-----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, SbFBVNK7PA9MK3pdIK9MGlD/I5hDr0VW2Ie+toHppsJjMJBHQ+5B3K3zbEceYvFv 8AnFsieLHv3EVOLFemTMaw== 0000950137-04-006336.txt : 20040806 0000950137-04-006336.hdr.sgml : 20040806 20040806151451 ACCESSION NUMBER: 0000950137-04-006336 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 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: 04957799 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 c87293e10vq.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, 2004 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common Stock, par value $.01 per share: 42,004,205 shares as of July 31, 2004. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I--FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited).................. 4 Tenneco Automotive Inc. and Consolidated Subsidiaries-- Report of Independent Registered Public Accounting Firm................................................ 4 Statements of Income................................. 5 Balance Sheets....................................... 6 Statements of Cash Flows............................. 7 Statements of Changes in Shareholders' Equity........ 8 Statements of Comprehensive Income................... 9 Notes to Consolidated Financial Statements........... 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 52 Item 4. Controls and Procedures........................... 52 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........................................... 53 Item 5. Other Information................................. * Item 6. Exhibits and Reports on Form 8-K.................. 53
- --------------- * 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; 2 - material substitution; - labor disruptions at our facilities or at any of our significant customers or suppliers; - economic, exchange rate and political conditions in the foreign countries where we operate or sell our products; - customer acceptance of new products; - new technologies that reduce the demand for certain of our products or otherwise render them obsolete; - our ability to realize our business strategy of improving operating performance; - capital availability or costs, including changes in interest rates, market perceptions of the industries in which we operate or ratings of securities; - changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies; - the impact of changes in and compliance with laws and regulations, including environmental laws and regulations, and environmental liabilities in excess of the amount reserved; - terrorism, acts of war and similar events, and their resultant impact on economic and political conditions; and - the occurrence or non-occurrence of other circumstances beyond our control. 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TENNECO AUTOMOTIVE INC. We have reviewed the accompanying consolidated balance sheet of Tenneco Automotive Inc. and consolidated subsidiaries as of June 30, 2004, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2004 and 2003, and of cash flows and changes in shareholders' equity for the six-month periods ended June 30, 2004 and 2003. These interim financial statements are the responsibility of Tenneco Automotive Inc.'s management. We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Tenneco Automotive Inc. and consolidated subsidiaries as of December 31, 2003, and the related consolidated statements of income (loss), cash flows, changes in shareholders' equity and comprehensive income (loss) for the year then ended (not presented herein); and in our report dated March 9, 2004, we expressed an unqualified opinion on those consolidated financial statements (such report includes explanatory paragraphs relating to (i) a change in accounting for goodwill and intangible assets upon the adoption of Statement of Financial Accounting Standards No. 142, and (ii) the application of procedures relating to certain disclosures and reclassifications of financial statement amounts related to the 2001 financial statements that were audited by other auditors who have ceased operations and for which we have expressed no opinion or other form of assurance other than with respect to such disclosures and reclassifications). In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Chicago, Illinois August 6, 2004 4 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- -------------------------- 2004 2003 2004 2003 ------------ ------------ ----------- ----------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) REVENUES Net sales and operating revenues........ $ 1,114 $ 998 $ 2,148 $ 1,919 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)......................... 874 779 1,704 1,522 Engineering, research, and development.......................... 19 13 34 32 Selling, general, and administrative.... 100 97 211 185 Depreciation and amortization of other intangibles.......................... 44 41 89 80 ----------- ----------- ----------- ----------- 1,037 930 2,038 1,819 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Loss on sale of receivables............. (1) (1) (1) (1) Other income (loss)..................... -- -- -- (1) ----------- ----------- ----------- ----------- (1) (1) (1) (2) ----------- ----------- ----------- ----------- INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST............ 76 67 109 98 Interest expense (net of interest capitalized)......................... 34 38 69 69 Income tax expense...................... 10 3 9 1 Minority interest....................... 2 2 3 3 ----------- ----------- ----------- ----------- NET INCOME................................ $ 30 $ 24 $ 28 $ 25 =========== =========== =========== =========== EARNINGS PER SHARE Average shares of common stock outstanding-- Basic................................... 41,475,722 40,394,671 41,132,232 40,244,623 Diluted................................. 44,181,228 41,333,408 43,839,409 41,137,177 Basic earnings per share of common stock................................... $ 0.73 $ 0.59 $ 0.69 $ 0.61 Diluted earnings per share of common stock................................... $ 0.69 $ 0.58 $ 0.65 $ 0.60
The accompanying notes to financial statements are an integral part of these statements of income. 5 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ (MILLIONS) ASSETS Current assets: Cash and cash equivalents................................. $ 166 $ 145 Receivables-- Customer notes and accounts, net........................ 530 427 Other................................................... 20 15 Inventories-- Finished goods.......................................... 153 149 Work in process......................................... 83 73 Raw materials........................................... 78 83 Materials and supplies.................................. 38 38 Deferred income taxes..................................... 62 63 Prepayments and other..................................... 140 112 ------- ------- 1,270 1,105 ------- ------- Other assets: Long-term notes receivable, net........................... 22 21 Goodwill.................................................. 192 193 Intangibles, net.......................................... 24 25 Deferred income taxes..................................... 202 189 Pension assets............................................ 7 6 Other..................................................... 147 145 ------- ------- 594 579 ------- ------- Plant, property, and equipment, at cost..................... 2,278 2,303 Less--Reserves for depreciation and amortization.......... 1,219 1,192 ------- ------- 1,059 1,111 ------- ------- $ 2,923 $ 2,795 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt)................................................... $ 20 $ 20 Trade payables............................................ 669 621 Accrued taxes............................................. 30 19 Accrued interest.......................................... 39 42 Accrued liabilities....................................... 211 162 Other..................................................... 28 29 ------- ------- 997 893 ------- ------- Long-term debt.............................................. 1,399 1,410 ------- ------- Deferred income taxes....................................... 124 119 ------- ------- Postretirement benefits..................................... 272 266 ------- ------- Deferred credits and other liabilities...................... 35 26 ------- ------- Commitments and contingencies Minority interest........................................... 23 23 ------- ------- Shareholders' equity: Common stock.............................................. -- -- Premium on common stock and other capital surplus......... 2,757 2,751 Accumulated other comprehensive loss...................... (260) (241) Retained earnings (accumulated deficit)................... (2,184) (2,212) ------- ------- 313 298 Less--Shares held as treasury stock, at cost.............. 240 240 ------- ------- 73 58 ------- ------- $ 2,923 $ 2,795 ======= =======
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, -------------- 2004 2003 ----- ----- (MILLIONS) OPERATING ACTIVITIES Net income.................................................. $ 28 $ 25 Adjustments to reconcile net income to cash provided (used) by operating activities-- Depreciation and amortization of other intangibles........ 89 80 Deferred income taxes..................................... (5) (10) Changes in components of working capital-- (Increase) decrease in receivables..................... (113) (87) (Increase) decrease in inventories..................... (16) 24 (Increase) decrease in prepayments and other current assets................................................ (27) (1) Increase (decrease) in payables........................ 60 30 Increase (decrease) in accrued taxes................... 13 (19) Increase (decrease) in accrued interest................ (2) (5) Increase (decrease) in other current liabilities....... 24 (19) Other..................................................... 8 10 ----- ----- Net cash provided by operating activities................... 59 28 ----- ----- INVESTING ACTIVITIES Net proceeds from sale of assets............................ 11 3 Expenditures for plant, property, and equipment............. (54) (54) Investments and other....................................... (2) (2) ----- ----- Net cash used by investing activities....................... (45) (53) ----- ----- Net cash provided (used) before financing activities........ 14 (25) FINANCING ACTIVITIES Issuance of common shares................................... 4 -- Proceeds from capital contributions......................... -- 1 Issuance of long-term debt.................................. -- 350 Debt issuance costs on long-term debt....................... -- (12) Retirement of long-term debt................................ (4) (276) Net increase (decrease) in short-term debt excluding current maturities of long-term debt.............................. 1 (25) Other....................................................... 2 (1) ----- ----- Net cash provided by financing activities................... 3 37 ----- ----- Effect of foreign exchange rate changes on cash and cash equivalents............................................... 4 (8) ----- ----- Increase in cash and cash equivalents....................... 21 4 Cash and cash equivalents, January 1........................ 145 54 ----- ----- Cash and cash equivalents, June 30 (Note)................... $ 166 $ 58 ===== ===== Cash paid during the period for interest.................... $ 74 $ 67 Cash paid during the period for income taxes (net of refunds).................................................. $ 7 $ 30
NOTE: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. The accompanying notes to financial statements are an integral part of these statements of cash flows. 7 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------------------------- 2004 2003 --------------------- --------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------- ---------- ------- (MILLIONS EXCEPT SHARE AMOUNTS) COMMON STOCK Balance January 1.................................. 42,167,296 $ -- 41,347,340 $ -- Issued pursuant to benefit plans................. 450,109 -- 541,865 -- Stock options exercised.......................... 676,107 -- 35,106 -- ---------- ------- ---------- ------- Balance June 30.................................... 43,293,512 -- 41,924,311 -- ========== ======= ========== ======= PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS Balance January 1.................................. 2,751 2,749 Premium on common stock issued pursuant to benefit plans................................. 6 2 ------- ------- Balance June 30.................................... 2,757 2,751 ------- ------- ACCUMULATED OTHER COMPREHENSIVE LOSS Balance January 1.................................. (241) (357) Other comprehensive income (loss)................ (19) 73 ------- ------- Balance June 30.................................... (260) (284) ------- ------- RETAINED EARNINGS (ACCUMULATED DEFICIT) Balance January 1.................................. (2,212) (2,246) Net income....................................... 28 25 ------- ------- Balance June 30.................................... (2,184) (2,221) ------- ------- LESS--COMMON STOCK HELD AS TREASURY STOCK, AT COST Balance January 1 and June 30...................... 1,294,692 240 1,294,692 240 ========== ------- ========== ------- Total....................................... $ 73 $ 6 ======= =======
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 (UNAUDITED)
THREE MONTHS ENDED JUNE 30, ---------------------------------------------------------------- 2004 2003 ------------------------------ ------------------------------ ACCUMULATED ACCUMULATED OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME INCOME INCOME INCOME (LOSS) (LOSS) (LOSS) (LOSS) ------------- ------------- ------------- ------------- (MILLIONS) NET INCOME.................................... $ 30 $24 ---- --- ACCUMULATED OTHER COMPREHENSIVE LOSS CUMULATIVE TRANSLATION ADJUSTMENT Balance April 1............................. $(149) $(251) Translation of foreign currency statements.............................. (13) (13) 47 47 ----- ----- Balance June 30............................. (162) (204) ----- ----- FAIR VALUE OF INTEREST RATE SWAPS Balance April 1............................. -- -- Fair value adjustment..................... -- -- -- -- ----- ----- Balance June 30............................. -- -- ----- ----- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance April 1 and June 30................. (98) (80) ----- ----- Balance June 30............................... $(260) $(284) ===== ---- ===== --- Other comprehensive income (loss)............. (13) 47 ---- --- COMPREHENSIVE INCOME.......................... $ 17 $71 ==== ===
SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------------- 2004 2003 ------------------------------ ------------------------------ ACCUMULATED ACCUMULATED OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME INCOME INCOME INCOME (LOSS) (LOSS) (LOSS) (LOSS) ------------- ------------- ------------- ------------- (MILLIONS) NET INCOME.................................... $ 28 $25 ---- --- ACCUMULATED OTHER COMPREHENSIVE LOSS CUMULATIVE TRANSLATION ADJUSTMENT Balance January 1........................... $(143) $(273) Translation of foreign currency statements.............................. (19) (19) 69 69 ----- ----- Balance June 30............................. (162) (204) ----- ----- FAIR VALUE OF INTEREST RATE SWAPS Balance January 1........................... -- (4) Fair value adjustment..................... -- -- 4 4 ----- ----- Balance June 30............................. -- -- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance January 1 and June 30............... (98) (80) ----- ----- Balance June 30............................... $(260) $(284) ===== ---- ===== --- Other comprehensive income (loss)............. (19) 73 ---- --- COMPREHENSIVE INCOME.......................... $ 9 $98 ==== ===
