued decline in exhaust replacement rates due primarily to the increasing use of stainless steel. Revenues from our operations in the rest of the world decreased $7 million to $158 million in the first six months of 2002 as compared to $165 million in the prior year. The primary reason for the decrease was 34 currency devaluation in South America of $16 million. This was partially offset by strengthening currency in Australia of $3 million. Additionally, lower aftermarket ride control volumes in our South American operations due to poor economic conditions contributed to the overall decrease. Offsetting these decreases were increased OE revenues at our Asian operations primarily driven by pass-through sales to OE customers. EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT") We reported EBIT of $98 million for the first six months of 2002, compared to $53 million for the same period last year. Reported results include restructuring and other charges and gains that have an effect on comparability of EBIT results between the years. To provide enhanced comparability, we have separately identified these costs, charges and gains by segment in the following table.
SIX MONTHS ENDED JUNE 30, 2002 ----------------------------------------------------- RESTRUCTURING GAIN ON OPERATING REPORTED AND OTHER SALE OF YORK, UNIT RESULTS CHARGES U.K. FACILITY RESULTS -------- ------------- ------------- --------- (MILLIONS) North America.................................... $72 $3 $ -- $75 Europe........................................... 16 2 (11) 7 Rest of World.................................... 10 -- -- 10 --- -- ---- --- $98 $5 $(11) $92 === == ==== ===
SIX MONTHS ENDED JUNE 30, 2001 ------------------------------------ RESTRUCTURING OPERATING REPORTED AND OTHER UNIT RESULTS CHARGES RESULTS -------- ------------- --------- (MILLIONS) North America............................................... $17 $19 $36 Europe...................................................... 30 8 38 Rest of World............................................... 6 3 9 --- --- --- $53 $30 $83 === === ===
In the preceding table, amounts reported as restructuring and other charges for 2002 include $3 million for other restructuring related costs and expenses, such as relocation and moving costs, that could not be accrued as part of our restructuring reserve, and $2 million related to costs associated with the amendment of certain terms of our senior credit facility. Amounts reported as restructuring and other charges for 2001 include $19 million related to the first and second quarter 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 our restructuring reserve, $6 million for environmental remediation activities, 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 and the gain on the sale of our York, U.K. facility see the section listed as "Restructuring Charges" and "Liquidity and Capital Resources -- Cash Flows", later in this Management's Discussion and Analysis. The following discussion of EBIT results compares the columns titled "Operating Unit Results" in the table above. EBIT for North American operations increased to $75 million in the first six months of 2002 from $36 million one year ago as higher sales volumes in both our OE and aftermarket segments improved our earnings in the first six months of the year. The elimination of goodwill amortization, discussed later in this Management's Discussion and Analysis under the section "Changes in Accounting Principles", contributed $6 million to the EBIT increase. Additionally, manufacturing efficiencies and lower spending in selling, general and administrative costs year over year contributed to OE profitability. The North American aftermarket was primarily driven by strong ride control volumes from both new and existing customers that generated approximately $12 million in increased EBIT in the first six months. Aftermarket pricing increases instituted in 2001 increased EBIT by $8 million. Manufacturing efficiencies as a result of higher volumes contributed $3 million in EBIT. Increased promotional spending and higher changeover costs to convert new customers recorded as selling, general and administrative expense partially offset these increases by $8 million. 35 Our European segment's EBIT declined to $7 million in the first six months of 2002 down from $38 million the previous year. Volume decreases and related operating inefficiencies in both the OE and aftermarket operations negatively impacted EBIT by $22 million. European EBIT was also reduced by $1 million due to an increase in reserves for recently identified warranty issues. See "Environmental and Other Matters". Partially offsetting these decreases was the elimination of goodwill amortization and lower selling, general and administrative overhead costs. EBIT for the company's operations in the rest of the world increased by $1 million in the first half of 2002 compared to the same period one year ago. Improved operating performance in South America was the primary reason for the increase. EBIT for our Asian and Australian operations remained flat year over year. EBIT AS A PERCENTAGE OF REVENUE The following table shows EBIT as a percentage of revenue by segment. The EBIT percentage is calculated after excluding the "restructuring and other charges" and gain on the sale of our York, U.K. facility described previously.
SIX MONTHS ENDED JUNE 30, ----------- 2002 2001 ---- ---- North America............................................... 7% 4% Europe...................................................... 1% 5% Rest of World............................................... 6% 5% Total Tenneco Automotive............................. 5% 5%
In North America, EBIT as a percentage of revenue increased by 3 percent for the first six months of 2002. Stronger volumes in both OE and aftermarket drove this increase. Price increases in the aftermarket also contributed to the increase. Additionally, manufacturing efficiencies and the elimination of goodwill contributed to the increase. In Europe, EBIT margins declined in the first six months due to significant decreases in both OE and aftermarket volumes. Also contributing to the decline were volume related manufacturing inefficiencies. EBIT as a percentage of revenue for the rest of the world increased one percent in the first half of 2002 as a result of improved operating performance. INTEREST EXPENSE, NET OF INTEREST CAPITALIZED We reported interest expense of $72 million during the six months ended June 30, 2002, compared to $90 million during the same period in 2001. The decrease in total interest expense is due to lower interest rates on our variable debt and overall lower debt balances. Capitalized interest for the first six months was $2 million in both 2002 and 2001. 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 an $8 million expense for the first six months of 2002, compared to a $9 million benefit for the same period in 2001. The first six months benefit included a $4 million tax benefit related to lower-than-expected costs for withholding taxes related to our foreign operations. The lower cost of tax withholding for the first half of 2002 tax repatriation transaction resulted from an amendment to our bank agreement allowing a more tax efficient transaction to be completed. The effective tax rate before this adjustment was 43 percent for the first six months of 2002 compared to 25 percent for the same period in 2001. In 2001, we had a pre-tax book loss. Consequently, non-tax deductible book expenses, primarily goodwill amortization reduced the overall effective tax rate. In 2002, that goodwill amortization has been eliminated. EARNINGS PER SHARE We reported earnings per diluted common share of $.41 for the first six months of 2002, compared to a loss of $.77 for the same period in 2001. Included in results for the first half of 2002 are the negative impacts 36 from expenses related to our restructuring plans and the costs related to the amendment of certain terms of the senior credit facility, offset by the gain on the sale of our York, U.K. facility and the tax benefit related to lower-than-expected costs for withholding taxes. Net, these items improved earnings per diluted common share by $.16. Included in results for the first half 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. These items reduced earnings per diluted common share by $.60. You should also read Note 6 in the "Notes to Financial Statements" for more detailed information on earnings per share. LIQUIDITY AND CAPITAL RESOURCES CAPITALIZATION
JUNE 30, DECEMBER 31, 2002 2001 % CHANGE -------- ------------ -------- (MILLIONS) Short term debt and current maturities...................... $ 160 $ 191 (16)% Long term debt.............................................. 1,261 1,324 (5) ------ ------ Total debt.................................................. 1,421 1,515 (6) ------ ------ Total minority interest..................................... 16 15 7 Common shareholders' equity................................. 110 74 49 ------ ------ Total capitalization........................................ $1,547 $1,604 (4) ====== ======
The year-to-date increase in shareholders' equity results from the translation of foreign balance sheets into U.S. dollars, where the dollar decline resulted in translation adjustments of $13 million, an increase in the fair market value of interest rate swaps of $5 million and our recorded net income of $17 million. The $13 million translation adjustment included $43 million from the strengthening of European currencies against the dollar offset by a $30 million decrease from the continued devaluation of the Argentine Peso. Short-term debt, which includes the current portion of long-term obligations and borrowings by foreign subsidiaries as well as our revolving credit facility, decreased by $31 million during the first six months of 2002. This decrease resulted from a decrease in borrowings of $67 million during the first six months of 2002 under our revolving credit facility and a $5 million decrease in our foreign subsidiaries' borrowings. The decrease was partially offset by a $40 million increase in the amount of long-term debt that will mature in one year or less. The borrowings outstanding under our revolving credit facility as of June 30, 2002 were $1 million and were $68 million as of December 31, 2001. The decline in long-term debt represents amounts due during the next year. We did not issue any long-term debt during 2002. Our financing arrangements are primarily provided by a $1.325 billion at June 30, 2002, committed senior secured financing arrangement with a syndicate of banks and other financial institutions. We 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 in 2000 by our original equipment customers, 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 were required to maintain as of the end of each of the 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 37 fee of $3 million to consenting lenders. We incurred legal, advisory and other costs related to the amendment process of $2 million. At the time of the second amendment, we expected that we would meet with the senior lenders during the first quarter of 2002 to negotiate further amendments to the senior credit facility. Consequently, we amended the senior credit facility for a third time on March 13, 2002. The third amendment revised the financial covenant ratios we are required to maintain as of the end of each of the quarters ending in 2002, 2003 and 2004. It also extends the limitation on annual capital expenditures of $150 million through this three-year period. The amendment further provides us with the option to enter into sale and leaseback arrangements on up to $200 million of our assets. The proceeds from these arrangements must be used to reduce senior debt. These senior debt prepayments would reduce the next scheduled principal amortization payments. Because the payments on senior debt from sale and leaseback transactions would be made on a pro-rata basis based on the remaining principal amounts outstanding on our Tranche A, B, and C senior term loans, but principal amortization payments are not pro-rata, about 35 percent of any sale and leaseback transactions we enter into during 2002 would reduce our scheduled principal amortization. The amendment also allows us to exclude up to $60 million of cash charges and expenses, before taxes, related to potential future cost reduction initiatives over the 2002-2004 period from the calculation of the financial covenant ratios we are required to maintain under our senior credit agreement. It also permits us to execute exchanges of our senior subordinated bonds for shares of common stock. We have not currently identified any sale and leaseback transactions that we plan to complete. However, we may enter into sale and leaseback transactions during 2002. We do not have any current plans to enter into any debt-for-stock exchanges. Any significant debt-for-stock exchange would require approval of our stockholders. In exchange for these amendments, we agreed to a $50 million reduction in our revolving credit facility, 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 $3 million to consenting lenders. We also incurred legal, advisory, and other costs related to the amendment process of $2 million. The 25 basis point increase in interest rates is expected to increase our interest cost by about $3 million annually. The senior secured credit facility, as amended on March 13, 2002, consists of: (i) a $450 million revolving credit facility with a final maturity date of November 4, 2005; (ii) a $338 million term loan with a final maturity date of November 4, 2005; (iii) a $269 million term loan with a final maturity date of November 4, 2007; and (iv) a $269 million term loan with a final maturity date of May 4, 2008. Quarterly principal repayment installments on each term loan began October 1, 2001. Borrowings under the facility bear interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 350 basis points for the revolving credit facility and the term loan maturing November 4, 2005, 400 basis points for the term loan maturing November 4, 2007 and 425 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 75 basis points, plus a margin of 250 basis points for the revolving credit facility and the term loan maturing November 4, 2005, 300 basis points for the term loan maturing November 4, 2007 and 325 basis points for the term loan maturing May 4, 2008. We also pay a commitment fee of 50 basis points on the unused portion of the revolving credit facility. 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 and fees paid on letters of credit issued under our revolving credit facility are subject to adjustment based on the consolidated leverage ratio (consolidated indebtedness divided by consolidated EBITDA as defined in the senior credit facility agreement) measured at the end of each quarter. Our consolidated leverage ratio fell below 4.50 as of June 30, 2002; therefore, the interest margins for borrowings under our revolving credit facility and on our term loan maturing November 4, 2005, and fees paid on letters of credit issued under our revolving credit facility will be reduced by 25 basis points in the third quarter. As a result, interest expense is expected to decrease by approximately $1 million annually before taxes. Our senior secured credit facility does not contain any terms that could accelerate the payment of the facility as a result of a credit rating agency downgrade. The amended senior credit facility requires that we maintain financial ratios equal to or better than the following consolidated leverage ratios (consolidated indebtedness divided by consolidated EBITDA), consolidated interest coverage ratios (consolidated EBITDA divided by consolidated cash interest paid), and fixed 38 charge coverage ratios (consolidated EBITDA less consolidated capital expenditures, divided by consolidated cash interest paid) at the end of each period indicated:
QUARTER ENDING --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2002 2002 2002 2002 --------- -------- ------------- ------------ Leverage Ratio (maximum)......................... 5.75 5.75 5.75 5.75 Interest Coverage Ratio (minimum)................ 1.60 1.65 1.65 1.65 Fixed Charge Coverage Ratio (minimum)............ 0.75 0.70 0.70 0.75
QUARTER ENDING --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2003 2003 2003 2003 --------- -------- ------------- ------------ Leverage Ratio (maximum)......................... 5.75 5.50 5.25 5.00 Interest Coverage Ratio (minimum)................ 1.65 1.75 1.80 1.95 Fixed Charge Coverage Ratio (minimum)............ 0.80 0.90 0.95 1.00
QUARTER ENDING --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2004 2004 2004 2004 2005-2008 --------- -------- ------------- ------------ --------- Leverage Ratio (maximum)............... 4.75 4.50 4.25 4.00 3.50 Interest Coverage Ratio (minimum)...... 2.10 2.20 2.25 2.35 3.00 Fixed Charge Coverage Ratio (minimum)............................ 1.15 1.25 1.35 1.45 1.75
For the quarter ended June 30, 2002, the consolidated leverage ratio was 4.24, the interest coverage ratio was 2.14, and the fixed charge coverage ratio was 1.30. For the quarter ended March 31, 2002, the consolidated leverage ratio was 4.72, the interest coverage ratio was 1.94, and the fixed charge coverage ratio was 1.17. The senior credit facility agreement also contains restrictions on our operations that are customary for similar facilities, including limitations on: (i) incurring additional liens; (ii) sale and leaseback transactions (except for the permitted transactions described above); (iii) liquidations and dissolutions; (iv) incurring additional indebtedness or guarantees; (v) capital expenditures; (vi) dividends; (vii) mergers and consolidations; and (viii) prepayments and modifications of subordinated and other debt instruments. Compliance with these requirements and restrictions is a condition for any incremental borrowings under the senior credit facility agreement and failure to meet these requirements enables the lenders to require repayment of any outstanding loans. As of June 30, 2002, we were in compliance with the financial covenants and operational restrictions. Our outstanding debt also includes $500 million of 11 5/8 percent Senior Subordinated Notes due October 15, 2009. The senior subordinated debt indenture requires that we, as a condition to incurring certain types of indebtedness not otherwise permitted, maintain an interest coverage ratio of not less than 2.25. The indenture also contains restrictions on our operations, including limitations on: (i) incurring additional indebtedness or liens; (ii) dividends; (iii) distributions and stock repurchases; (iv) investments; and (v) 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. In addition to our senior credit facility and senior subordinated notes, we also sell some of our account receivables. In North America, we have a $100 million accounts receivable securitization program with a commercial bank. We sell original equipment and aftermarket receivables on a daily basis under this program. At June 30, 2002, we had sold $85 million of account receivables under this program. This program is subject to cancellation prior to its maturity date if we were to (i) fail to pay interest or principal payments on an amount of indebtedness exceeding $50 million, (ii) default on the financial covenant ratios under the senior credit facility, or (iii) fail to maintain certain financial ratios in connection with the accounts receivable securitization program. This program carries a one-year renewable term ending in October 2002. We previously renewed the program in October 2001. We also sell some receivables in our European operations to 39 regional banks in Europe. At June 30, 2002, we had sold $55 million of accounts receivable in Europe. The arrangements to sell receivables in Europe are not committed and can be cancelled at any time. If we were not able to sell receivables under either the North American or European securitization programs, our borrowings under our revolving credit agreement would increase. 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 loan agreement, supplemented, if necessary, by proceeds from the sale and leaseback transactions described above, will be sufficient to meet our future capital requirements for the following year, including scheduled debt principal amortization payments. Our ability to meet the financial covenants in 2002 depends upon a number of operational and economic factors, many of which are beyond our control. Factors that could impact our ability to comply with the financial covenants include the rate at which consumers continue to buy new vehicles and the rate at which they continue to repair vehicles already in service, as well as our ability to successfully implement our restructuring plans. Lower North American vehicle production levels, weakening in the global aftermarket, or a reduction in vehicle production levels in Europe, beyond our expectations, could impact our ability to meet our financial covenant ratios. In the event that we are unable to meet these 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. Should we be required to implement any of these actions to meet our cash flow needs, we believe we can do so in a reasonable time frame and at a reasonable cost. CONTRACTUAL OBLIGATIONS Our remaining required debt principal amortization and payment obligations under lease and certain other financial commitments are shown in the following table:
PAYMENTS DUE IN: -------------------------------------------------- BEYOND 2002 2003 2004 2005 2006 2006 TOTAL ---- ---- ---- ---- ---- ------ ------ (MILLIONS) Obligations: Revolver borrowings....................... $ 1 $ -- $ -- $ -- $-- $ -- $ 1 Senior long-term debt..................... 87 93 94 92 7 502 875 Long-term notes........................... 11 1 -- 1 -- 4 17 Capital leases............................ 1 1 1 1 1 11 16 Subordinated long-term debt............... -- -- -- -- -- 500 500 Short-term debt........................... 12 -- -- -- -- -- 12 ---- ---- ---- ---- --- ------ ------ Debt and Capital lease obligations...... 112 95 95 94 8 1,017 1,421 Operating leases.......................... 15 14 12 10 5 14 70 ---- ---- ---- ---- --- ------ ------ Total Payments............................ $127 $109 $107 $104 $13 $1,031 $1,491 ==== ==== ==== ==== === ====== ======
If we do not maintain compliance with the terms of our senior credit facility and senior subordinated debt indenture described above, all amounts under those arrangements could, automatically or at the option of the lenders become due. Additionally, each of those facilities contains provisions that certain events of default under one facility will constitute default under the other facility, allowing the acceleration of all amounts due. We currently expect to maintain compliance with terms of all of our various credit agreements for the foreseeable future. We have also guaranteed payment and performance of approximately $11 million of obligations at June 30, 2002, compared to $9 million at June 30, 2001. These guarantees are primarily related to performance of lease obligations by a former affiliate. 40 DIVIDENDS ON COMMON STOCK On January 10, 2001, we announced that our Board of Directors had eliminated the quarterly dividend on our 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. CASH FLOWS
SIX MONTHS ENDED JUNE 30, --------------- 2002 2001 ---- ---- (MILLIONS) Cash provided (used) by: Operating activities...................................... $124 $ 6 Investing activities...................................... (21) (48) Financing activities...................................... (96) 73
OPERATING ACTIVITIES For the six months ended June 30, 2002, cash flows provided from operating activities were $124 million compared to $6 million in the same period last year. Higher earnings for the first six months of 2002 were a key driver to the increase in cash provided. In addition, we generated $59 million in cash from working capital during the first half of 2002, compared to the first half of 2001 when working capital required $29 million in cash as we prepared for our peak selling period. This reflects our continued focus on improving working capital balances. This $88 million improvement was primarily achieved through better management of our payables. At the end of 2001, we reduced payables balances by taking advantage of early payment discounts available from suppliers in Europe. During 2002 we returned to paying on terms which increased payables balances and also improved working capital. Additionally in June we received a payment from an OE customer for the reimbursement of expenses related to a cancelled platform. Of the total cash payment, $11 million was recorded in operating activities and the remaining balance was recorded in investing activities. In June 2001, we entered into arrangements with two major OE customers in North America under which, in exchange for a discount that is less than our marginal borrowing cost, payments for product sales are made earlier than otherwise required under existing payment terms. These arrangements reduced accounts receivable by $50 million and $8 million as of June 30, 2002 and 2001, respectfully. At December 31, 2001, these arrangements reduced accounts receivable by $34 million. During the first six months of 2002, we received $16 million in cash from these arrangements. These arrangements can be cancelled at any time. INVESTING ACTIVITIES Cash used for investing activities was $27 million lower in the first six months of 2002 compared to the same period a year ago due primarily to $17 million proceeds from the sale of our York, U.K. facility. Also contributing was a $19 million settlement from an OE customer for reimbursement of expenses related to a cancelled platform. Capital expenditures were $52 million in the first six months of 2002, up from $47 million in the same period last year. FINANCING ACTIVITIES Cash used for financing activities was $96 million in the first six months of 2002 compared to $73 million of cash provided in the same period of 2001. The decrease in the first six months of this year is attributable to lower short-term borrowings during the period of $67 million. Additionally, we made principal payments of $24 million on our senior credit facility during the first six months of 2002. 41 INTEREST RATE RISK Our 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. We pay a current market rate of interest on these borrowings. We have financed our long-term capital requirements with long-term debt with original maturity dates ranging from six to ten years. Under the terms of our senior credit facility agreement, we were required to hedge our exposure to floating interest rates by April 2000 so that at least 50 percent of our long-term debt was fixed for a period of at least three years. In February 2000, we hedged $250 million of our floating rate long-term debt with three-year, floating to fixed interest rate swaps. In April 2000, we hedged an additional $50 million of our floating rate long-term debt with three-year, floating to fixed interest rate swaps. The hedges that we executed fully satisfied the interest rate hedging requirement of the senior credit facility agreement. On June 30, 2002, we had $505 million in long-term debt obligations that have fixed interest rates until at least June 30, 2003, and $756 million in long-term debt obligations that have interest rates subject to change prior to June 30, 2003 based on prevailing market interest rates. We estimate that the fair value of our long-term debt at June 30, 2002 was about 92 percent of its book value. A one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $6 million after tax. OUTLOOK North America light vehicle production has continued at a relatively strong pace for the first half of 2002. Manufacturer incentives have kept consumer purchases higher than estimates at the beginning of the year, lowering vehicle inventories. Consequently, current estimates for the 2002 North America light vehicle build rate range from 16.1 million units to 16.3 million units. However, we remain cautious regarding second half volumes due to continuing uncertain economic conditions in the U.S. and uncertainty about the willingness of the original equipment manufacturers to continue to support consumer automobile sales through incentives. Production of heavy duty trucks has also been strong during the first half of 2002. We believe, however, that the pending implementation of new emissions standards in October 2002 has caused operators to pull forward their truck purchases into the first three quarters of 2002. We believe these advance purchases will reduce sales of heavy duty trucks in the fourth quarter of this year and potentially into 2003, as well. In Europe, uncertain economic conditions have contributed to declining car sales, reducing first half production. Additionally, several platforms for which we provide parts have reached the end of their production, and replacement platforms have been slow to launch. These issues combined have significantly reduced our volumes in Europe, particularly in the emissions control business. While we expect that product launches will ramp up, offsetting part of this decline, we expect production to be below last year in Europe. Further, the economic problems in Argentina and uncertainty in Brazil are likely to result in lower sales in that region of the world. EURO CONVERSION The European Monetary Union resulted in the adoption of a common currency, the "euro," among eleven European nations. The euro has been 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 our operational divisions as well as our 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 we 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 were fully "euro ready" by the end of the three year transition period. The costs associated with transitioning to the euro were not material to our consolidated financial position or the results of our operations. 