The accompanying notes to financial statements are an integral part of these statements of comprehensive income. 9 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) As you read the accompanying financial statements and Management's Discussion and Analysis you should also read our Annual Report on Form 10-K for the year ended December 31, 2003. In our opinion, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly Tenneco Automotive Inc.'s financial position, results of operations, cash flows, changes in shareholders' equity, and comprehensive income for the periods indicated. We have prepared the unaudited interim consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements. Our consolidated financial statements include all majority-owned subsidiaries. We carry investments in 20 percent to 50 percent owned companies at cost plus equity in undistributed earnings and cumulative translation adjustments from the date of acquisition since we have the ability to exert significant influence over operating and financial policies. We have reclassified prior year's financial statements where appropriate to conform to 2004 presentations. (2) In June 2003, we issued $350 million of 10 1/4 percent senior secured notes in a private placement. The notes have a final maturity date of July 15, 2013. The notes accrued interest from June 19, 2003 with a first interest payment date of January 15, 2004. In October 2003, we completed an offer to exchange all of the notes issued in the June 2003 private placement for a like amount of the 10 1/4 percent senior secured notes, with substantially identical terms, which had been registered under the Securities Act of 1933. We received net proceeds in the second quarter of 2003 from the offering of the notes, after deducting underwriting discounts and commissions and our expenses, of $338 million. We used the net proceeds of the offering to repay outstanding amounts under our senior credit facility as follows: (i) first, to prepay $199 million on the term loan A due November 4, 2005, (ii) second, to prepay $52 million on the term loans B and C due November 4, 2007 and May 4, 2008, respectively, and (iii) third, to prepay outstanding borrowings of $87 million under the revolving credit portion of our senior credit facility. In connection with issuing $350 million of 10 1/4 percent senior secured notes due July 15, 2013, we amended the senior credit facility effective May 29, 2003. This amendment allowed us to incur debt secured by a second lien on our U.S. assets and to have that debt guaranteed by our major U.S. subsidiaries. The amendment also allowed us to use a portion of the proceeds from the new senior secured notes to repay outstanding borrowings under the revolving credit facility, without having to reduce the then-applicable $450 million size of the revolving credit facility, and to prepay the term loans under the senior credit facility on a non pro-rata basis with the remaining net proceeds from the notes. In exchange for these amendments, we agreed to pay an aggregate sum of $1 million to consenting lenders. We also incurred legal, advisory and other costs related to the amendment process of $1 million. These costs were included in the capitalized debt issuance costs. In December 2003, we amended and restated our senior credit facility and in connection therewith, we issued an additional $125 million of 10 1/4 percent senior secured notes in a private placement. We received $136 million of net proceeds from the offering of the additional $125 million of 10 1/4 percent senior secured notes, after deducting underwriting discounts and commissions and other expenses and including a 13 percent price premium over par. We also received $391 million in net proceeds from the new term loan B borrowings under the amended and restated senior credit facility, after deducting fees and other expenses. We used the combined net proceeds of $527 million to prepay the $514 million outstanding under term loans A, B and C under the senior credit facility immediately prior to the completion of the transaction. The remaining $13 million of net proceeds were used for general corporate purposes. In addition, we received $6 million of accrued interest on the new notes for the period from June 19 through December 12, 2003 that investors paid 10 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) us and that we subsequently used to pay, on January 15, 2004, the accrued interest on the notes from June 19, 2003. In June 2004, we completed an offer to exchange all of the notes issued in the December 2003 private placement for a like amount of the 10 1/4 percent senior secured notes, with substantially identical terms, which have been registered under the Securities Act of 1933. We incurred $27 million in fees associated with the issuance of the aggregate $475 million of 10 1/4 percent senior secured notes and the amendment and restatement of our senior credit facility which will be amortized over the term of the senior secured notes and the amended and restated senior credit facility. After giving effect to the use of the net proceeds from both the June and December transactions, we expect these transactions would have increased our annual interest expense by approximately $9 million for 2003. This does not give effect to the fixed-to-floating interest rate swaps we completed in April 2004, described below. In addition, we expensed in the second and fourth quarters of 2003 a total of approximately $12 million of existing deferred debt issuance costs as a result of retiring the term loans under the senior credit facility. In April 2004, we amended our senior credit facility in connection with a proposed transaction to refinance our outstanding senior subordinated notes. While we abandoned the proposed transaction in late May 2004, the amendment remains in effect. The amendment permitted certain aspects of the transaction and made other minor technical changes. In April 2004, we entered into three separate fixed-to-floating interest rate swaps with two separate financial institutions. These agreements swapped an aggregate of $150 million of fixed interest rate debt at a per annum rate of 10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus a spread of 5.68 percent. Each agreement requires semi-annual settlements through July 15, 2013. Based on the current LIBOR as determined under these agreements of 1.86 percent (which remains in effect until January 15, 2005), these swaps would reduce our annual interest expense by approximately $4 million. The swaps qualify as fair value hedges in accordance with Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," and as such are recorded on the balance sheet at market value with an offset to the underlying hedged item, which is long-term debt. As of June 30, 2004, the fair value of the interest rate swaps was approximately a negative $6 million, which has been recorded as a decrease to long-term debt and an increase to other long-term liabilities. (3) Over the past several years we have adopted plans to restructure portions of our operations. These plans were approved by the Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. Prior to the change in accounting required for exit or disposal activities, we recorded charges to income related to these plans for costs that do not benefit future activities in the period in which the plans were finalized and approved, while actions necessary to affect these restructuring plans occurred over future periods in accordance with established plans. In the fourth quarter of 2001, our Board of Directors approved a restructuring plan, a project known as Project Genesis, designed to lower our fixed costs, improve efficiency and utilization, and better optimize our global footprint. Project Genesis involved closing eight facilities, improving the process flow and efficiency through value mapping and plant arrangement at 20 facilities, relocating production among facilities, and centralizing some functional areas. The closed facilities included an emission control aftermarket plant and an aftermarket distribution operation in Europe, a ride control plant in Europe, an engineering center in Europe, one building at an emission 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. 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 was reflected in cost of sales, while $4 million was included in selling, general and administrative expenses. We also recorded a pre-tax charge of $4 million in cost of sales 11 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) related to a strategic decision to adjust some product offerings and our customer supply strategy in the European aftermarket. Finally, we also incurred $1 million in other restructuring related costs during the fourth quarter of 2001 for the value mapping and rearrangement of one of our emission 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 $0.81 per diluted common share. As of December 31, 2003, we have eliminated 974 positions in connection with Project Genesis. Additionally, we executed this plan more efficiently than originally anticipated and as a result in the fourth quarter of 2002 reduced our reserves related to this restructuring activity by $6 million, which was recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2 million of severance reserve to the asset impairment reserve. This reclassification became necessary as actual asset impairments along with the sale of our closed facilities were different than the original estimates. We completed the remaining restructuring activities related to Project Genesis in the second quarter of 2004. In the first quarter of 2003, we incurred severance costs of $1 million associated with eliminating 17 salaried positions through selective layoffs and an early retirement program. Additionally, 93 hourly positions were eliminated through selective layoffs in the quarter. These reductions were done to reduce ongoing labor costs in North America. This charge was primarily recorded in cost of sales. In October of 2003 we announced the closure of an emission control manufacturing facility in Birmingham, U.K. Approximately 130 employees will be eligible for severance benefits in accordance with union contracts and U.K. legal requirements. We incurred approximately $2 million in costs related to this action in the first six months of 2004. Additional costs related to this closing are not expected to exceed $3 million and will be recorded in the second half of 2004. This action is in addition to the plant closures announced in Project Genesis in the fourth quarter of 2001. In addition to the above costs, we incurred $8 million in restructuring and restructuring related costs in the first six months of 2004. These costs are primarily related to the continuation of the optimization of our manufacturing footprint that was started with Project Genesis in 2001. Including the costs incurred in 2002 and 2003 of $18 million, we have incurred a total of $28 million for activities related to our restructuring actions initiated in prior periods that could not be accrued as part of the restructuring charges for these actions. Amounts related to the reserves we have established regarding activities that are part of our restructuring plans are as follows:
DECEMBER 31, JUNE 30, 2003 2004 CHARGED TO IMPACT OF 2004 RESTRUCTURING CASH ASSET EXCHANGE RESTRUCTURING RESERVE PAYMENTS ACCOUNTS RATES RESERVE ------------- -------- ---------- --------- ------------- (MILLIONS) Severance............................... $1 $1 $-- $-- $-- Asset Impairment........................ -- -- -- -- -- Other................................... -- -- -- -- -- -- -- --- --- --- $1 $1 $-- $-- $-- == == === === ===
Under the terms of our amended and restated senior credit agreement that took effect on December 12, 2003, 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 2002-2006 period from the calculation of the financial covenant ratios we are required to maintain under our senior credit agreement. As of June 30, 2004, we have excluded $29 million of the $60 million available under the terms of the senior credit facility. In addition to 12 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) the announced actions, we continue to evaluate additional opportunities to initiate actions that will reduce our costs through implementing the most appropriate and efficient logistics, distribution and manufacturing footprint for the future. There can be no assurances, however, that we will undertake additional restructuring actions. Actions that we take, if any, will require the approval of our Board of Directors, or its authorized committee, and if the costs of the plans exceed the amount previously approved by our senior lenders, could require approval by our senior lenders. We plan to conduct any workforce reductions that result in compliance with all legal and contractual requirements including obligations to consult with workers' councils, union representatives and others. (4) 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, 2004, we are designated as a potentially responsible party in one Superfund site. We have estimated our share of the remediation costs for this site to be less than $1 million in the aggregate. In addition to the Superfund site, we may have the obligation to remediate current or former facilities, and we estimate our share of remediation costs at these facilities to be approximately $11 million. For the Superfund site and the current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund site, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at the Superfund site, and of other liable parties at our current and former facilities, has been considered, where appropriate, in our determination of our estimated liability. We believe that any potential costs associated with our current status as a potentially responsible party in the Superfund site, or as a liable party at our current or former facilities, will not be material to our results of operations or consolidated financial position. We also from time to time are involved in legal proceedings or claims that are incidental to the conduct of our business. Some of these proceedings allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warnings issues, and other product liability related matters), employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. As another example, we are involved in litigation with the minority owner of one of our Indian joint ventures over various 13 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) operational issues which involves a court-mandated bidding process. We vigorously defend ourselves against all of these claims. In future periods, we could be subjected to cash costs or non-cash charges to earnings if we are required to sell our interest in the joint venture on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our future consolidated financial position or results of operations. In addition, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. Many of these cases involve significant numbers of individual claimants. However, only a small percentage of these claimants allege that they were automobile mechanics who were allegedly exposed to our former muffler products and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other evidence, it is unlikely that mechanics were exposed to asbestos by our former muffler products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number of each in some cases exceeding 200 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. On the other hand, we are experiencing an increasing number of these claims, likely due to bankruptcies of major asbestos manufacturers. We vigorously defend ourselves against these claims as part of our ordinary course of business. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolution in the form of a dismissal of the claim or a judgment in our favor. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future financial condition or results of operations. We provide warranties on some of our products. The warranty terms vary but range from one year up to limited lifetime warranties on some of our premium aftermarket products. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified on OE products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. We actively study trends of warranty claims and take action to improve product quality and minimize warranty claims. We believe that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. The reserve is included in both long-term and short-term liabilities on the balance sheet. Below is a table that shows the activity in the warranty accrual accounts:
SIX MONTHS ENDED JUNE 30, ----------- 2004 2003 ---- ---- (MILLIONS) Beginning Balance........................................... $18 $21 Accruals related to product warranties...................... 3 5 Reductions for payments made................................ (3) (3) --- --- Ending Balance.............................................. $18 $23 === ===
(5) In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which was revised in December 2003. FIN 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the entity that has the controlling financial interest. FIN 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or 14 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) significant financial support provided to it. This interpretation as revised is effective January 1, 2004. The adoption of FIN 46 did not have a material impact on our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amended and clarified financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on our financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 established standards for classification of certain financial instruments that have characteristics of both liabilities and equity but have been presented entirely as equity or between the liabilities and equity section of the statement of financial position. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 did not have a material impact on our financial position. In December 2003, the FASB revised SFAS No. 132, "Employer's Disclosures About Pensions and Other Postretirement Benefits." The revised SFAS No. 132 changes employers' disclosures about pension plans and other postretirement benefits and requires additional disclosures about assets, obligations, cash flows and net periodic benefit cost. The revised statement is effective for annual and interim periods ended after December 15, 2003. We adopted the revised disclosures as of December 31, 2003, in our consolidated financial statements. On December 8, 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) into law. The Act introduces a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree healthcare plans that provide prescription drug benefits that are at least actuarially equivalent to Medicare Part D. As permitted by FASB Staff Position ("FSP") 106-1, we previously chose to defer recognizing the effects of the Act on our postretirement healthcare insurance plans until authoritative guidance was issued by the FASB. Accordingly, our measure of the accumulated projected benefit obligation and net periodic postretirement benefit expense do not reflect the effects of the Act. In May 2004, the FASB issued FSP No. 106-2, which supercedes FSP No. 106-1 and requires the commencement of accounting recognition for the effects of the Act no later than our quarter ending September 30, 2004. We anticipate implementing the accounting guidance related to the effects of the Act during the quarter ending September 30, 2004. We anticipate the Act will result in a reduction of our future net healthcare expenses and liabilities. (6) We entered into an agreement during the third quarter of 2000 to sell an interest in some of our U.S. trade accounts receivable to a third party. Receivables become eligible for the program on a daily basis, at which time the receivables are sold to the third party, net of a purchase discount, through a wholly-owned subsidiary. Under this agreement, as well as individual agreements with third parties in Europe, we have sold accounts receivable of $148 million and $128 million at June 30, 2004 and 2003, respectively. We recognized a loss of less than $1 million in each of the six months ended June 30, 2004 and 2003, respectively, on these sales of trade accounts, representing the discount from book values at which these receivables were sold to the third party. The discount rate varies based on funding cost incurred by the third party, and it averaged approximately 4 percent during the time period in 2004 when we sold receivables. We retained ownership of the remaining interest in the pool of receivables not sold to the third party. The retained interest represents a credit enhancement for the program. We value the retained interest based upon the amount we expect to collect from our customers, which approximates book value. 15 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (7) We account for our stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees." As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," and amended by SFAS No. 148, "Accounting for Stock-based Compensation--Transition and Disclosure, an amendment of FASB Statement No. 123," we follow the disclosure requirements only of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ----------------- ----------------- 2004 2003 2004 2003 ----- ----- ----- ----- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) Net income............................................... $ 30 $ 24 $ 28 $ 25 Add: Stock-based employee compensation expense included in net income, net of income tax....................... 1 1 8 -- Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of income tax.............................. (1) (1) (9) (1) ----- ----- ----- ----- Pro forma net income..................................... $ 30 $ 24 $ 27 $ 24 ===== ===== ===== ===== Earnings per share: Basic--as reported....................................... $0.73 $0.59 $0.69 $0.61 Basic--pro forma......................................... $0.73 $0.58 $0.67 $0.59 Diluted--as reported..................................... $0.69 $0.58 $0.65 $0.60 Diluted--pro forma....................................... $0.68 $0.57 $0.63 $0.58
The fair value of each option granted during the first six months of 2004 and 2003 is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions for grants in the first six months of 2004 and 2003, respectively: (i) risk-free interest rates of 4.07 percent and 5.20 percent; (ii) expected lives of 10 years and 10 years; (iii) expected volatility of 43.56 percent and 39.52 percent; and (iv) dividend yield of 0.00 percentage and 0.00 percentage. 16 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (8) Earnings per share of common stock outstanding were computed as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2004 2003 2004 2003 ------------ ------------ ----------- ----------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) Basic earnings per share-- Net income.................................. $ 30 $ 24 $ 28 $ 25 =========== =========== =========== =========== Average shares of common stock outstanding............................... 41,475,722 40,394,671 41,132,232 40,244,623 =========== =========== =========== =========== Earnings per average share of common stock..................................... $ 0.73 $ 0.59 $ 0.69 $ 0.61 =========== =========== =========== =========== Diluted earnings per share-- Net income.................................. $ 30 $ 24 $ 28 $ 25 =========== =========== =========== =========== Average shares of common stock outstanding............................... 41,475,722 40,394,671 41,132,232 40,244,623 Effect of dilutive securities: Restricted stock.......................... 241,371 18,866 268,634 45,930 Stock options............................. 2,464,135 919,871 2,438,543 846,624 ----------- ----------- ----------- ----------- Average shares of common stock outstanding including dilutive shares................. 44,181,228 41,333,408 43,839,409 41,137,177 =========== =========== =========== =========== Earnings per average share of common stock..................................... $ 0.69 $ 0.58 $ 0.65 $ 0.60 =========== =========== =========== ===========
Options to purchase 748,652 and 4,709,501 shares of common stock were outstanding at June 30, 2004 and 2003, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares on such dates. (9) Net periodic pension costs (income) and postretirement benefit costs (income) consist of the following components:
PENSION POSTRETIREMENT PENSION POSTRETIREMENT -------------- --------------- -------------- ---------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------------- ------------------------------------ 2004 2003 2004 2003 2004 2003 2004 2003 ---- ---- ----- ---- ---- ---- ----- ----- (MILLIONS) (MILLIONS) Service cost............................. $ 5 $ 4 $ 1 $1 $ 10 $ 8 $ 1 $ 3 Interest cost............................ 7 7 2 3 15 14 4 5 Expected return on plan assets........... (7) (7) -- -- (15) (14) -- -- Net amortization: Actuarial loss......................... 2 1 1 1 3 1 3 2 Prior service cost..................... 1 1 (2) -- 2 2 (4) (1) --- --- ----- -- ---- ---- ----- ----- Net pension and postretirement costs..... $ 7 $ 6 $ 2 $5 $ 15 $ 11 $ 4 $ 9 === === ===== == ==== ==== ===== =====
For the six months ended June 30, 2004, we made pension contributions of approximately $8 million. Based on current actuarial estimates, we believe we will be required to make approximately $10 million to $15 million in contributions for the remainder of 2004. We made postretirement contributions of approximately $3 million during the first six months of 2004. Based on current actuarial estimates, we believe we will be required to make approximately $3 million in contributions for the remainder of 2004. (10) We occasionally provide guarantees that could require us to make future payments in the event that the third party primary obligor does not make its required payments. We have not recorded a liability for any 17 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) of these guarantees. The only third party guarantee we have made is the performance of lease obligations by a former affiliate. Our maximum liability under this guarantee was approximately $4 million and $5 million at June 30, 2004 and 2003, respectively. We have no recourse in the event of default by the former affiliate. However, we have not been required to make any payments under this guarantee. Additionally, we have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our then existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee the $800 million senior secured credit facility, the $475 million senior secured notes and the $500 million senior subordinated notes on a joint and several basis. The arrangement for the senior secured credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of 66 percent of the stock of certain first-tier foreign subsidiaries. The arrangement for the $475 million senior secured notes is also secured by second-priority liens on substantially all our domestic assets, excluding some of the stock of our domestic subsidiaries. This arrangement is not secured by any pledges of stock or assets of our foreign subsidiaries. You should also read Note 12 where we present the Supplemental Guarantor Condensed Consolidating Financial Statements. We have issued guarantees through letters of credit in connection with some obligations of our affiliates. We have guaranteed through letters of credit support for local credit facilities, travel and procurement card programs, and cash management requirements for some of our subsidiaries totaling $34 million. We have also issued $18 million in letters of credit to support some of our subsidiaries' insurance arrangements. In addition, we have issued $3 million in guarantees through letters of credit to guarantee other obligations of subsidiaries primarily related to environmental remediation activities. (11) 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. 18 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) The following table summarizes certain segment information:
SEGMENT ------------------------------------------------------------- RECLASS NORTH AMERICA EUROPE OTHER & ELIMS CONSOLIDATED ------------- ------ ----- --------- ------------ (MILLIONS) FOR THE THREE MONTHS ENDED JUNE 30, 2004 Revenues from external customers............ $ 523 $ 446 $145 $ -- $1,114 Intersegment revenues....................... 2 13 5 (20) -- Income before interest, income taxes, and minority interest......................... 50 14 12 -- 76 FOR THE THREE MONTHS ENDED JUNE 30, 2003 Revenues from external customers............ $ 501 $ 388 $109 $ -- $ 998 Intersegment revenues....................... 2 10 3 (15) -- Income before interest, income taxes, and minority interest......................... 49 11 7 -- 67 AT JUNE 30, 2004, AND FOR THE SIX MONTHS THEN ENDED Revenues from external customers............ $1,026 $ 854 $268 $ -- $2,148 Intersegment revenues....................... 3 27 10 (40) -- Income before interest, income taxes, and minority interest......................... 80 11 18 -- 109 Total Assets................................ 747 1,138 918 120 2,923 AT JUNE 30, 2003, AND FOR THE SIX MONTHS THEN ENDED Revenues from external customers............ $ 982 $ 733 $204 $ -- $1,919 Intersegment revenues....................... 4 19 5 (28) -- Income before interest, income taxes, and minority interest......................... 77 10 11 -- 98 Total Assets................................ 755 1,057 737 124 2,673
(12) Supplemental guarantor condensed financial statements are presented below: Basis of Presentation Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries (which are referred to as the Guarantor Subsidiaries) fully and unconditionally guarantee our senior subordinated notes due 2009 and our senior secured notes due 2013 on a joint and several basis. We have not presented separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries because management has determined that such information is not material to the holders of the notes. Therefore, the Guarantor Subsidiaries are combined in the presentation below. These condensed consolidating financial statements are presented on the equity method. Under this method, our investments are recorded at cost and adjusted for our ownership share of a subsidiary's cumulative results of operations, capital contributions and distributions, and other equity changes. You should read the condensed consolidating financial statements of the Guarantor Subsidiaries in connection with our consolidated financial statements and related notes of which this note is an integral part. Distributions There are no significant restrictions on the ability of the Guarantor Subsidiaries to make distributions to us. 19 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 2004 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External....................... $489 $625 $ -- $ -- $1,114 Affiliated companies........... 10 81 -- (91) -- ---- ---- ---- ---- ------ 499 706 -- (91) 1,114 ---- ---- ---- ---- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)...... 384 581 -- (91) 874 Engineering, research, and development.................... 9 10 -- -- 19 Selling, general, and administrative................. 52 48 -- -- 100 Depreciation and amortization of other intangibles.............. 20 24 -- -- 44 ---- ---- ---- ---- ------ 465 663 -- (91) 1,037 ---- ---- ---- ---- ------ OTHER INCOME (EXPENSE) Loss on sale of receivables....... -- (1) -- -- (1) Other income (loss)............... 10 (8) -- (2) -- ---- ---- ---- ---- ------ 10 (9) -- (2) (1) ---- ---- ---- ---- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES......... 44 34 -- (2) 76 Interest expense-- External (net of interest capitalized)................. -- 2 32 -- 34 Affiliated companies (net of interest income)............. 21 (3) (18) -- -- Income tax expense (benefit)...... (31) 12 (17) (46) 10 Minority interest................. -- 2 -- -- 2 ---- ---- ---- ---- ------ 54 21 3 (48) 30 Equity in net income (loss) from affiliated companies........... 24 -- 27 (51) -- ---- ---- ---- ---- ------ NET INCOME (LOSS)................... $ 78 $ 21 $ 30 $(99) $ 30 ==== ==== ==== ==== ======
20 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 2003 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External....................... $478 $520 $ -- $ -- $998 Affiliated companies........... 12 87 -- (99) -- ---- ---- ---- ---- ---- 490 607 -- (99) 998 ---- ---- ---- ---- ---- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)...... 379 499 -- (99) 779 Engineering, research, and development.................... 6 7 -- -- 13 Selling, general, and administrative................. 44 53 -- -- 97 Depreciation and amortization of other intangibles.............. 18 23 -- -- 41 ---- ---- ---- ---- ---- 447 582 -- (99) 930 ---- ---- ---- ---- ---- OTHER INCOME (EXPENSE) Loss on sale of receivables....... -- (1) -- -- (1) Other income (loss)............... -- -- -- -- -- ---- ---- ---- ---- ---- -- (1) -- -- (1) ---- ---- ---- ---- ---- INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES......... 43 24 -- -- 67 Interest expense-- External (net of interest capitalized)................. (1) 1 38 -- 38 Affiliated companies (net of interest income)............. 25 (2) (23) -- -- Income tax expense (benefit)...... (1) (3) (20) 27 3 Minority interest................. -- 2 -- -- 2 ---- ---- ---- ---- ---- 20 26 5 (27) 24 Equity in net income (loss) from affiliated companies........... 33 (1) 19 (51) -- ---- ---- ---- ---- ---- NET INCOME (LOSS)................... $ 53 $ 25 $ 24 $(78) $ 24 ==== ==== ==== ==== ====