42 ENVIRONMENTAL AND OTHER MATTERS We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation. We record liabilities when environmental assessments indicate that remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. We consider all available evidence including prior experience in remediation of contaminated sites, other companies' cleanup experiences and data released by the United States Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. Where future cash flows are fixed or reliably determinable, we have discounted the liabilities. All other environmental liabilities are recorded at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our financial statements. As of June 30, 2002, we continue to be designated as a potentially responsible party in two Superfund sites. We have estimated our share of the remediation costs for these sites to be less than $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 $15 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 at the Superfund sites, and of other liable parties at our current and former facilities, 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 completed and analyzed the results of our evaluation of contamination and migration from that facility. We initially increased the reserve by $3 million in the fourth quarter of 2000 related to on-site remediation activities and $5 million in the first quarter of 2001 following evaluation of needed off-site remediation activities. However, after further investigation of alternative remediation technologies, we were able to identify a more efficient technology and thereby reduce the reserve by $4 million in the fourth quarter of 2001. We believe that any potential 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 results of operations or consolidated financial position. As previously discussed, from time to time we are subject to product warranty claims whereby we are required to bear costs of repair or replacement of certain of our products. Warranty claims may range from individual customer claims to full recalls of all products in the field. In the second quarter 2002, based on currently available facts and data, we increased our warranty reserve in the amount of $1 million for recently identified warranty issues. We are continuing to investigate, and pursue commercial and other resolutions of these issues. We presently believe that it is reasonably possible that we could incur additional costs and charges related to these issues after the second quarter in amounts that could be material to our income statement in the periods when we are required to record the costs and charges. We cannot predict with certainty the ultimate amount or timing of any such future costs or charges. However, we believe that these 43 amounts will not be material to our consolidated financial position or impact our ability to meet our debt covenants. We also from time to time are involved in legal proceedings or claims that are incidental to the operation of our businesses. Some of these proceedings or claims allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warnings issues, asbestos exposure, or other product liability related matters), employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. We will continue to vigorously defend ourself against all of these claims. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our consolidated financial condition or results of operations. During the second quarter of 2002, we reached an agreement with an OE customer to recover our investment in development costs and related equipment, as well as amounts owed to some of our suppliers, for a platform cancelled by the customer. We collected $30 million, net of the amounts we owed to suppliers, during the second quarter pursuant to this agreement. The agreement had no effect on our results of operations. EMPLOYEE STOCK OWNERSHIP PLANS We have established Employee Stock Ownership Plans for the benefit of our employees. Under the plans, participants may elect to defer up to 16 percent of their salary each year through contributions to the plan, which are invested in selected mutual funds or used to buy our common stock. Through December 31, 2001, we matched qualified contributions with a contribution of 75 percent of each employee's contribution up to 8 percent of the employee's salary. Beginning January 1, 2002, this match was reduced to 50 percent of each employee's contribution up to 8 percent of the employee's salary. These matching contributions were made in company stock through December 31, 2001 and in cash starting January 1, 2002. All contributions vest immediately. We recorded expense for these matching contributions of approximately $3 million and $5 million for the three months ended June 30, 2002 and 2001 respectively. 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. 44 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our annual stockholders' meeting on May 14, 2002, to consider and vote on two separate proposals: (i) a proposal to elect M. Kathryn Eickhoff, Mark P. Frissora, Frank Macher, Sir David Plastow, Roger Porter, David B. Price, Jr., Dennis Severance and Paul Stecko as directors of our company for a term expiring at our next annual stockholders' meeting, and (ii) a proposal to approve the Tenneco Automotive Inc. 2002 Long-Term Incentive Plan. The meeting proceeded and all proposals were approved by the requisite vote of the holders of our outstanding common stock. The following sets forth the vote results with respect to these proposals at the meeting: Election of Directors
VOTES FOR VOTES WITHHELD ---------- -------------- M. Kathryn Eichhoff.................................. 31,640,397 764,583 Mark P. Frissora..................................... 31,637,447 767,533 Frank Macher......................................... 31,704,886 700,094 Sir David Plastow.................................... 31,611,584 793,396 Roger Porter......................................... 31,705,775 699,205 David B. Price, Jr................................... 31,723,382 681,598 Dennis Severance..................................... 31,705,247 699,733 Paul Stecko.......................................... 31,369,424 1,035,556
Approval of Tenneco Automotive Inc. 2002 Long-Term Incentive Plan
VOTES FOR VOTES AGAINST VOTES ABSTAIN - --------- ------------- ------------- 28,455,776 3,636,449 312,755
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 June 30, 2002: Current Report on Form 8-K dated April 23, 2002, including pursuant to Item 5 certain information pertaining to the results of our operations for the first quarter 2002. Current Report on Form 8-K dated May 16, 2002, as amended, including pursuant to Item 5 certain information pertaining to the change in our certifying public accountants, from Arthur Andersen LLP to Deloitte & Touche LLP. 45 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: August 14, 2002 46 INDEX TO EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR QUARTER ENDED JUNE 30, 2002
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2 -- None. 3.1(a) -- Restated Certificate of Incorporation of the registrant dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(a) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(b) -- Certificate of Amendment, dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(c) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(c) -- Certificate of Ownership and Merger, dated July 8, 1997 (incorporated herein by reference from Exhibit 3.1(d) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(d) -- Certificate of Designation of Series B Junior Participating Preferred Stock dated September 9, 1998 (incorporated herein by reference from Exhibit 3.1(d) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 3.1(e) -- Certificate of Elimination of the Series A Participating Junior Preferred Stock of the registrant dated September 11, 1998 (incorporated herein by reference from Exhibit 3.1(e) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 3.1(f) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(f) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(g) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(g) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(h) -- Certificate of Ownership and Merger merging Tenneco Automotive Merger Sub Inc. with and into the registrant, dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(h) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(i) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated May 9, 2000 (incorporated herein by reference from Exhibit 3.1(i) of the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 1-12387). 3.2 -- By-laws of the registrant, as amended 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).
47
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).
48
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) -- 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(h) -- 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(i) -- 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(j) -- 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). 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).
49
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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 from Exhibit 4.1 to the registrant's current report on Form 8-K dated March 22, 2001, File No. 1-12387) 4.5(d) -- Third Amendment to Credit Agreement, dated as of March 13, 2002, among the registrant, JP Morgan Chase Bank as administrative agent and the lenders named herein (incorporated by reference from Exhibit 4.1 to the registrant's current report on Form 8-K dated March 13, 2002, file No. 1-12387) 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). 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).
50
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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 -- 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). 10.16 -- 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). 10.17 -- 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). 10.18 -- 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). 10.19 -- 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). 10.20 -- 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). 10.21 -- 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). 10.22 -- 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). 10.23 -- 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).
51
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.24 -- Form of Indemnity Agreement entered into between the registrant and the following directors of the registrant: Paul Stecko, M. Kathryn Eickhoff and Dennis Severance (incorporated herein by reference from Exhibit 10.29 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-12387). 10.25 -- Mark P. Frissora Special Appendix under Tenneco Automotive Inc. Supplemental Executive Retirement Plan (incorporated herein by reference from Exhibit 10.30 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-12387). 10.26 -- Letter Agreement dated as of June 1, 2001 between the registrant and Hari Nair (incorporated herein by reference from Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2001, File No. 1-12387). *10.27 -- Tenneco Automotive Inc. 2002 Long-term Incentive Plan 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 52 EX-10.27 3 c71168exv10w27.txt LONG-TERM INCENTIVE PLAN EXHIBIT 10.27 TENNECO AUTOMOTIVE INC. 2002 LONG-TERM INCENTIVE PLAN ARTICLE 1 GENERAL 1.1. Purpose. The Tenneco Automotive Inc. 2002 Long-Term Incentive Plan (the "Plan") has been established by Tenneco Automotive Inc. (the "Company") to: (i) promote the long-term success of the Company and its Subsidiaries (as defined herein); (ii) attract and retain persons eligible to participate in the Plan; (iii) motivate Participants (as defined herein), by means of appropriate incentives, to achieve long-range goals; (iv) provide incentive compensation opportunities that are competitive with those of other similar companies; (v) further identify Participants' interests with those of the Company's other stockholders through compensation that is based on the Company's common stock; and (vi) thereby promote the long-term financial interest of the Company and its Subsidiaries, including the growth in value of the Company's equity and enhancement of long-term stockholder return. 1.2. Participation. Subject to the terms and conditions of the Plan, the Committee (as defined herein) shall determine and designate, from time to time, from among the Eligible Individuals (as defined herein), including without limitation transferees of Eligible Individuals to the extent the transfer is permitted by the Plan and the applicable Award Agreement (as defined herein), those persons who will be granted one or more Awards (as defined herein) under the Plan, and thereby become "Participants" in the Plan. 1.3. Operation and Administration. The operation and administration of the Plan, including the Awards made under the Plan, shall be subject to the provisions of Article 5 (relating to operation and administration). ARTICLE 2 CERTAIN DEFINED TERMS As used in this Plan, the following terms shall have the meanings set forth or referenced below. In addition, other terms may be defined in the other Articles and Sections of this Plan, and, unless the context otherwise requires, shall have the specified meanings throughout the Plan: (a) Award. The term "Award" means any award or benefit granted under the Plan, including, without limitation, the grant of Options, SARs, Bonus Stock Awards, Stock Equivalent Unit Awards, Restricted Stock Awards, Restricted Stock Unit Awards and Performance Unit Awards. (b) Board. The term "Board" means the Board of Directors of the Company. (c) Change in Control. The term "Change in Control" shall mean any of the following events (but no event other than one of the following events): (i) any person, alone or together with any of its affiliates or associates, becoming the beneficial owner, directly or indirectly, of securities of the Company representing (A) fifteen percent (15%) or more of either the Company's then outstanding shares of common stock or the combined voting power of the Company's then outstanding securities having general voting rights, and a majority of the Incumbent Board does not approve the acquisition before the acquisition occurs, or (B) forty percent (40%) or more of either the Company's then outstanding shares of common stock or the combined voting power of the Company's then outstanding securities having general voting rights; provided, however, that, notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to this subparagraph (i) solely because the requisite percentage of either the Company's then outstanding shares of common stock or the combined voting power of the Company's then outstanding securities having general voting rights is acquired by one or more employee benefits plans maintained by the Tenneco Companies; or 1 (ii) members of the Incumbent Board ceasing to constitute a majority of the Board; or (iii) the consummation of any plan of merger, consolidation, share exchange or combination between the Company and any person, including without limitation becoming a subsidiary of any other person, without members of the Incumbent Board, as constituted immediately prior to the merger, consolidation, share exchange or combination, constituting a majority of the board of directors of (A) the surviving or successor corporation of such transaction, or (B) if the surviving or successor corporation of such transaction is a majority-owned subsidiary of another corporation or corporations, the ultimate parent company of the surviving or successor corporation; or (iv) the consummation of any sale, exchange or other disposition of all or substantially all of the Company's assets without members of the Incumbent Board immediately prior to any such sale, exchange or disposition of all or substantially all of the Company's assets constituting a majority of the board of directors of (A) the corporation which holds such assets after such disposition, or (B) if such corporation is a majority-owned subsidiary of another corporation or corporations, the ultimate parent company of the corporation which holds such assets after such disposition; provided, however, that the Board may determine conclusively that any transaction does not constitute a sale, exchange or other disposition of substantially all of the Company's assets; or (v) if any person, alone or together with any of its affiliates or associates, elects or has elected during any period not exceeding 24 months, at least 25% of the members of the Board, without the approval of the Incumbent Board, and such members are comprised of persons not serving as members of the Board immediately prior to the formation of such group or the first solicitation of proxies by such person; or (vi) the Company's stockholders approving a plan of complete liquidation or dissolution of the Company. (d) Code. The term "Code" means the Internal Revenue Code of 1986, as amended. A reference to any provision of the Code shall include reference to any successor provision of the Code. (e) Common Stock. The term "Common Stock" means the Company's common stock, par value $.01 per share. (f) Covered Employee. The term "Covered Employee" means a Participant who, as of the date of vesting and/or payout of an Award, as applicable, is a "covered employee," as defined in Code section 162(m) and the regulations promulgated under Code section 162(m). (g) Effective Date. The term "Effective Date" has the meaning set forth in Section 5.1. (h) Eligible Individual. For purposes of the Plan, the term "Eligible Individual" means any employee of the Company or a Subsidiary, any consultant or other person providing services to the Company or a Subsidiary and any member of the Board; provided, however, that an incentive stock option may only be granted to an employee of the Company or a Subsidiary. (i) Fair Market Value. For purposes of determining the "Fair Market Value" of a share of Common Stock as of any date, the following rules shall apply: (i) If the principal market for the shares of Common Stock is a national securities exchange or the NASDAQ securities market, then the "Fair Market Value" as of that date shall be the average of the highest and lowest sales prices of a share of Common Stock on that date (or, if such day is not a business day, the next preceding business day) on the principal exchange or market on which the shares of Common Stock are then listed or admitted to trading. (ii) If the shares of Common Stock are not listed on a national securities exchange and the shares of Common Stock are not quoted on the NASDAQ securities market, then the "Fair Market Value" as of that date shall be the average of the highest and lowest prices of a share of Common Stock on that date (or, if such day is not a business day, the next preceding business day) as reported 2 on the NASDAQ OTC Bulletin Board Service or by the National Quotation Bureau, Incorporated or a comparable service. (iii) If subparagraphs (i) and (ii) next above are otherwise inapplicable, then the Fair Market Value of the shares of Common Stock shall be determined in good faith by the Committee. (j) Incumbent Board. The "Incumbent Board" shall consist of the following persons: (i) the members of the Board as of the Effective Date, to the extent they continue to serve as members of the Board; and (ii) any individual who becomes a member of the Board after the Effective Date, if his or her election or nomination for election as a director is approved by a vote of at least three-quarters of the then Incumbent Board, other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company. (k) Participants. The term "Participants" has the meaning set forth in Section 1.2. (l) Performance Measure. The term "Performance Measure" means any of the following: (1) net earnings; (2) earnings per share; (3) net sales growth; (4) net income (before or after taxes); (5) net operating profit; (6) return measures (including, but not limited to, return on assets, capital, equity or sales); (7) cash flow (including, but not limited to, operating cash flow and free cash flow); (8) cash flow return on investments, which equals net cash flows divided by owner's equity; (9) earnings before or after taxes, interest, depreciation and/or amortization; (10) internal rate of return or increase in net present value; (11) dividend payments to parent; (12) gross margins; (13) gross margins minus expenses; (14) operating margin; (15) share price (including, but no limited to, growth measures and total stockholder return); (16) expense targets; (17) working capital targets relating to inventory and/or accounts receivable; (18) planning accuracy (as measured by comparing planned results to actual