21 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2004 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External....................... $890 $1,258 $ -- $ -- $2,148 Affiliated companies........... 27 107 -- (134) -- ---- ------ ---- ----- ------ 917 1,365 -- (134) 2,148 ---- ------ ---- ----- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)...... 703 1,135 -- (134) 1,704 Engineering, research, and development.................... 16 18 -- -- 34 Selling, general, and administrative................. 108 103 -- -- 211 Depreciation and amortization of other intangibles.............. 39 50 -- -- 89 ---- ------ ---- ----- ------ 866 1,306 -- (134) 2,038 ---- ------ ---- ----- ------ OTHER INCOME (EXPENSE) Loss on sale of receivables....... -- (1) -- -- (1) Other income (loss)............... 18 (11) -- (7) -- ---- ------ ---- ----- ------ 18 (12) -- (7) (1) ---- ------ ---- ----- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES......... 69 47 -- (7) 109 Interest expense-- External (net of interest capitalized)................. -- 3 66 -- 69 Affiliated companies (net of interest income)............. 42 (5) (37) -- -- Income tax expense (benefit)...... (34) 14 (35) 64 9 Minority interest................. -- 3 -- -- 3 ---- ------ ---- ----- ------ 61 32 6 (71) 28 Equity in net income (loss) from affiliated companies........... 38 -- 22 (60) -- ---- ------ ---- ----- ------ NET INCOME (LOSS)................... $ 99 $ 32 $ 28 $(131) $ 28 ==== ====== ==== ===== ======
22 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) STATEMENT OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues-- External....................... $865 $1,054 $ -- $ -- $1,919 Affiliated companies........... 23 107 -- (130) -- ---- ------ ---- ----- ------ 888 1,161 -- (130) 1,919 ---- ------ ---- ----- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)...... 696 956 -- (130) 1,522 Engineering, research, and development.................... 16 16 -- -- 32 Selling, general, and administrative................. 85 100 -- -- 185 Depreciation and amortization of other intangibles.............. 36 44 -- -- 80 ---- ------ ---- ----- ------ 833 1,116 -- (130) 1,819 ---- ------ ---- ----- ------ OTHER INCOME (EXPENSE) Loss on sale of receivables....... -- (1) -- -- (1) Other income (loss)............... (1) 2 -- (2) (1) ---- ------ ---- ----- ------ (1) 1 -- (2) (2) ---- ------ ---- ----- ------ INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM AFFILIATED COMPANIES......... 54 46 -- (2) 98 Interest expense-- External (net of interest capitalized)................. (1) 2 68 -- 69 Affiliated companies (net of interest income)............. 42 1 (43) -- -- Income tax expense (benefit)...... (5) (1) (35) 42 1 Minority interest................. -- 3 -- -- 3 ---- ------ ---- ----- ------ 18 41 10 (44) 25 Equity in net income (loss) from affiliated companies........... 45 (2) 15 (58) -- ---- ------ ---- ----- ------ NET INCOME (LOSS)................... $ 63 $ 39 $ 25 $(102) $ 25 ==== ====== ==== ===== ======
23 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) BALANCE SHEET
JUNE 30, 2004 ------------------------------------------------------------------------ TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- --------- ------------ (MILLIONS) ASSETS Current assets: Cash and cash equivalents.......... $ 96 $ 70 $ -- $ -- $ 166 Receivables, net................... 163 595 23 (231) 550 Inventories........................ 99 253 -- -- 352 Deferred income taxes.............. 70 9 -- (17) 62 Prepayments and other.............. 30 110 -- -- 140 ------ ------ ------ ------- ------ 458 1,037 23 (248) 1,270 ------ ------ ------ ------- ------ Other assets: Investment in affiliated companies....................... 289 -- 2,118 (2,407) -- Notes and advances receivable from affiliates...................... 2,811 39 3,284 (6,134) -- Long-term notes receivable, net.... 2 20 -- -- 22 Goodwill........................... 136 56 -- -- 192 Intangibles, net................... 14 10 -- -- 24 Deferred income taxes.............. 132 -- 103 (33) 202 Pension assets..................... -- 7 -- -- 7 Other.............................. 47 66 34 -- 147 ------ ------ ------ ------- ------ 3,431 198 5,539 (8,574) 594 ------ ------ ------ ------- ------ Plant, property, and equipment, at cost............................... 880 1,398 -- -- 2,278 Less--Reserves for depreciation and amortization.................... 529 690 -- -- 1,219 ------ ------ ------ ------- ------ 351 708 -- -- 1,059 ------ ------ ------ ------- ------ $4,240 $1,943 $5,562 $(8,822) $2,923 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt) Short-term debt--non-affiliated.......... $ -- $ 16 $ 4 $ -- $ 20 Short-term debt--affiliated..... 18 115 10 (143) -- Trade payables..................... 219 535 -- (85) 669 Accrued taxes...................... -- 42 16 (28) 30 Other.............................. 112 130 38 (2) 278 ------ ------ ------ ------- ------ 349 838 68 (258) 997 Long-term debt--non-affiliated....... -- 15 1,384 -- 1,399 Long-term debt--affiliated........... 2,103 -- 4,031 (6,134) -- Deferred income taxes................ 68 39 -- 17 124 Postretirement benefits and other liabilities........................ 217 78 6 6 307 Commitments and contingencies Minority interest.................... -- 23 -- -- 23 Shareholders' equity................. 1,503 950 73 (2,453) 73 ------ ------ ------ ------- ------ $4,240 $1,943 $5,562 $(8,822) $2,923 ====== ====== ====== ======= ======
24 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) BALANCE SHEET
DECEMBER 31, 2003 ------------------------------------------------------------------------ TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS & SUBSIDIARIES SUBSIDIARIES COMPANY) ELIMS CONSOLIDATED ------------ ------------ --------------- --------- ------------ (MILLIONS) ASSETS Current assets: Cash and cash equivalents.......... $ 70 $ 75 $ -- $ -- $ 145 Receivables, net................... 136 449 19 (162) 442 Inventories........................ 89 254 -- -- 343 Deferred income taxes.............. 85 9 -- (31) 63 Prepayments and other.............. 40 72 -- -- 112 ------ ------ ------ ------- ------ 420 859 19 (193) 1,105 ------ ------ ------ ------- ------ Other assets: Investment in affiliated companies....................... 330 -- 2,105 (2,435) -- Notes and advances receivable from affiliates...................... 2,741 37 3,243 (6,021) -- Long-term notes receivable, net.... 2 19 -- -- 21 Goodwill........................... 136 57 -- -- 193 Intangibles, net................... 14 11 -- -- 25 Deferred income taxes.............. 124 -- 78 (13) 189 Pension assets..................... -- 6 -- -- 6 Other.............................. 39 70 36 -- 145 ------ ------ ------ ------- ------ 3,386 200 5,462 (8,469) 579 ------ ------ ------ ------- ------ Plant, property, and equipment, at cost............................... 877 1,426 -- -- 2,303 Less--Reserves for depreciation and amortization.................... 511 681 -- -- 1,192 ------ ------ ------ ------- ------ 366 745 -- -- 1,111 ------ ------ ------ ------- ------ $4,172 $1,804 $5,481 $(8,662) $2,795 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities of long-term debt) Short-term debt--non-affiliated....... $ -- $ 16 $ 4 $ -- $ 20 Short-term debt--affiliated... -- 123 10 (133) -- Trade payables..................... 184 464 -- (27) 621 Accrued taxes...................... -- 32 17 (30) 19 Other.............................. 100 94 40 (1) 233 ------ ------ ------ ------- ------ 284 729 71 (191) 893 Long-term debt--non-affiliated....... -- 17 1,393 -- 1,410 Long-term debt--affiliated........... 2,062 -- 3,959 (6,021) -- Deferred income taxes................ 92 40 1 (14) 119 Postretirement benefits and other liabilities........................ 210 77 (1) 6 292 Commitments and contingencies Minority interest.................... -- 23 -- -- 23 Shareholders' equity................. 1,524 918 58 (2,442) 58 ------ ------ ------ ------- ------ $4,172 $1,804 $5,481 $(8,662) $2,795 ====== ====== ====== ======= ======
25 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities.............. $ 80 $ 93 $(114) $ -- $ 59 ---- ---- ----- ----- ---- INVESTING ACTIVITIES Net proceeds from sale of assets.... -- 11 -- -- 11 Expenditures for plant, property, and equipment..................... (18) (36) -- -- (54) Investments and other............... (1) (1) -- -- (2) ---- ---- ----- ----- ---- Net cash used by investing activities........................ (19) (26) -- -- (45) ---- ---- ----- ----- ---- FINANCING ACTIVITIES Issuance of common shares........... -- -- 4 -- 4 Proceeds from capital contributions..................... -- -- -- -- -- Issuance of long-term debt.......... -- -- -- -- -- Debt issuance costs on long-term debt.............................. -- -- -- -- -- Retirement of long-term debt........ -- (2) (2) -- (4) Net increase (decrease) in short-term debt excluding current maturities of long-term debt...... -- 1 -- -- 1 Intercompany dividends and net increase (decrease) in intercompany obligations.......... (35) (77) 112 -- -- Other............................... -- 2 -- -- 2 ---- ---- ----- ----- ---- Net cash provided (used) by financing activities.............. (35) (76) 114 -- 3 ---- ---- ----- ----- ---- Effect of foreign exchange rate changes on cash and cash equivalents....................... -- 4 -- -- 4 ---- ---- ----- ----- ---- Increase (decrease) in cash and cash equivalents....................... 26 (5) -- -- 21 Cash and cash equivalents, January 1................................. 70 75 -- -- 145 ---- ---- ----- ----- ---- Cash and cash equivalents, June 30 (Note)............................ $ 96 $ 70 $ -- $ -- $166 ==== ==== ===== ===== ====
NOTE: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. 26 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities.............. $ 68 $ 61 $(101) $ -- $ 28 ---- ---- ----- ----- ----- INVESTING ACTIVITIES Net proceeds from the sale of assets............................ -- 3 -- -- 3 Expenditures for plant, property, and equipment..................... (20) (34) -- -- (54) Investments and other............... -- (2) -- -- (2) ---- ---- ----- ----- ----- Net cash used by investing activities........................ (20) (33) -- -- (53) ---- ---- ----- ----- ----- FINANCING ACTIVITIES Issuance of common shares........... -- -- -- -- -- Proceeds from capital contributions..................... -- -- 1 -- 1 Issuance of long-term debt.......... -- -- 350 -- 350 Debt issuance costs on long-term debt.............................. -- -- (12) -- (12) Retirement of long-term debt........ -- (2) (274) -- (276) Net increase (decrease) in short-term debt excluding current maturities of long-term debt...... -- -- (25) -- (25) Intercompany dividends and net increase (decrease) in intercompany obligations.......... (47) (14) 61 -- -- Other............................... -- (1) -- -- (1) ---- ---- ----- ----- ----- Net cash provided (used) by financing activities.............. (47) (17) 101 -- 37 ---- ---- ----- ----- ----- Effect of foreign exchange rate changes on cash and cash equivalents....................... -- (8) -- -- (8) ---- ---- ----- ----- ----- Increase (decrease) in cash and cash equivalents....................... 1 3 -- -- 4 Cash and cash equivalents, January 1................................. -- 54 -- -- 54 ---- ---- ----- ----- ----- Cash and cash equivalents, June 30 (Note)............................ $ 1 $ 57 $ -- $ -- $ 58 ==== ==== ===== ===== =====
NOTE: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. (The preceding notes are an integral part of the foregoing financial statements.) 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE SUMMARY We are one of the world's leading manufacturers of automotive emission control and ride control products and systems. We completed the separation of our packaging business in a series of transactions during 1999, culminating in the spin-off to our shareholders of the common stock of Pactiv Corporation (formerly known as Tenneco Packaging Inc.) on November 4, 1999. We serve both original equipment (OE) vehicle manufacturers and the repair and replacement markets, or aftermarket, globally through leading brands, including Monroe(R), Rancho(R), Clevite(R) Elastomers and Fric Rot(TM) ride control products and Walker(R), Fonos(TM), and Gillet(TM) emission control products. Worldwide we serve more than 30 different original equipment manufacturers, and our products or systems are included on six of the top 10 passenger car models produced in North American and Western Europe and all of the top 10 light truck models produced in North America for 2003. During 2003, our aftermarket customers were comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. We operate more than 70 manufacturing facilities worldwide and employ approximately 19,100 people to service our customer's demands. Factors that are critical to our success include new business awards, managing our overall global manufacturing footprint to ensure proper placement and workforce levels in line with business needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes, fixing or eliminating unprofitable businesses and reducing overall costs. In addition, our ability to adapt to key industry trends, such as the consolidation of OE customers, increasing technologically sophisticated content, changing aftermarket distribution channels, increasing environmental standards and extended product life of automotive parts, also plays a critical role in our success. We have a substantial amount of indebtedness, with total debt, net of cash balances, of $1.253 billion as of June 30, 2004. As such, our ability to generate cash--both to fund operations and service our debt--is also a significant area of focus for our company. See "Liquidity and Capital Resources" below for further discussion of cash flows. Total revenues for the second quarter of 2004 were $1.1 billion, a 12 percent increase over the second quarter of 2003. Higher global OE volumes and improved North American aftermarket revenues drove this increase. Gross margin for the second quarter of 2004 was 21.5 percent down four-tenths of a percent from 21.9 percent in the second quarter of 2003. Strong growth in the global OE business outpaced the improvement in the higher gross margin aftermarket. We reported selling, general, administrative and engineering expenses for the second quarter of 2004 of 10.7 percent of revenues, as compared to 11.0 percent of revenues for the second quarter of 2003. The decrease was primarily attributable to higher sales volumes that more than offset the impact of aftermarket new-customer changeover costs, restructuring and certain consulting fees that related to a 1999 agreement that provided that a portion of the consultant's compensation would be in stock appreciation rights that were priced above the market price of our stock at the grant date. EBIT was $76 million for the second quarter of 2004, up $9 million from the $67 million reported in the second quarter of 2003. Stronger global operational performances drove this improvement. Total revenues for the first six months of 2004 were $2.1 billion, a 12 percent increase over the $1.9 million reported for same period last year. Strong OE volumes, improved North American aftermarket revenues and currency appreciation primarily drove this increase. Gross margin for first six months of 2004 was 20.7 percent, the same percentage as the first six months of 2003. Selling, general, administrative and engineering expenses for the first six months of 2004 were 11.4 percent of revenues, slightly higher than the 11.3 percent of revenues reported for the same period last year. The increase included higher sales volumes being offset by higher aftermarket new-customer changeover costs, restructuring and certain consulting fees tied to the stock price. EBIT was $109 million for the first six months of 2004, up $11 million from the $98 million reported for prior year. The increase in EBIT was primarily driven by higher volumes and operating efficiencies. 28 RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003 NET SALES AND OPERATING REVENUES The following tables reflect our revenues for the second quarter of 2004 and 2003. We present these reconciliations of revenues in order to reflect the trend in our sales in various product lines and geographic regions separately from the effects of doing business in currencies other than the U.S. dollar. Additionally, "pass-through" catalytic converter sales include precious metals pricing, which may be volatile. These "pass-through" catalytic converter sales occur when, at the direction of our OE customers, we purchase catalytic converters or components from suppliers, use them in our manufacturing process, and sell them as part of the completed system. While our original equipment customers assume the risk of this volatility, it impacts our reported revenue. Excluding "pass-through" catalytic converter sales removes this impact. We have not reflected any currency impact in the 2003 table since this is the base period for measuring the effects of currency during 2004 on our operations. We use this information to analyze the trend in our revenues before these factors. We believe investors find this information useful in understanding period-to-period comparisons in our revenues.