results); (19) comparisons to various stock market indices; (20) comparisons to the performance of other companies; (21)technological achievement; (22) customer counts; (23) customer satisfaction, quality management or customer service performance; and (24) EVA(R). For purposes of this Plan, "EVA" means the positive or negative value determined by net operating profits after taxes over a charge for capital, or any other financial measure, as determined by the Committee in its sole discretion. (EVA is a registered trademark of Stern Stewart & Co.) (m) Subsidiary. The term "Subsidiary" means any corporation, partnership, joint venture or other entity during any period in which at least a fifty percent voting or profits interest is owned, directly or indirectly, by the Company (or by any entity that is a successor to the Company), and any other business venture designated by the Committee in which the Company (or any entity that is a successor to the Company) has a significant interest, as determined in the discretion of the Committee. (n) Tenneco Companies. The term "Tenneco Companies" means the Company and any Subsidiary of which a majority of the voting common stock or capital stock is owned directly or indirectly by the Company. ARTICLE 3 OPTIONS AND SARS 3.1. Certain Definitions. (a) The grant of an "Option" entitles the Participant to purchase shares of Common Stock at an Exercise Price (as defined herein) established by the Committee. Any Option granted under this Article 3 may be either an incentive stock option (an "ISO") or a non-qualified stock option (an "NQO"), as determined in the discretion of the Committee. An "ISO" is an Option that is intended to satisfy the requirements applicable to an "incentive stock option" described in section 422(b) of the 3 Code. An "NQO" is an Option that is not intended to be an "incentive stock option" as that term is described in section 422(b) of the Code. (b) A stock appreciation right (an "SAR") entitles the Participant to receive, in cash or shares of Common Stock (as determined in accordance with Section 5.2), value equal to (or otherwise based on) the excess of: (i) the Fair Market Value of a specified number of shares of Common Stock at the time of exercise; over (ii) an Exercise Price established by the Committee. 3.2. Exercise Price. The "Exercise Price" of each Option and SAR granted under this Article 3 shall be established by the Committee or shall be determined by a method established by the Committee at the time the Option or SAR is granted; provided, however, that the Exercise Price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant (or, if greater, the par value of a share of Common Stock). 3.3. Exercise. An Option and an SAR granted under this Article 3 shall be exercisable in accordance with such terms and conditions and during such periods as may be established by the Committee; provided, however, that no Option or SAR shall be exercisable after the tenth anniversary of the date as of which such Award was granted. 3.4. Payment of Option Exercise Price. The payment of the Exercise Price of an Option granted under this Article 3 shall be subject to the following: (a) Subject to the following provisions of this Section 3.4, the full Exercise Price for shares of Common Stock purchased upon the exercise of any Option shall be paid at the time of such exercise (except that, in the case of an exercise arrangement approved by the Committee and described in Section 3.4(c), payment may be made as soon as practicable after the exercise). (b) The Exercise Price shall be payable to the Company in full either: (i) in cash or its equivalent, (ii) by tendering (either by actual delivery or attestation) previously acquired shares of Common Stock having an aggregate Fair Market Value at the time of exercise equal to the total Exercise Price (provided that the shares that are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Exercise Price or must have been purchased on the open market), (iii) by a combination of (i) and (ii), or (iv) by any other method approved by the Committee in its sole discretion at the time of grant and as set forth in the Award Agreement. (c) The Committee may permit a Participant to elect to pay the Exercise Price upon the exercise of an Option by irrevocably authorizing a third party to sell shares of Common Stock (or a sufficient portion of the shares of Common Stock) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise. 3.5. Settlement of Award. Settlement of Options and SARs is subject to the provisions of Section 5.7. ARTICLE 4 OTHER STOCK-RELATED AWARDS 4.1. Certain Definitions. (a) A "Bonus Stock" Award is a grant of shares of Common Stock in return for previously performed services, or in return for the Participant surrendering other compensation that may be due to such Participant from the Company or a Subsidiary. (b) A "Stock Equivalent Unit" Award is a grant of a right to receive cash in an amount equal to the value of a specified number of shares of Common Stock, in the future, which may be contingent on the achievement of performance or other objectives, including without limitation continued service, during a specified period. 4 (c) A "Performance Unit" Award is a grant of a right to receive a specified number of shares, or dollar amount of shares, of Common Stock, in the future, which is contingent on the achievement of performance or other objectives, including without limitation continued service, during a specified period. (d) A "Restricted Stock" Award is a grant of shares of Common Stock, and a "Restricted Stock Unit" Award is a grant of a right to receive a specified number of shares of Common Stock, or cash in an amount equal to the value of a specified number of shares of Common Stock, in the future, with such shares of Common Stock or right to future delivery of such shares of Common Stock or payment of cash subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the Participant, or achievement of performance or other objectives, as determined by the Committee. 4.2. Restrictions on Awards. Each Bonus Stock Award, Stock Equivalent Unit Award, Restricted Stock Award, Restricted Stock Unit Award and Performance Unit Award shall be subject to such conditions, restrictions and contingencies as the Committee shall determine. The Committee may designate whether any such Award being granted to any Participant is intended to be "performance-based compensation" as that term is used in section 162(m) of the Code. Any such Awards designated as intended to be "performance-based compensation" shall be conditioned on the achievement of one or more Performance Measures, to the extent required by Code section 162(m). For Awards under this Section 4.2 intended to be "performance-based compensation," the grant of the Awards and the establishment of the Performance Measures shall be made during the period required under Code section 162(m). Any Performance Measure(s) may be used to measure the performance of the Company as a whole or any business unit or Subsidiary of the Company or any combination thereof, as the Committee may deem appropriate, or any such performance as compared to the performance of a group of comparator companies, or any published or special index that the Committee, in its sole discretion, deems appropriate. The Committee also has the authority to provide for accelerated vesting of any Award made under this Article 4 based on the achievement of performance goals pursuant to the Performance Measures specified herein. The Committee may provide in any such Award that any evaluation of performance may include or exclude any of the following events that occurs during a performance period: (a) asset write-downs, (b) litigation or claim judgments or settlements, (c) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (d) accruals for reorganization and restructuring programs, (e) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in management's discussion and analysis of financial condition and results of operations appearing in the Company's annual report to stockholders for the applicable year, (f) acquisitions or divestitures, and (g) foreign exchange gains and losses. To the extent such inclusions or exclusions affect Awards to Covered Employees intended to qualify as "performance-based compensation," they shall be prescribed in a form that meets the requirements of Code section 162(m) for deductibility. Awards that are designed to qualify as "performance-based compensation," and that are held by Covered Employees, may not be adjusted upward (the Committee shall retain the discretion to adjust such Awards downward). In the event that applicable tax and/or securities laws change to permit Board or Committee discretion to alter the governing Performance Measures without obtaining stockholder approval of such changes, the Board and Committee shall have the discretion to make such changes without obtaining stockholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards under this Article 4 that shall not qualify as "performance-based compensation," the Committee may make such grants without satisfying the requirements of Code section 162(m). ARTICLE 5 OPERATION AND ADMINISTRATION 5.1. Effective Date. Subject to the approval of the stockholders of the Company, the Plan shall be effective as of March 12, 2002 (the "Effective Date"). The Plan shall be unlimited in duration and, in the event of Plan termination, shall remain in effect as long as any Awards under it are outstanding; provided, however, that no Awards may be granted under the Plan after the ten-year anniversary of the Effective Date (except for Awards granted pursuant to commitments entered into prior to such ten-year anniversary). 5 5.2. Plan and Other Limitations. The Awards that may be granted under the Plan shall be subject to the following: (a) The shares of Common Stock with respect to which Awards may be made under the Plan shall be shares of Common Stock currently authorized but unissued or currently held or, to the extent permitted by applicable law, subsequently acquired by the Company as treasury shares, including shares of Common Stock purchased in the open market or in private transactions. (b) Subject to the following provisions of this Section 5.2, the maximum number of shares of Common Stock that may be delivered to Participants and their beneficiaries under the Plan shall be equal to 2,000,000 (Two Million) shares of Common Stock. In addition, subject to the following provisions of this Section 5.2, the maximum number of shares of Common Stock that may be delivered to Participants and their beneficiaries under the Plan pursuant to Full Value Awards (as defined below) shall be equal to 500,000 (Five Hundred Thousand) shares of Common Stock. For the purposes of this Plan, "Full Value Awards" shall be Awards of Bonus Stock, Stock Equivalent Units, Performance Units, Restricted Stock or Restricted Stock Units. (c) To the extent provided by the Committee, any Award of Stock Equivalent Units, Performance Units or Restricted Stock Units may be settled in cash rather than shares of Common Stock. To the extent any shares of Common Stock covered by an Award are not delivered to a Participant or beneficiary because the Award is forfeited or canceled, or the shares of Common Stock are not delivered because the Award is settled in cash or used to satisfy the applicable tax withholding obligation, such shares of Common Stock shall not be deemed to have been delivered for purposes of determining the maximum number of shares of Common Stock available for delivery under the Plan or, if applicable, pursuant to Full Value Awards. (d) If the exercise price of any Option granted under the Plan is satisfied by tendering shares of Common Stock to the Company (by either actual delivery or by attestation), only the number of shares of Common Stock issued net of the shares of Common Stock tendered shall be deemed delivered for purposes of determining the maximum number of shares of Common Stock available for delivery under the Plan. (e) Subject to Section 5.2(f), the following additional limitations are imposed under the Plan. (i) The maximum number of shares of Common Stock that may be covered by Awards granted to any one individual pursuant to Article 3 (relating to Options and SARs) shall be 350,000 shares of Common Stock during any one calendar year period. If an Option is in tandem with an SAR, such that the exercise of the Option or SAR with respect to a share of Common Stock cancels the tandem SAR or Option right, respectively, with respect to such share, the tandem Option and SAR rights with respect to each share of Common Stock shall be counted as covering only one share of Common Stock for purposes of applying the limitations of this clause (i). (ii) For Awards granted pursuant to Article 4 that are intended to be "performance-based compensation" (as that term is used for purposes of Code section 162(m)), no more than 200,000 shares of Common Stock and, if such Awards are denominated in cash value, no more than $800,000, may be subject to such Awards granted to any one individual during any one calendar year. If, after shares have been earned, the delivery is deferred, any additional shares attributable to dividends or other amounts attributable to earnings during the deferral period shall be disregarded. Unless otherwise indicated by the Committee at the time of grant, all Awards granted pursuant to Article 4 for which the vesting or payment are conditioned on achievement of one or more Performance Measures shall be deemed to be intended to be "performance-based compensation" for the purposes of Code section 162(m). (f) In the event of a corporate transaction involving the Company (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), the Committee may adjust the terms of the Plan and Awards to preserve the benefits or potential benefits of the Plan or the Awards. 6 Action by the Committee with respect to the Plan or Awards under this Section 5.2(f) may include: (i) adjustment of the number and kind of shares which may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding Awards; (iii) adjustment of the Exercise Price of outstanding Options and SARs; and (iv) any other adjustments that the Committee determines to be equitable. 5.3. General Restrictions. Delivery of shares of Common Stock or other amounts under the Plan shall be subject to the following: (a) Notwithstanding any other provision of the Plan, the Company shall have no liability to deliver any shares of Common Stock under the Plan or make any other distribution of benefits under the Plan unless such delivery or distribution would comply with all applicable laws (including, without limitation, the requirements of the Securities Act of 1933, as amended), and the applicable requirements of any securities exchange or similar entity. (b) To the extent that the Plan provides for issuance of certificates to reflect the issuance of shares of Common Stock, the issuance may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the applicable rules of any securities exchange. 5.4. Tax Withholding. All distributions under the Plan shall be subject to withholding of all applicable taxes, and the Committee may condition the delivery of any shares or other benefits under the Plan on satisfaction of the applicable withholding obligations. Except as otherwise provided by the Committee, such withholding obligations may be satisfied (a) through cash payment by the Participant, (b) through the surrender of shares of Common Stock which the Participant already owns, or (c) through the surrender of shares of Common Stock to which the Participant is otherwise entitled under the Plan; provided, however, that such shares of Common Stock under this paragraph (c) may be used to satisfy not more than the Company's minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including without limitation payroll taxes, that are applicable to such supplemental taxable income). 5.5. Grant and Use of Awards. In the discretion of the Committee, a Participant may be granted any Award permitted under the provisions of the Plan, and more than one Award may be granted to a Participant. Awards may be granted as alternatives to or replacement of awards granted or outstanding under the Plan, or any other plan or arrangement of the Company or a Subsidiary (including a plan or arrangement of a business or entity, all or a portion shares of common stock of which is acquired by the Company or a Subsidiary). The Committee may use available shares of Common Stock hereunder as the form of payment for compensation, grants or rights earned or due under any other compensation plans or arrangements of the Company or a Subsidiary, including the plans and arrangements of the Company or a Subsidiary assumed in business combinations. 5.6. Dividends and Dividend Equivalents. An Award (including without limitation an Option or SAR Award) may provide the Participant with the right to receive dividend payments, dividend equivalent payments or dividend equivalent units with respect to shares of Common Stock subject to the Award (both before and after the shares of Common Stock subject to the Award are earned, vested, or acquired), which payments may be either made currently or credited to an account for the Participant, and may be settled in cash or shares of Common Stock, as determined by the Committee. Any such settlements, and any such crediting of dividends or dividend equivalents or reinvestment in shares of Common Stock or Common Stock equivalents, may be subject to such conditions, restrictions and contingencies as the Committee shall establish, including the reinvestment of such credited amounts in Common Stock equivalents. 5.7. Settlement of Awards. The obligation to make payments and distributions with respect to Awards of Stock Equivalent Units, Performance Units or Restricted Stock Units may be satisfied through cash payments, the delivery of shares of Common Stock, the granting of replacement Awards, or any combination thereof as the Committee shall determine. Satisfaction of any obligations to make payments or distributions under an Award, which is sometimes referred to as "settlement" of the Award, may be subject to such conditions, restrictions and contingencies as the Committee shall determine. The Committee may permit or 7 require the deferral of any Award payment, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents, and may include converting such credits into deferred Common Stock equivalents. Each Subsidiary shall be liable for payment of cash due under the Plan with respect to any Participant to the extent that such benefits are attributable to the services rendered for that Subsidiary by the Participant. Any disputes relating to liability of a Subsidiary for cash payments shall be resolved by the Committee. 5.8. Transferability. Except as otherwise provided by the Committee, Awards under the Plan are not transferable except as designated by the Participant by will or by the laws of descent and distribution. 5.9. Form and Time of Elections. Unless otherwise specified herein, each election required or permitted to be made by any Participant or other person entitled to benefits under the Plan, and any permitted modification or revocation thereof, shall be in writing filed with the Committee at such times, in such form and subject to such restrictions and limitations, not inconsistent with the terms of the Plan, as the Committee shall require. 5.10. Agreement With Company. An Award under the Plan shall be subject to such terms and conditions, not inconsistent with the Plan, as the Committee shall, in its sole discretion, prescribe. The terms and conditions of any Award to any Participant shall be reflected in such form of written document, if any, as is determined by the Committee. A copy of such document shall be provided to the Participant, and the Committee may, but need not, require that the Participant sign a copy of such document. Such document is referred to in the Plan as an "Award Agreement" regardless of whether any Participant signature is required. 5.11. Action by Company or Subsidiary. Any action required or permitted to be taken by the Company or any Subsidiary shall be by resolution of its board of directors, or by action of one or more members of the board (including a committee of the board) who are duly authorized to act for the board, or (except to the extent prohibited by applicable law or applicable rules of any stock exchange) by a duly authorized officer of such company. 5.12. Gender and Number. Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular. 5.13. Limitation of Implied Rights. (a) Neither a Participant nor any other person shall, by reason of participation in the Plan, acquire any right in or title to any assets, funds or property of the Company or any Subsidiary whatsoever, including, without limitation, any specific funds, assets or other property which the Company or any Subsidiary, in its sole discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the shares of Common Stock or amounts, if any, payable under the Plan, unsecured by any assets of the Company or any Subsidiary, and nothing contained in the Plan shall constitute a guarantee that the assets of the Company or any Subsidiary shall be sufficient to pay any benefits to any person. (b) The Plan does not constitute a contract of employment or continued service, and selection as a Participant will not give any participating individual the right to be retained in the employ or continued service of the Company or any Subsidiary, nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. Except as otherwise provided in the Plan, no Award under the Plan shall confer upon the holder thereof any rights as a stockholder of the Company prior to the date on which the individual fulfills all conditions for receipt of such rights. 5.14. Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. 8 ARTICLE 6 CHANGE IN CONTROL Subject to the provisions of Section 5.2(f) (relating to certain adjustments), upon the occurrence of a Change in Control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any applicable governmental agencies or national securities exchange, or unless the Committee shall otherwise provide in the Award Agreement: (a) any and all Options and SARs granted hereunder shall become immediately vested and exercisable and shall remain exercisable for the lesser of 36 months following such Change in Control or the remaining maximum term of such Award (regardless of whether the applicable Participant's employment or directorship is terminated upon or after such Change in Control); (b) any period of restriction and restrictions imposed on Restricted Stock or Restricted Stock Units granted hereunder shall lapse and each Participant holding any such Award shall be entitled to be paid in cash, within 30 days after the Change in Control, the total of the fair market value, determined as of immediately prior to such Change in Control, of any such Award which he or she held immediately prior to such Change in Control; and (c) the target payout opportunities attainable under all Bonus Stock, Stock Equivalent Unit and Performance Unit Awards granted hereunder shall be deemed to have been fully earned as of the effective date of the Change in Control (based on an assumed achievement of all relevant targeted performance goals over any applicable performance period(s)) and each Participant holding any such Award shall be entitled to be paid in cash, within 30 days after the Change in Control, the total of the fair market value, determined as of immediately prior to such Change in Control, of any such Award which he or she held immediately prior to such Change in Control. ARTICLE 7 COMMITTEE 7.1. Administration. The authority to control and manage the operation and administration of the Plan shall be vested in a committee (the "Committee") in accordance with this Article 7. The Committee shall be selected by the Board, and shall consist solely of two or more members of the Board. From and after the Effective Date, unless removed by the Board or unless said committee no longer exists, the Company's Compensation/Nominating/Governance Committee shall be the Committee for purposes of this Plan. If the Committee does not exist, or for any other reason determined by the Board, the Board may take any action under the Plan that would otherwise be the responsibility of the Committee. 7.2. Powers of Committee. The Committee's administration of the Plan shall be subject to the following: (a) Subject to the provisions of the Plan, the Committee will have the authority and discretion to select from among the Eligible Individuals those persons who shall receive Awards, to determine the time or times of receipt, to determine the types of Awards and the number of shares of Common Stock or other amounts covered by the Awards, to establish the terms, conditions, performance criteria, restrictions and other provisions of such Awards and (subject to the restrictions imposed by Article 8) to cancel or suspend Awards. (b) To the extent that the Committee determines that the restrictions imposed by the Plan preclude the achievement of the material purposes of the Awards in jurisdictions outside the United States, the Committee will have the authority and discretion to modify those restrictions as the Committee determines to be necessary or appropriate to conform to applicable requirements or practices of jurisdictions outside of the United States. (c) The Committee will have the authority and discretion to conclusively interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, to determine the terms and 9 provisions of any Award Agreement made pursuant to the Plan and to make all other determinations that may be necessary or advisable for the administration of the Plan. (d) Any interpretation of the Plan by the Committee and any decision made by it under the Plan is final and binding on all persons. (e) In controlling and managing the operation and administration of the Plan, the Committee shall take action in a manner that conforms to the certificate of incorporation and by-laws of the Company, and applicable state corporate law. 7.3. Delegation by Committee. Except to the extent prohibited by applicable law or the applicable rules of a securities exchange, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time. 7.4. Information to be Furnished to Committee. The Company and Subsidiaries shall furnish the Committee with such data and information as it determines may be required for it to discharge its duties. The records of the Company and Subsidiaries as to an individual's employment or service, termination of employment or service, leave of absence, reemployment or recommencement of service and compensation shall be conclusive on all persons unless determined to be incorrect. Participants and other persons entitled to benefits under the Plan must furnish the Committee such evidence, data or information as the Committee considers desirable to carry out the terms of the Plan. ARTICLE 8 AMENDMENT AND TERMINATION The Board may, at any time, amend or terminate the Plan, and may amend any Award Agreement, provided that no amendment or termination may, in the absence of written consent to the change by the affected Participant (or, if the Participant is not then living, the affected beneficiary), adversely affect the rights of any Participant or beneficiary under any Award granted under the Plan prior to the date such amendment is adopted by the Board; and further provided that adjustments pursuant to Section 5.2(f) shall not be subject to the foregoing limitations of this Article 8. Notwithstanding anything herein to the contrary, (i) without the prior approval of the Company's stockholders, Options issued under the Plan will not be repriced, replaced, or regranted through cancellation, or by lowering the exercise price of a previously granted Option, and (ii) no amendment of the Plan shall be made without stockholder approval if stockholder approval is required by applicable law, regulation or stock exchange rule. ARTICLE 9 MISCELLANEOUS 9.1. Governing Law. The validity, construction and effect of the Plan, and any actions taken or relating to the Plan, shall be determined in accordance with the laws of the State of Illinois and applicable federal law. 9.2. Severability. If for any reason any provision or provisions of the Plan are determined invalid or unenforceable, the validity and effect of the other provisions of the Plan shall not be affected thereby. 10 IN WITNESS WHEREOF, the Company has caused the Plan to be executed on its behalf by its respective officer thereunder duly authorized, on the day and year set forth below. Date: As of March 12, 2002 TENNECO AUTOMOTIVE INC. By: /s/ TIMOTHY R. DONOVAN ---------------------------------------------------- Timothy R. Donovan Executive Vice President, General Counsel and Managing Director -- International 11 EX-12 4 c71168exv12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------------- 2002 2001 -------- -------- Net income (loss)............................................................... $ 17 $ (29) Add: Interest expense................................................................ 72 90 Portion of rentals representative of the interest factor........................ 5 5 Income tax expense (benefit) and other taxes on income.......................... 8 (9) Minority Interest............................................................... 1 - Amortization of interest capitalized............................................ - 2 Undistributed (earnings) losses of affiliated companies in which less than a 50% voting interest is owned.............................................. 1 - ----- ----- Earnings as defined....................................................... $ 104 $ 59 ===== ===== Interest expense................................................................ $ 72 $ 90 Interest capitalized............................................................ 2 2 Portion of rentals representative of the interest factor........................ 5 5 Fixed charges as defined.................................................. $ 79 $ 97 ===== ===== Ratio of earnings to fixed charges.............................................. 1.32 0.61 ===== =====
NOTE: Earnings were inadequate to cover fixed charges by $38 million for the six months ended June 30, 2001. EX-15 5 c71168exv15.txt LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION EXHIBIT 15 August 14, 2002 Tenneco Automotive Inc. 500 North Field Drive Lake Forest, IL 60045 We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Tenneco Automotive Inc. and consolidated subsidiaries for the period ended June 30, 2002, as indicated in our report dated July 22, 2002; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, is incorporated by reference in Registration Statement Nos. 333-17485, 333-30933, 333-17487, 333-41535, 333-27279, 333-23249, 333-27281, 333-41537, 333-48777, 333-76261, 333-33442, 333-33934 and 333-58056 on Form S-8 and Registration Statement No. 333-24291 on Form S-3. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Chicago, Illinois -----END PRIVACY-ENHANCED MESSAGE-----