THREE MONTHS ENDED JUNE 30, 2004 ------------------------------------------------------------- PASS-THROUGH REVENUES SALES EXCLUDING REVENUES EXCLUDING CURRENCY AND CURRENCY EXCLUDING CURRENCY PASS-THROUGH REVENUES IMPACT CURRENCY IMPACT SALES -------- -------- --------- ------------ ------------ (MILLIONS) North America Aftermarket Ride Control................................ $ 100 $-- $ 100 $ -- $100 Emission Control............................ 44 -- 44 -- 44 ------ --- ------ ---- ---- Total North America Aftermarket........ 144 -- 144 -- 144 North America Original Equipment Ride Control................................ 120 -- 120 -- 120 Emission Control............................ 259 1 258 84 174 ------ --- ------ ---- ---- Total North America Original Equipment........................... 379 1 378 84 294 Total North America................. 523 1 522 84 438 Europe Aftermarket Ride Control................................ 51 2 49 -- 49 Emission Control............................ 52 2 50 -- 50 ------ --- ------ ---- ---- Total Europe Aftermarket............... 103 4 99 -- 99 Europe Original Equipment Ride Control................................ 91 4 87 -- 87 Emission Control............................ 252 14 238 81 157 ------ --- ------ ---- ---- Total Europe Original Equipment........ 343 18 325 81 244 Total Europe........................ 446 22 424 81 343 Asia.......................................... 58 1 57 20 37 South America................................. 36 (1) 37 3 34 Australia..................................... 51 4 47 4 43 ------ --- ------ ---- ---- Total Other......................... 145 4 141 27 114 ------ --- ------ ---- ---- Total Tenneco Automotive...................... $1,114 $27 $1,087 $192 $895 ====== === ====== ==== ====
29
THREE MONTHS ENDED JUNE 30, 2003 ----------------------------------------------------------------- PASS-THROUGH REVENUES SALES EXCLUDING REVENUES EXCLUDING CURRENCY AND CURRENCY EXCLUDING CURRENCY PASS-THROUGH REVENUES IMPACT CURRENCY IMPACT SALES -------- -------- --------- ------------ ------------ (MILLIONS) North America Aftermarket Ride Control............................ $ 90 $ -- $ 90 $ -- $ 90 Emission Control........................ 46 -- 46 -- 46 ---- ----- ---- ---- ---- Total North America Aftermarket.... 136 -- 136 -- 136 North America Original Equipment Ride Control............................ 118 -- 118 -- 118 Emission Control........................ 247 -- 247 75 172 ---- ----- ---- ---- ---- Total North America Original Equipment....................... 365 -- 365 75 290 Total North America............. 501 -- 501 75 426 Europe Aftermarket Ride Control............................ 53 -- 53 -- 53 Emission Control........................ 49 -- 49 -- 49 ---- ----- ---- ---- ---- Total Europe Aftermarket........... 102 -- 102 -- 102 Europe Original Equipment Ride Control............................ 64 -- 64 -- 64 Emission Control........................ 222 -- 222 73 149 ---- ----- ---- ---- ---- Total Europe Original Equipment.... 286 -- 286 73 213 Total Europe.................... 388 -- 388 73 315 Asia...................................... 40 -- 40 14 26 South America............................. 29 -- 29 3 26 Australia................................. 40 -- 40 4 36 ---- ----- ---- ---- ---- Total Other..................... 109 -- 109 21 88 ---- ----- ---- ---- ---- Total Tenneco Automotive.................. $998 $ -- $998 $169 $829 ==== ===== ==== ==== ====
Revenues from our North American operations increased $22 million in the second quarter of 2004 compared to the same period last year reflecting higher sales from both the OE and aftermarket businesses. Total North American OE revenues were up $14 million to $379 million in the second quarter of 2004, driven by higher volumes in both emission and ride control businesses. OE emission control revenues were up $12 million to $259 million in the second quarter of 2004, from $247 million in the prior year. Adjusted for pass-through sales, which increased 12 percent, and currency, OE emission control sales were up $2 million compared to the prior year. OE ride control revenues for the second quarter of 2004 increased two percent from the prior year. Total OE revenues, excluding pass-through sales and currency, increased two percent in the second quarter of 2004, while North American light vehicle production rates were flat with the second quarter of 2003. OE revenues benefited from higher heavy-duty volumes, our position on many of North America's top-selling platforms and a favorable shift in the mix of products we sold our OE customers. Aftermarket revenues for North America were $144 million in the second quarter of 2004, representing an increase of seven percent compared to the prior year. Aftermarket ride control revenues increased $10 million or 11 percent in the second quarter of 2004, due in large part to orders from a new customer as well as higher sales of premium priced products. Aftermarket emission control revenues decreased three percent in the second quarter of 2004 compared to 2003. It appears that the double-digit declines we experienced in the exhaust aftermarket, driven by the OE introduction of stainless steel and its negative impact on aftermarket replacement rates, are subsiding. Our European segment's revenues increased $58 million or 15 percent in the second quarter of 2004 compared to last year. Total OE revenues were $343 million in the second quarter of 2004, up 20 percent from last year. OE emission control revenues increased 14 percent to $252 million in the second quarter of 2004, 30 from $222 million in the prior year. Excluding an $8 million increase in pass-through sales and a $14 million increase due to strengthening currency, OE emission control revenues increased six percent over 2003, while European light vehicle production levels were flat with the second quarter of 2003. We experienced this increase despite the flat market production rates as a result of our position on successful platforms with Volvo, Mercedes and Volkswagen, along with new launches on Peugeot, Porsche and BMW models. OE ride control revenues increased to $91 million in the second quarter of 2004, up 41 percent from $64 million a year ago. Excluding a $4 million benefit from currency appreciation, OE ride control revenues increased 34 percent. We experienced this revenue increase, despite the flat European build rate, due to stronger sales on new platforms with Volkswagen, Renault and Ford. European aftermarket sales were $103 million in the second quarter of 2004 compared to $102 million last year. Excluding $4 million attributable to currency appreciation, European aftermarket revenues declined four percent in the second quarter of 2004 compared to last year. Ride control aftermarket revenues, excluding the impact of currency, were down seven percent compared to the prior year as a result of customer consolidations, primarily in Germany and the U.K. In addition, aftermarket emission control revenues excluding currency declined by one percent, versus an estimated market decline of eight percent. The exhaust segment is being adversely impacted by the now-standard use of stainless steel, which increases the lifespan of OE exhaust products. Revenues from our Other operations, which include South America, Australia and Asia, increased $36 million to $145 million in the second quarter of 2004 as compared to $109 million in the prior year. Higher OE exhaust volumes drove increased revenues of $18 million at our Asian operations. In Australia, stronger OE volumes and strengthening currency increased revenues by 27 percent to $51 million. Excluding the impact of currency, Australian revenues increased 15 percent. South American revenues were up $7 million primarily as a result of improving economies in both Brazil and Argentina, driving both OE and aftermarket volumes higher. EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")
THREE MONTHS ENDED JUNE 30, --------------- 2004 2003 CHANGE ---- ---- ------ (MILLIONS) North America............................................... $50 $49 $1 Europe...................................................... 14 11 3 Other....................................................... 12 7 5 --- --- -- $76 $67 $9 === === ==
The EBIT results shown in the preceding table include the following items, discussed below under "Restructuring and Other Charges" which have an effect on the comparability of EBIT results between periods:
THREE MONTHS ENDED JUNE 30, --------------- 2004 2003 ---- ---- (MILLIONS) North America Restructuring-related expenses............................ $1 $-- Changeover costs for a major new aftermarket customer..... 2 -- Consulting fees indexed to stock price.................... 1 -- Europe Restructuring-related expenses............................ 4 1
EBIT for North American operations increased to $50 million in the second quarter of 2004 from $49 million one year ago. Higher volumes in both OE ride control and emission control segments increased EBIT by $8 million in the second quarter of 2004 compared to the prior year. The higher North American ride 31 control aftermarket volumes increased EBIT by $6 million. Offsetting these increases were OE price concessions, materials costs and currency. Included in North America's second quarter 2004 EBIT was $1 million in restructuring and restructuring-related expenses, $2 million of changeover costs for a major new aftermarket customer that we acquired in the first quarter and $1 million in consulting fees indexed to the stock price. The customer changeover costs include the cost of acquiring and disposing of competitor inventory when we supply aftermarket parts to a new customer. We expect an additional $2 million of changeover costs related to this customer in the second half of 2004. The consulting fees relate to a 1999 agreement that provided that a portion of the consultant's compensation would be in stock appreciation rights that were priced above the market price of our stock at the grant date. These rights expire in November 2004. Our European segment's EBIT was a $14 million for the second quarter of 2004, up $3 million from $11 million in 2003. Higher OE volumes contributed $5 million to EBIT in the second quarter. Also contributing to EBIT was manufacturing efficiencies of $4 million, currency appreciation of $1 million and aftermarket price increases of $1 million. Partially offsetting these increases in the second quarter were lower aftermarket volumes and OE pricing concessions. Included in 2004's second quarter EBIT were $4 million in restructuring related expenses. Included in 2003's second quarter EBIT was $1 million in restructuring-related expenses. EBIT for our Other operations increased $5 million to $12 million in the second quarter of 2004 compared to $7 million one year ago. Higher OE revenues in all regions drove this improvement. Additionally, favorable currency exchange rates in Australia increased EBIT by $1 million. EBIT AS A PERCENTAGE OF REVENUE
THREE MONTHS ENDED JUNE 30, --------------- 2004 2003 ---- ---- North America............................................... 10% 10% Europe...................................................... 3% 3% Other....................................................... 8% 6% Total Tenneco Automotive.................................. 7% 7%
In North America, EBIT as a percentage of revenue for the second quarter of 2004 remained flat compared to the prior year. Higher volumes in both the OE and aftermarket segments were offset by higher price concessions and materials costs, including changeover costs. In Europe, EBIT margins for the second quarter of 2004 were also flat compared to the prior year. Weaker aftermarket volumes, OE price concessions and restructuring costs offset OE volume increases, manufacturing efficiencies and currency appreciation. EBIT as a percentage of revenue for our Other operations increased two percent in the second quarter of 2004 from the prior year. Higher OE volumes in all regions and currency appreciation in Australia drove the increase. INTEREST EXPENSE, NET OF INTEREST CAPITALIZED We reported interest expense of $34 million in the second quarter of 2004 compared to $38 million in the prior year. Last year's interest expense included $5 million related to the write off of debt issuance costs that were deferred on the senior debt we paid down with the proceeds of the June $350 million bond offering. Excluding that write-off, the latest quarter's increase resulted from higher interest expense on the debt issued in June of last year, partially offset by benefits of the interest rate swaps we entered into in April of this year. See more detailed explanations on our debt structure, including the $350 million bond offering in June 2003, the $125 million bond offering in December 2003 and the senior debt refinancing in December 2003 and their anticipated impact on our interest expense, in "Liquidity and Capital Resources -- Capitalization" later in this Management's Discussion and Analysis. In April 2004, we entered into three separate fixed-to-floating interest rate swaps with two separate financial institutions. These agreements swapped an aggregate of $150 million of fixed rate debt at a per 32 annum rate of 10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus a spread of 5.68 percent. Based on the current LIBOR as determined under these agreements of 1.86 percent (which remains in effect until January 15, 2005), these swaps would reduce our annual interest expense by approximately $4 million. INCOME TAXES Income taxes were $10 million in the second quarter of 2004, compared to $3 million in the prior year. Included in the second quarter of 2004's results is a benefit of $4 million primarily related to the settlement of outstanding Canadian tax issues. Included in the second quarter of 2003 was a benefit of $8 million related to the resolution of outstanding tax issues. The effective rate for the second quarter of 2004 including the $4 million benefit was 23 percent. Excluding the $4 million benefit, our effective tax rate was 34 percent. The effective tax rate for the second quarter of 2003 was 14 percent when including the $8 million benefit. Excluding this $8 million benefit, the effective tax rate was 40 percent. EARNINGS PER SHARE We reported earnings of $30 million or $0.69 per diluted common share for the second quarter of 2004, compared to $24 million or $0.58 per diluted common share for 2003. Included in the results for the second quarter of 2004 were the negative impacts from expenses related to our restructuring activities, customer changeover costs for a major new aftermarket customer, consulting fees indexed to the stock price and tax benefits for the resolution of several outstanding tax issues. The net impact of these items decreased earnings per diluted common share by $0.01. Included in the results for the second quarter of 2003 are the negative impacts from expenses related to our restructuring activities, the write-off of debt issuance costs relating to the bond transaction in June of 2003 and a tax benefit for the resolution of outstanding audit issues. The net impact of these items increased earnings per diluted common share by $0.09. You should also read Note 8 to the consolidated financial statements for more detailed information on earnings per share. RESTRUCTURING AND OTHER CHARGES Over the past several years we have adopted plans to restructure portions of our operations. These plans were approved by the Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. Prior to the change in accounting required for exit or disposal activities, we recorded charges to income related to these plans for costs that do not benefit future activities in the period in which the plans were finalized and approved, while actions necessary to affect these restructuring plans occurred over future periods in accordance with established plans. In the fourth quarter of 2001, our Board of Directors approved a restructuring plan, a project known as Project Genesis, designed to lower our fixed costs, improve efficiency and utilization, and better optimize our global footprint. Project Genesis involved closing eight facilities, improving the process flow and efficiency through value mapping and plant arrangement at 20 facilities, relocating production among facilities, and centralizing some functional areas. The closed facilities included an emission control aftermarket plant and an aftermarket distribution operation in Europe, a ride control plant in Europe, an engineering center in Europe, one building at an emission 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. 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 was reflected in cost of sales, while $4 million was included in selling, general and administrative expenses. 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. Finally, we also incurred $1 million in other restructuring related costs during the fourth quarter of 2001 for the value mapping and rearrangement of one of our emission 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 $0.81 per diluted common share. As of December 31, 2003, we have eliminated 974 positions in connection with Project Genesis. Additionally, we executed this plan more 33 efficiently than originally anticipated and as a result in the fourth quarter of 2002 reduced our reserves related to this restructuring activity by $6 million, which was recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2 million of severance reserve to the asset impairment reserve. This reclassification became necessary as actual asset impairments along with the sale of our closed facilities were different than the original estimates. We completed the remaining restructuring activities related to Project Genesis in the second quarter of 2004. In the first quarter of 2003, we incurred severance costs of $1 million associated with eliminating 17 salaried positions through selective layoffs and an early retirement program. Additionally, 93 hourly positions were eliminated through selective layoffs in the quarter. These reductions were done to reduce ongoing labor costs in North America. This charge was primarily recorded in cost of sales. In October of 2003 we announced the closure of an emission control manufacturing facility in Birmingham, U.K. Approximately 130 employees will be eligible for severance benefits in accordance with union contracts and U.K. legal requirements. We incurred approximately $2 million in costs related to this action in the first six months of 2004. Additional costs related to this closing are not expected to exceed $3 million and will be recorded in the second half of 2004. This action is in addition to the plant closures announced in Project Genesis in the fourth quarter of 2001. In addition to the above costs, we incurred $8 million in restructuring and restructuring related costs in the first six months of 2004. These costs are primarily related to the continuation of the optimization of our manufacturing footprint that was started with Project Genesis in 2001. Including the costs incurred in 2002 and 2003 of $18 million, we have incurred a total of $28 million for activities related to our restructuring actions initiated in prior periods that could not be accrued as part of the restructuring charges for these actions. To date we have generated about $31 million of annual savings from Project Genesis. About $7 million of savings was related to closing the eight facilities, about $16 million of savings was related to value mapping and plant arrangement and about $8 million of savings was related to relocating production among facilities and centralizing some functional areas. To date, there have been no significant deviations from planned savings. All actions for Project Genesis have been completed including $1 million of severance that was paid during the second quarter of 2004. Amounts related to the reserves we have established regarding activities that are part of our restructuring plans are as follows:
DECEMBER 31, JUNE 30, 2003 2004 CHARGED TO IMPACT OF 2004 RESTRUCTURING CASH ASSET EXCHANGE RESTRUCTURING RESERVE PAYMENTS ACCOUNTS RATES RESERVE ------------- -------- ---------- --------- ------------- (MILLIONS) Severance............................... $1 $1 $ -- $ -- $ -- Asset Impairment........................ -- -- -- -- -- Other................................... -- -- -- -- -- -- -- ----- ----- ----- $1 $1 $ -- $ -- $ -- == == ===== ===== =====
Under the terms of our amended and restated senior credit agreement that took effect on December 12, 2003, 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 2002-2006 period from the calculation of the financial covenant ratios we are required to maintain under our senior credit agreement. As of June 30, 2004, we have excluded $29 million of the $60 million available under the terms of the senior credit facility. In addition to the announced actions, we continue to evaluate additional opportunities to initiate actions that will reduce our costs through implementing the most appropriate and efficient logistics, distribution and manufacturing footprint for the future. There can be no assurances, however, that we will undertake additional restructuring actions. Actions that we take, if any, will require the approval of our Board of Directors, or its authorized committee, and if the costs of the plans exceed the amount previously approved by our senior lenders, could 34 require approval by our senior lenders. We plan to conduct any workforce reductions that result in compliance with all legal and contractual requirements including obligations to consult with workers' councils, union representatives and others. CRITICAL ACCOUNTING POLICES We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America. Preparing our financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following paragraphs include a discussion of some critical areas where estimates are required. Revenue Recognition We recognize revenue for sales to our original equipment and aftermarket customers under the terms of our arrangements with those customers, generally at the time of shipment from our plants or distribution centers. For our aftermarket customers, we provide for promotional incentives and returns at the time of sale. Estimates are based upon the terms of the incentives and historical experience with returns. Where we have offered product warranty, we also provide for warranty costs. Those estimates are based upon historical experience and upon specific warranty issues as they arise. While we have not experienced any material differences between these estimates and our actual costs, it is reasonably possible that future warranty issues could arise that could have a significant impact on our financial statements. Long-Term Receivables We expense pre-production design and development costs incurred for our original equipment customers unless we have a contractual guarantee for reimbursement of those costs from the customer. At June 30, 2004, we had $16 million recorded as a long-term receivable from original equipment customers for guaranteed pre-production design and development arrangements. While we believe that the vehicle programs behind these arrangements will enter production, these arrangements allow us to recover our pre-production design and development costs in the event that the programs are cancelled or do not reach expected production levels. We have not experienced any material losses on arrangements where we have a contractual guarantee of reimbursement from our customers. Income Taxes We have a U.S. Federal tax net operating loss ("NOL") carryforward at June 30, 2004, of $537 million, which will expire in varying amounts from 2018 to 2024. The federal tax effect of that NOL is $188 million, and is recorded as an asset on our balance sheet at June 30, 2004. 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 U.S. operations and upon strategies available to accelerate usage of the NOL. Circumstances that could change that estimate include future U.S. earnings at lower than expected levels or a majority ownership change as defined in the rules of the U.S. tax law. If that estimate changed, we would be required to cease recognizing an income tax benefit for any new NOL and could be required to record a reserve for some or all of the asset currently recorded on our balance sheet. As of June 30, 2004, we believe that there has been a significant change in our ownership, but not a majority change, in the last three years. Stock-Based Compensation We utilize the intrinsic value method to account for our stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." If our compensation costs for our stock-based compensation plans were determined using the fair value method of accounting as provided in Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for 35 Stock-Based Compensation," we estimate that our pro-forma net income and earnings per share would be lower by approximately $1 million or $0.02 per diluted share for both the six months ended June 30, 2004 and 2003. Goodwill and Other Intangible Assets We utilize an impairment-only approach to value our purchased goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year in the fourth quarter, we perform an impairment analysis on the balance of goodwill. Inherent in this calculation is the use of estimates as the fair value of our designated reporting units is based upon the present value of our expected future cash flows. In addition, our calculation includes our best estimate of our weighted average cost of capital and growth rate. If the calculation results in a fair value of goodwill which is less than the book value of goodwill, an impairment charge would be recorded in the operating results of the impaired reporting unit. Pension and Other Postretirement Benefits We have various defined benefit pension plans that cover substantially all of our employees. We also have postretirement health care and life insurance plans that cover a majority of our domestic employees. Our pension and postretirement health care and life insurance expenses and valuations are dependent on management's assumptions used by our actuaries in calculating such amounts. These assumptions include discount rates, health care cost trend rates, long-term return on plan assets, retirement rates, mortality rates and other factors. Health care cost trend rate assumptions are developed based on historical cost data and an assessment of likely long-term trends. Retirement and mortality rates are based primarily on actual plan experience. Our approach to establishing the discount rate assumption starts with the Moody's AA Corporate Bond Index adjusted for an incremental yield based on actual historical performance. This incremental yield adjustment is the result of selecting securities whose yields are higher than the "normal" bonds that comprise the index. Based on this approach, at September 30, 2003 the discount rate for pension plans was 6.1 percent. The discount rate for postretirement benefits was 6.5 percent at September 30, 2003. Our approach to determining expected return on plan asset assumptions evaluates both historical returns as well as estimates of future returns, and is adjusted for any expected changes in the long-term outlook for the equity and fixed income markets. As a result, our estimate of the long-term rate of return on plan assets for our pension plans was 8.4 percent for 2003 and is 8.75 percent for 2004. CHANGES IN ACCOUNTING PRINCIPLES In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which was revised in December 2003. FIN 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the entity that has the controlling financial interest. FIN 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support provided to it. This interpretation as revised is effective January 1, 2004. The adoption of FIN 46 did not have a material impact on our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amended and clarified financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on our financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 established standards for classification of certain financial instruments that have characteristics of both liabilities and equity but have been presented 36 entirely as equity or between the liabilities and equity section of the statement of financial position. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 did not have a material impact on our financial position. In December 2003, the FASB revised SFAS No. 132, "Employer's Disclosures About Pensions and Other Postretirement Benefits." The revised SFAS No. 132 changes employers' disclosures about pension plans and other postretirement benefits and requires additional disclosures about assets, obligations, cash flows and net periodic benefit cost. The revised statement is effective for annual and interim periods ended after December 15, 2003. We adopted the revised disclosures as of December 31, 2003, in our consolidated financial statements. On December 8, 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) into law. The Act introduces a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree healthcare plans that provide prescription drug benefits that are at least actuarially equivalent to Medicare Part D. As permitted by FASB Staff Position ("FSP") 106-1, we previously chose to defer recognizing the effects of the Act on our postretirement healthcare insurance plans until authoritative guidance was issued by the FASB. Accordingly, our measure of the accumulated projected benefit obligation and net periodic postretirement benefit expense do not reflect the effects of the Act. In May 2004, the FASB issued FSP No. 106-2, which supercedes FSP No. 106-1 and requires the commencement of accounting recognition for the effects of the Act no later than our quarter ending September 30, 2004. We anticipate implementing the accounting guidance related to the effects of the Act during the quarter ending September 30, 2004. We anticipate the Act will result in a reduction of our future net healthcare expenses and liabilities. 37 RESULTS FROM OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 NET SALES AND OPERATING REVENUES The following tables reflect our revenues for the first six months of 2004 and 2003, including the same reconciliations as are presented above for the second quarter of 2004 and 2003. See "Results from Operations for the Three Months Ended June 30, 2004 and 2003" for a description of why we present, and how we use, these reconciliations.
SIX MONTHS ENDED JUNE 30, 2004 -------------------------------------------------------------------- PASS-THROUGH REVENUES SALES EXCLUDING REVENUES EXCLUDING CURRENCY AND CURRENCY EXCLUDING CURRENCY PASS-THROUGH REVENUES IMPACT CURRENCY IMPACT SALES -------- -------- ------------ ------------ ------------ (MILLIONS) North America Aftermarket Ride Control.......................... $ 185 $-- $ 185 $ -- $ 185 Emissions Control..................... 81 -- 81 -- 81 ------ --- ------ ---- ------ Total North America Aftermarket................... 266 -- 266 -- 266 North America Original Equipment Ride Control.......................... 238 -- 238 -- 238 Emissions Control..................... 522 6 516 172 344 ------ --- ------ ---- ------ Total North America Original Equipment..................... 760 6 754 172 582 Total North America........... 1,026 6 1,020 172 848 Europe Aftermarket Ride Control.......................... 89 6 83 -- 83 Emissions Control..................... 94 8 86 -- 86 ------ --- ------ ---- ------ Total Europe Aftermarket......... 183 14 169 -- 169 Europe Original Equipment Ride Control.......................... 176 14 162 -- 162 Emissions Control..................... 495 35 460 158 302 ------ --- ------ ---- ------ Total Europe Original Equipment..................... 671 49 622 158 464 Total Europe.................. 854 63 791 158 633 Asia.................................... 97 1 96 33 63 South America........................... 71 3 68 7 61 Australia............................... 100 16 84 8 76 ------ --- ------ ---- ------ Total Other................... 268 20 248 48 200 ------ --- ------ ---- ------ Total Tenneco Automotive................ $2,148 $89 $2,059 $378 $1,681 ====== === ====== ==== ======
38
SIX MONTHS ENDED JUNE 30, 2003 -------------------------------------------------------------------- PASS-THROUGH REVENUES SALES EXCLUDING REVENUES EXCLUDING CURRENCY AND CURRENCY EXCLUDING CURRENCY PASS-THROUGH REVENUES IMPACT CURRENCY IMPACT SALES -------- -------- ------------ ------------ ------------ (MILLIONS) North America Aftermarket Ride Control.......................... $ 162 $ -- $ 162 $ -- $ 162 Emissions Control..................... 82 -- 82 -- 82 ------ ----- ------ ---- ------ Total North America Aftermarket................... 244 -- 244 -- 244 North America Original Equipment Ride Control.......................... 234 -- 234 -- 234 Emissions Control..................... 504 -- 504 162 342 ------ ----- ------ ---- ------ Total North America Original Equipment..................... 738 -- 738 162 576 Total North America........... 982 -- 982 162 820 Europe Aftermarket Ride Control.......................... 88 -- 88 -- 88 Emissions Control..................... 90 -- 90 -- 90 ------ ----- ------ ---- ------ Total Europe Aftermarket......... 178 -- 178 -- 178 Europe Original Equipment Ride Control.......................... 121 -- 121 -- 121 Emissions Control..................... 434 -- 434 147 287 ------ ----- ------ ---- ------ Total Europe Original Equipment..................... 555 -- 555 147 408 Total Europe.................. 733 -- 733 147 586 ------ ----- ------ ---- ------ Asia.................................... 76 -- 76 27 49 South America........................... 55 -- 55 5 50 Australia............................... 73 -- 73 7 66 ------ ----- ------ ---- ------ Total Other................... 204 -- 204 39 165 ------ ----- ------ ---- ------ Total Tenneco Automotive................ $1,919 $ -- $1,919 $348 $1,571 ====== ===== ====== ==== ======
Revenues from our North American operations increased $44 million in the first six months of 2004 compared to last year's first six months reflecting higher sales from both OE and aftermarket businesses. Total North American OE revenues increased three percent to $760 million in the first six months of this year primarily due to higher emission control volumes and ride control heavy-duty volumes. OE emission control revenues were up four percent in the first six months of 2004 as compared to the prior year. Pass-through emission control sales increased six percent to $172 million in the first six months of 2004. Adjusted for pass-through sales, and currency, OE emission control sales were up one percent compared to the prior year. OE ride control revenues increased two percent from the prior year. Total OE revenues, excluding pass-through sales, and currency, increased one percent in the first six months of 2004, while North American light vehicle production was unchanged from the first six months a year ago. Our revenue improvement was greater than the flat production rate primarily due to our strong position on top-selling platforms with General Motors, Ford and Toyota, as well as higher heavy-duty volumes. Aftermarket revenues for North America were $266 million in the first six months of 2004, representing an increase of nine percent compared to the same period in the prior year. Aftermarket ride control revenues increased $23 million or 15 percent in the first six months of 2003, primarily due to orders from a new customer, higher sales of premium priced products and, to a lesser degree, introductory sales of recently launched DuPont car care appearance products. Aftermarket emission control revenues declined one percent in the first six months of 2004 compared to 2003 reflecting a continued overall market decline in the emission control business and the longer lives of exhaust components due to the OE use of stainless steel, which reduces aftermarket replacement rates. 39 Our European segment's revenues increased $121 million or 16 percent in the first six months of 2004 compared to last year's first six months. Total OE revenues were $671 million, up 21 percent from the first six months of last year. OE emission control revenues in the first six months increased 14 percent to $495 million from $434 million in the prior year. Excluding an $11 million increase in pass-through sales and a $35 million increase due to strengthening currency, OE emissions control revenues increased five percent over the first six months of 2003. This improvement was greater than overall European production levels, which remained unchanged during the first six months compared to a year ago. Strong volumes on PSA, Volkswagen, Ford and Porsche platforms more than offset the general market's flat production rates. OE ride control revenues in the first six months increased to $176 million, up 45 percent from $121 million a year ago. Excluding a $14 million benefit from currency appreciation, OE ride control revenues increased 34 percent. We experienced this revenue increase despite the overall flat market build rates due to stronger sales on new and existing platforms with Volkswagen, Ford, Renault and Fiat. European aftermarket sales were $183 million in the first six months of this year compared to $178 million in last year's first six months. Excluding $14 million attributable to currency appreciation, European aftermarket revenues declined six percent in the first six months of 2004 compared to the same period last year. Ride control aftermarket revenues, excluding the impact of currency, were down six percent compared with the prior year, reflecting continued market pressure from customer consolidations. Additionally, aftermarket emission control revenues were lower as a result of the now standard use of longer lasting stainless steel by OE manufacturers. Excluding the impact of currency, European aftermarket emission control revenues declined five percent from the prior year. Revenues from our Other operations, which include South America, Australia and Asia, increased $64 million to $268 million in the first six months of 2004 as compared to $204 million in the first six months of the prior year. Higher OE volumes and pass-through sales drove increased revenues of $21 million at our Asian operations. In Australia, stronger volumes and strengthening currency increased revenues by 37 percent to $100 million. Stronger volumes, pricing and currency appreciation increased South American revenues by 16 million or 27 percent over the same period last year. EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")
SIX MONTHS ENDED JUNE 30, ---------------------- 2004 2003 CHANGE ---- ---- ------ (MILLIONS) North America............................................... $ 80 $77 $ 3 Europe...................................................... 11 10 1 Other....................................................... 18 11 7 ---- --- --- $109 $98 $11 ==== === ===
The EBIT results shown in the preceding table include the following items, discussed above under "Restructuring Charges", which have an effect on the comparability of EBIT results between periods:
SIX MONTHS ENDED JUNE 30, ------------ 2004 2003 ---- ---- (MILLIONS) North America Restructuring-related expenses............................ $3 $3 Changeover costs for a major new aftermarket customer..... 8 -- Consulting fees indexed to stock price.................... 2 -- Europe Restructuring-related expenses............................ 7 3 Consulting fees indexed to stock price.................... 1 -- Other Consulting fees indexed to stock price.................... 1 --
40 EBIT for North American operations increased to $80 million in the first six months of 2004 from $77 million one year ago, driven by higher volumes in both the OE ride control and emission control product lines. Higher OE ride and emission control volumes increased EBIT by $7 million and $5 million, respectively. Partially offsetting these increases were price concessions and higher selling, general and administrative costs. The North American aftermarket ride control volumes increased EBIT by $13 million with price and mix improvements adding another $4 million to EBIT. These increases were substantially offset by higher selling, general and administrative costs including changeover, promotion and advertising expenses. Included in 2004's EBIT for the first six months was $3 million in restructuring and restructuring-related expenses, $8 million in changeover costs and $2 million in consulting fees indexed to the stock price. Included in 2003's EBIT for the first six months was $3 million in restructuring-related expenses. Our European segment's EBIT was $11 million for the first six months of 2004, up $1 million from $10 million in the first six months of 2003. Higher OE volumes in both product lines contributed $10 million to EBIT. OE manufacturing efficiencies increased EBIT $3 million. Currency appreciation added $2 million of EBIT compared to the same period last year. These increases were partially offset by price concessions and higher selling, general and administrative costs. Lower aftermarket volumes also reduced EBIT by $4 million, but were more than offset by higher operating efficiencies and customer price increases. Included in 2004's EBIT for the first six months were $7 million in restructuring-related expenses and $1 million in consulting fees indexed to the stock price. For the same period last year, EBIT included $3 million in restructuring-related expenses. EBIT for our Other operations increased $7 million to $18 million in the first six months of 2004 compared to the same period one year ago. Higher revenues, operating efficiencies and strengthening Australian currency are the main drivers of this increase. Included in 2004's EBIT for the first six months was $1 million in consulting fees indexed to the stock price. EBIT AS A PERCENTAGE OF REVENUE
SIX MONTHS ENDED JUNE 30, ------------ 2004 2003 ---- ---- North America............................................... 8% 8% Europe...................................................... 1% 1% Other....................................................... 7% 5% Total Tenneco Automotive.................................. 5% 5%
In North America, EBIT as a percentage of revenue for the first six months of 2004 was flat compared to the prior year. Higher volumes in both the OE and aftermarket segments were offset by higher price concessions, materials costs and selling, general and administrative costs, including changeover costs. In Europe, EBIT margins for the first six months of 2004 were level with the same period last year, remaining at one percent. OE volume increases, manufacturing efficiencies and currency appreciation were offset by OE price concessions, restructuring expenses and higher selling, general and administrative costs. EBIT as a percentage of revenue for our Other operations increased to seven percent in the first six months of 2004 compared to five percent in the prior year. Higher volumes, operating efficiencies and currency appreciation, primarily drove this increase. INTEREST EXPENSE, NET OF INTEREST CAPITALIZED We reported interest expense of $69 million for the first six months of both 2004 and 2003. Last year's interest expense includes $5 million for the write-off of senior debt issuance costs that were deferred on the senior debt that we paid down with the proceeds of our $350 million bond offering in June of 2003. For the first six months of 2004 higher interest expense on the 10 1/4bonds that we issued in June and December of 2003 was partially offset by benefits of the interest rate swaps we entered into in April of this year. See more detailed explanations on our debt structure, including the $350 million bond offering in June 2003 and its anticipated 41 impact on our interest expense, in "Liquidity and Capital Resources--Capitalization" later in this Management's Discussion and Analysis. INCOME TAXES Income taxes were a $9 million expense for the first six months of 2004, compared to a $1 million expense for the first six months of 2003. The first six months of 2004 included $5 million of tax benefits, reflecting the settlement of prior year tax issues on a more favorable basis than originally anticipated. Including these benefits the effective tax for the first six months of 2004 was 23 percent. Excluding these benefits our effective tax rate was 34 percent. The first six months of 2003 included benefits of $11 million related to the resolution of outstanding tax issues. Including these benefits the effective tax rate for the first six months of 2003 was five percent. Excluding these benefits our effective tax rate was 40 percent. EARNINGS PER SHARE We reported earnings per diluted common share of $0.65 for the first six months of 2004, compared to $0.60 per diluted share for the first six months of 2003. Included in the results for the first six months of 2004 were the negative impacts from expenses related to our restructuring activities, customer changeover costs for a major new aftermarket customer, consulting fees indexed to the stock price and benefits for the resolution of outstanding tax issues. In total, these items decreased earnings per diluted common share by $0.20. Included in the results for the first six months of 2003 are the negative impacts from expenses related to our restructuring activities, the write-off of debt issuance costs relating to the bond transaction in June of 2003 and tax benefits for the resolution of several audit issues. The net impact of these items increased earnings per diluted common share by $0.10. You should also read Note 8 to the financial statements for more detailed information on earnings per share. LIQUIDITY AND CAPITAL RESOURCES CAPITALIZATION
JUNE 30, DECEMBER 31, 2004 2003 % CHANGE -------- ------------ -------- (MILLIONS) Short-term debt and current maturities...................... $ 20 $ 20 --% Long-term debt.............................................. 1,399 1,410 (1) ------ ------ Total debt.................................................. 1,419 1,430 (1) ------ ------ Total minority interest..................................... 23 23 -- Common shareholders' equity................................. 73 58 26 ------ ------ Total capitalization........................................ $1,515 $1,511 -- ====== ======
General. The increase in shareholders' equity primarily results from the net income of $28 million reported in the first six months of 2004 and a $6 million increase in premium on common stock issued pursuant to benefit plans and other transactions. This amount was offset by a decrease of $19 million related to the translation of foreign balances into U.S. dollars. Although our book equity balance was small at June 30, 2004, it should not affect our business operations. We have no debt covenants that are based upon our book equity, and there are no other agreements that are adversely impacted by our relatively low book equity. Short-term debt, which includes the current portion of long-term obligations and borrowings by foreign subsidiaries, as well as our revolving credit facility, remained constant in the second quarter of 2004. There were no borrowings outstanding under our revolving credit facility at both June 30, 2004 and 2003. The overall decrease in long-term debt resulted from payments made on our outstanding long-term debt and capital leases in addition to our position on interest rate swaps entered into in April 2004. See below for further information on the interest rate swaps. 42 Senior Credit Facility. Our financing arrangements are primarily provided by a committed senior secured financing arrangement with a syndicate of banks and other financial institutions, which was $800 million at June 30, 2004. The arrangement is secured by substantially all our domestic assets and pledges of 66 percent of the stock of certain first-tier foreign subsidiaries, as well as guarantees by our material domestic subsidiaries. We originally entered into this facility in 1999 and since that time have periodically requested and received amendments to the facility for various purposes. In 2003, we engaged in a series of transactions that resulted in the full refinancing of the facility, through an amendment and restatement, in December. In June 2003, we issued $350 million of 10 1/4 percent senior secured notes in a private placement. The notes have a final maturity date of July 15, 2013. The notes accrue interest from June 19, 2003 with a first interest payment date of January 15, 2004. In October 2003, we completed an offer to exchange all of the notes issued in the June 2003 private placement for a like amount of the 10 1/4 percent senior secured notes, with substantially identical terms, which had been registered under the Securities Act of 1933. These notes are described in more detail below under "--Senior and Subordinated Notes." We received net proceeds in the second quarter of 2003 from the offering of the notes, after deducting underwriting discounts and commissions and our expenses, of $338 million. We used the net proceeds of the offering to repay outstanding amounts under our senior credit facility as follows: (i) first, to prepay $199 million on the term loan A due November 4, 2005, (ii) second, to prepay $52 million on the term loans B and C due November 4, 2007 and May 4, 2008, respectively, and (iii) third, to prepay outstanding borrowings of $87 million under the revolving credit portion of our senior credit facility. In connection with issuing $350 million of 10 1/4 percent senior secured notes due July 15, 2013, we amended the senior credit facility effective May 29, 2003. This amendment allowed us to incur debt secured by a second lien on our U.S. assets and to have that debt guaranteed by our major U.S. subsidiaries. The amendment also allowed us to use a portion of the proceeds from the new senior secured notes to repay outstanding borrowings under the revolving credit facility, without having to reduce the then-applicable $450 million size of the revolving credit facility, and to prepay the term loans under the senior credit facility on a non pro-rata basis with the remaining net proceeds from the notes. In exchange for these amendments, we agreed to pay an aggregate sum of $1 million to consenting lenders. We also incurred legal, advisory and other costs related to the amendment process of $1 million. These costs were included in the capitalized debt issuance costs. In December 2003, we amended and restated our senior credit facility and in connection therewith, we issued an additional $125 million of 10 1/4 percent senior secured notes in a private placement. We received $136 million of net proceeds from the offering of the additional $125 million of 10 1/4 percent senior secured notes, after deducting underwriting discounts and commissions and other expenses and including a 13 percent price premium over par. We also received $391 million in net proceeds from the new term loan B borrowings under the amended and restated senior credit facility, after deducting fees and other expenses. We used the combined net proceeds of $527 million to prepay the $514 million outstanding under term loans A, B and C under the senior credit facility immediately prior to the completion of the transaction. The remaining $13 million of net proceeds were used for general corporate purposes. In addition, we received $6 million of accrued interest on the new notes for the period from June 19 through December 12, 2003 that investors paid us and that we subsequently used to pay, on January 15, 2004, the accrued interest on the notes from June 19, 2003. In June 2004, we completed an offer to exchange all of the notes issued in the December 2003 private placement for a like amount of the 10 1/4 percent senior secured notes, with substantially identical terms, which have been registered under the Securities Act of 1933. We incurred $27 million in fees associated with the issuance of the aggregate $475 million of 10 1/4 percent senior secured notes and the amendment and restatement of our senior credit facility which will be amortized over the term of the senior secured notes and the amended and restated senior credit facility. After giving effect to the use of the net proceeds from both the June and December transactions, we expect these transactions would have increased our annual interest expense by approximately $9 million for 2003. This does not give effect to the fixed-to-floating interest rate swaps we completed in April 2004, 43 described below. In addition, we expensed in the second and fourth quarters of 2003 a total of approximately $12 million of existing deferred debt issuance costs as a result of retiring the term loans under the senior credit facility. In April 2004, we amended our senior credit facility in connection with a proposed transaction to refinance our outstanding senior subordinated notes. While we abandoned the proposed transaction in late May 2004, the amendment remains in effect. The amendment permitted certain aspects of the transaction and made other minor technical changes. In April 2004, we entered into three separate fixed-to-floating interest rate swaps with two separate financial institutions. These agreements swapped an aggregate of $150 million of fixed interest rate debt at a per annum rate of 10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus a spread of 5.68 percent. Each agreement requires semi-annual settlements through July 15, 2013. Based on the current LIBOR as determined under these agreements of 1.86 percent (which remains in effect until January 15, 2005), these swaps would reduce our annual interest expense by approximately $4 million. Our amended and restated senior credit facility consists of a seven-year, $400 million term loan B facility maturing in December 2010; a five-year, $220 million revolving credit facility maturing in December 2008; and a seven-year, $180 million tranche B letter of credit/revolving loan facility maturing in December 2010. Although the term loan facility and the tranche B letter of credit/revolving loan facility mature in 2010, the two facilities are subject to mandatory prepayment in full, and any letters of credit issued under the term loan B/revolving loan facility are subject to full cash collateralization, (a) on April 15, 2009, if by that date our senior subordinated notes are not refinanced or extended with a maturity not earlier than April 15, 2011, and (b) on the date which is six months prior to the date to which the senior subordinated notes have been refinanced or had their maturity extended, if our senior subordinated notes have been refinanced or had their maturity extended to a date prior to April 15, 2011. Quarterly principal repayment installments of $1 million on the term loan B facility will begin on March 31, 2004 and continue until December 31, 2009, then rise to $94 million each on March 31, June 30, and September 30 of 2010, with the remaining $94 million final principal repayment due on December 12, 2010. As of June 30, 2004, borrowings under the term loan B facility and the tranche B letter of credit facility bear interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 300 basis points; or (ii) a rate consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 200 basis points. Under the provisions of the senior credit facility agreement, the interest margins for borrowings under the credit facility and fees paid on letters of credit issued under our credit facility are subject to adjustment based on the consolidated leverage ratio (consolidated indebtedness divided by consolidated EBITDA as defined in the senior credit facility agreement) measured at the end of each quarter. The interest margins for borrowings under the term loan B facility will be further reduced by 25 basis points following the end of each fiscal quarter for which the consolidated leverage ratio is less than 3.5. The interest margin on our revolving credit facility is currently 25 basis points higher than those stated above, and is subject to adjustment beginning with the fourth quarter of 2004. We also pay a commitment fee of 50 basis points on the unused portion of the revolving credit facility. 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 new $180 million tranche B letter of credit/revolving loan facility is available for borrowings of revolving loans and to support letters of credit issued from time to time under the senior credit facility. On December 12, 2003, the tranche B letter of credit/revolving loan facility lenders deposited $180 million with the administrative agent, who will invest that amount in time deposits. Revolving loans can be drawn, repaid and reborrowed thereunder. Such revolving loans will be funded from such deposits and such repayments will be redeposited with the administrative agent. If a letter of credit is paid under this facility and not reimbursed in full by us, each participating lender's ratable share of the deposit will be applied automatically in satisfaction of the reimbursement obligation. We will not have an interest in any such funds on deposit, and we will not account for such funds as our indebtedness when deposited with the administrative agent until drawn by us as described below. Revolving loans borrowed under such facility will be funded with the funds on deposit in such accounts and accrue interest at a rate per annum equal to LIBOR plus 300 basis points. Letters of credit issued thereunder will accrue a letter of credit fee at a per annum rate of 300 basis points for the pro 44 rata account of the lenders under such facility and a fronting fee for the ratable account of the issuers thereof at a per annum rate in an amount to be agreed upon payable monthly in arrears. The administrative agent will pay on a monthly basis to the lenders under the facility a return on their funds actually on deposit in such accounts in an amount equal to a per annum rate of monthly LIBOR (reset every business day during such monthly period) minus 10 basis points. We will be obligated to pay such lenders on a monthly basis a fee equal to the excess of (x) a per annum rate equal to monthly LIBOR (reset at the start of the applicable month) plus 300 basis points on the size of such facility (i.e., $180 million initially) over (y) the sum of (1) the amount of such return for such month, (2) the amount of interest accrued on such loans under such facility for such month and (3) the letter of credit fees (but not the fronting fees) accrued on such letters of credit under such facility for such month; provided, that except in certain circumstances, the aggregate amount of such interest and fees shall not exceed the amount determined pursuant to clause (x) above minus such return. The interest margins paid on revolving loans and the fees paid on letters of credit issued under the tranche B letter of credit/revolving loan facility will reduce by 25 basis points following the end of each fiscal quarter for which the consolidated leverage ratio is less than 4.0. The tranche B letter of credit/revolving loan facility will be reflected as debt on our balance sheet only if we have outstanding thereunder revolving loans or payments by the facility in respect of letters of credit. We will not be liable for any losses to or misappropriation of any (i) return due to the administrative agent's failure to achieve the return described above or to pay all or any portion of such return to any lender under such facility or (ii) funds on deposit in such account by such lender (other than the obligation to repay funds released from such accounts and provided to us as revolving loans under such facility). The amended and restated 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 charge coverage ratios (consolidated EBITDA less consolidated capital expenditures, divided by consolidated cash interest paid) at the end of each period indicated. The financial ratios required under the amended senior credit facility and, in the case of the first and second quarters of 2004, the actual ratios we achieved are shown in the following tables:
QUARTER ENDED ------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2004 2004 2004 2004 ------------ ------------ ------------- ------------ REQ. ACT. REQ. ACT. REQUIRED REQUIRED ---- ---- ---- ---- ------------- ------------ Leverage Ratio (maximum).................... 5.00 3.97 5.00 3.78 4.75 4.75 Interest Coverage Ratio (minimum)........... 2.00 2.77 2.00 3.15 2.00 2.00 Fixed Charge Coverage Ratio (minimum)....... 1.10 1.76 1.10 2.04 1.10 1.10
QUARTERS ENDING ---------------------------------------------------------------------------------------------------- MARCH 31, 2005- SEPTEMBER 30- MARCH 31- MARCH 31- MARCH 31- MARCH 31- MARCH 31- JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2005 2005 2006 2007 2008 2009 2010 --------- ------------- ------------ ------------ ------------ ------------ ------------ REQ. REQ. REQ. REQ. REQ. REQ. REQ. --------- ------------- ------------ ------------ ------------ ------------ ------------ Leverage Ratio (maximum)... 4.75 4.50 4.25 3.75 3.50 3.50 3.50 Interest Coverage Ratio (minimum)................ 2.00 2.00 2.10 2.20 2.35 2.50 2.75 Fixed Charge Coverage Ratio (minimum)................ 1.10 1.10 1.15 1.25 1.35 1.50 1.75
As part of the amendment and restatement, the terms of our senior credit facility were also revised to: (i) extend the period of time during which we can exclude up to $60 million of cash charges and expenses, before taxes, related to any cost reduction initiatives from the calculation of the financial covenant ratios by another two years through 2006; (ii) permit the refinancing of our senior subordinated notes and/or our 10 1/4 percent senior secured notes using the net cash proceeds from the issuance of similarly structured debt; (iii) permit the repurchase of our senior subordinated notes and/or our 10 1/4 percent senior secured notes using the net cash proceeds from the issuance of shares of common stock of Tenneco Automotive Inc.; and 45 (iv) delete the mandatory prepayment of term loans from excess cash flow in 2003 and reduce the percentage of excess cash flow that must be used to prepay term loans in subsequent years from 75 percent to 50 percent. The senior credit facility agreement also contains restrictions on our operations that are customary for similar facilities, including limitations on: (i) incurring additional liens; (ii) sale and leaseback transactions (except for the permitted transactions as described in the amendment); (iii) liquidations and dissolutions; (iv) incurring additional indebtedness or guarantees; (v) capital expenditures; (vi) dividends; (vii) mergers 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, 2004, we were in compliance with both the financial covenants (as indicated above) and operational restrictions of the facility. Senior Secured and Subordinated Notes. Our outstanding debt also includes $500 million of 11 5/8 percent senior subordinated notes due October 15, 2009 in addition to the $475 million of 10 1/4 percent senior secured notes due July 15, 2013 described above. We can redeem some or all of the notes at any time after July 15, 2008, in the case of the senior secured notes, and October 15, 2004, in the case of the senior subordinated notes. If we sell certain of our assets or experience specified kinds of changes in control, we must offer to repurchase the notes. We are permitted to redeem up to 35 percent of the senior secured notes with the proceeds of certain equity offerings completed before July 15, 2006. The senior indentures for our senior secured notes and existing senior subordinated notes require 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. We have not incurred any of the types of indebtedness not otherwise permitted by the indentures. The indentures also contain restrictions on our operations, including limitations on: (i) incurring additional indebtedness or liens; (ii) dividends; (iii) distributions and stock repurchases; (iv) investments; and (v) mergers and consolidations. Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee these notes on a joint and several basis. In addition, the senior secured notes and related guarantees are secured by second priority liens, subject to specified exceptions, on all of our and our subsidiary guarantors' assets that secure obligations under our senior credit facility, except that only a portion of the capital stock of our and our subsidiary guarantor's domestic subsidiaries is provided as collateral and no assets or capital stock of our direct or indirect foreign subsidiaries secure the notes or guarantees. There are no significant restrictions on the ability of the subsidiaries that have guaranteed these notes to make distributions to us. As of June 30, 2004, we were in compliance with the covenants and restrictions of these indentures. From time to time, we evaluate opportunities to refinance our senior and subordinated notes. For example, the 11 5/8 percent senior subordinated notes are callable beginning in October 2004. If we determined it is advantageous to do so, we could refinance the senior subordinated notes with the cash proceeds of sales of new debt, debt securities or preferred stock convertible into common equity, or common stock, or through any combination of those securities. We previously disclosed our consideration of specific transactions to refinance our subordinated notes earlier this year, but determined not to proceed with those transactions because the pricing for the new securities we would have issued to complete the refinancing was not sufficiently attractive in light of our intended use of the proceeds. Any future decision to refinance our current debt will be based upon the current economic conditions and the benefits to our company. Accounts Receivable Securitization. In addition to our senior credit facility, senior secured notes and senior subordinated notes, we also sell some of our accounts receivable. In North America, we have an accounts receivable securitization program with a commercial bank. We sell original equipment and aftermarket receivables on a daily basis under this program. We had sold accounts receivable under this program of $48 million and $50 million at June 30, 2004 and 2003, respectively. This program is subject to cancellation prior to its maturity date if we were to (i) fail to pay interest or principal payments on an amount of indebtedness exceeding $50 million, (ii) default on the financial covenant ratios under the senior credit facility, or (iii) fail to maintain certain financial ratios in connection with the accounts receivable securitization program. In January 2003, this program was amended to extend its term to January 31, 2005 and reduce 46 the size of the program to $50 million. The program has since been amended to increase its size to $75 million with its termination date unchanged at January 31, 2005. We also sell some receivables in our European operations to regional banks in Europe. At June 30, 2004, we had sold $100 million of accounts receivable in Europe up from $78 million at June 30, 2003. The arrangements to sell receivables in Europe are not committed and can be cancelled at any time. If we were not able to sell receivables under either the North American or European securitization programs, our borrowings under our revolving credit agreements would increase. These accounts receivable securitization programs provide us with access to cash at costs that are generally favorable to alternative sources of financing, and allow us to reduce borrowings under our revolving credit agreements. Capital Requirements. We believe that cash flows from operations, combined with available borrowing capacity described above, assuming that we maintain compliance with the financial covenants and other requirements of our loan agreement, 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 depends upon a number of operational and economic factors, many of which are beyond our control. Factors that could impact our ability to comply with the financial covenants include the rate at which consumers continue to buy new vehicles and the rate at which they continue to repair vehicles already in service, as well as our ability to successfully implement our restructuring plans. Lower North American vehicle production levels, weakening in the global aftermarket, or a reduction in vehicle production levels in Europe, beyond our expectations, could impact our ability to meet our financial covenant ratios. In the event that we are unable to meet these financial covenants, we would consider several options to meet our cash flow needs. These options could include further renegotiations with our senior credit lenders, additional cost reduction or restructuring initiatives, sales of assets or common stock, or other alternatives to enhance our financial and operating position. Should we be required to implement any of these actions to meet our cash flow needs, we believe we can do so in a reasonable time frame. CONTRACTUAL OBLIGATIONS Our remaining required debt principal amortization and payment obligations under lease and certain other financial commitments as of June 30, 2004, are shown in the following table:
PAYMENTS DUE IN: -------------------------------------------------------- BEYOND 2004 2005 2006 2007 2008 2008 TOTAL ---- ---- ---- ---- ---- ------ ------ (MILLIONS) Obligations: Revolver borrowings....................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- Senior long-term debt..................... 2 4 4 4 4 380 398 Long-term notes........................... -- 1 -- 1 2 470 474 Capital leases............................ 2 3 3 3 2 5 18 Subordinated long-term debt............... -- -- -- -- -- 500 500 Other subsidiary debt..................... 1 -- -- -- -- -- 1 Short-term debt........................... 12 -- -- -- -- -- 12 ---- ---- ---- ---- ---- ------ ------ Debt and capital lease obligations.......... 17 8 7 8 8 1,355 1,403 Operating leases............................ 9 15 12 12 5 6 59 Interest payments........................... 62 122 122 122 121 285 834 Capital commitments......................... 29 -- -- -- -- -- 29 Stock appreciation rights................... 2 -- -- -- -- -- 2 ---- ---- ---- ---- ---- ------ ------ Total Payments.............................. $119 $145 $141 $142 $134 $1,646 $2,327 ==== ==== ==== ==== ==== ====== ======
We principally use our revolving credit facilities to finance our short-term capital requirements. As a result, we classify the outstanding balances of the revolving credit facilities within our short-term debt even though the revolving credit facility has a termination date of December 13, 2008 and the tranche B letter of credit facility/revolving loan facility has a termination date of December 13, 2010. 47 If we do not maintain compliance with the terms of our senior credit facility or the indentures governing our senior secured notes or senior subordinated notes described above, all amounts under those arrangements could, automatically or at the option of the lenders or other debt holders, become due. Additionally, each of those facilities contains provisions that certain events of default under one facility will constitute a default under the other facility, allowing the acceleration of all amounts due. We currently expect to maintain compliance with terms of all of our various credit agreements for the foreseeable future. Included in our contractual obligations is the amount of interest to be paid on our long-term debt. As our debt structure contains both fixed and variable rate interest debt, we have made assumptions in calculating the amount of the future interest payments. Interest on our senior secured notes is calculated using the fixed rates of 10 1/4 percent. Interest on our senior subordinated notes is calculated using the fixed rate of 11 5/8 percent. Interest on our variable rate debt is calculated as 350 basis point plus LIBOR of 1.5 percent which is the current rate at June 30, 2004. We have assumed that LIBOR will remain unchanged for the outlying years. See "--Capitalization--Senior Secured and Subordinated Notes." In addition we have included the impact of our interest rate swaps entered into in April 2004. See "Interest Rate Risk" below. We have also included an estimate of expenditures required after June 30, 2004 to complete the facilities and projects authorized at December 31, 2003, in which we have made substantial commitments in connections with facilities. In addition, we have included an estimate of our obligation to a consulting firm who received stock appreciation rights ("SAR") as partial payment for services rendered in the year 2000. The SAR's expire in November 2004. We have not included purchase obligations as part of our contractual obligations as we generally do not enter into long-term agreements with our suppliers. In addition, the agreements we currently have do not specify the volumes we are required to purchase. If any commitment is provided, in many cases the agreements state only the minimum percentage of our purchase requirements we must buy from the supplier. As a result, these purchase obligations fluctuate from year to year and we are not able to quantify the amount of our future obligation. We have also not included material cash requirements for taxes and funding requirements for pension and postretirement benefits. We have not included cash requirements for taxes as we are a taxpayer in certain foreign jurisdictions but not in domestic locations. Additionally, it is difficult to estimate taxes to be paid as shifts in where we generate income can have a significant impact on future tax payments. We have not included cash requirements for funding pension and postretirement costs, as based upon current estimates we believe we will be required to make contributions between $24 million to $29 million to those plans in 2004 of which approximately $11 million has been contributed as of June 30, 2004. Pension and postretirement contributions beyond 2004 will be required but those amounts will vary based upon many factors, including the performance of our pension fund investments during 2004. We occasionally provide guarantees that could require us to make future payments in the event that the third party primary obligor does not make its required payments. We have not recorded a liability for any of these guarantees. The only third party guarantee we have made is the performance of lease obligations by a former affiliate. Our maximum liability under this guarantee was approximately $4 million and $5 million at June 30, 2004 and 2003, respectively. We have no recourse in the event of default by the former affiliate. However, we have not been required to make any payments under this guarantee. Additionally, we have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our then existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee the $800 million senior secured credit facility, the $475 million senior secured notes and the $500 million senior subordinated notes on a joint and several basis. The arrangement for the senior secured credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of 66 percent of the stock of certain first-tier foreign subsidiaries. The arrangement for the $475 million senior secured notes is also secured by second-priority liens on substantially all of our domestic assets, excluding some of the stock of our domestic subsidiaries. This arrangement is not secured by any pledges of stock or assets of our foreign subsidiaries. You should also read Note 12 where we present the Supplemental Guarantor Condensed Consolidating Financial Statements. 48 We have issued guarantees through letters of credit in connection with some obligations of our affiliates. We have guaranteed through letters of credit support for local credit facilities, travel and procurement card programs, and cash management requirements for some of our subsidiaries totaling $34 million. We have also issued $18 million in letters of credit to support some of our subsidiaries' insurance arrangements. In addition, we have issued $3 million in guarantees through letters of credit to guarantee other obligations of subsidiaries primarily related to environmental remediation activities. CASH FLOWS
SIX MONTHS ENDED JUNE 30, ------------ 2004 2003 ---- ---- (MILLIONS) Cash provided (used) by: Operating activities...................................... $ 59 $ 28 Investing activities...................................... (45) (53) Financing activities...................................... 3 37
Operating Activities For the six months ended, June 30, 2004, cash flows provided from operating activities were $59 million as compared to $28 million in the prior six months. The increase was primarily attributable to higher earnings and a reduced use of working capital year over year. For the first six months of 2004 working capital was a use of $61 million as compared to a use of $77 million for the first six months of 2003. More aggressive management of payables, lower cash tax payments and the timing of payments versus other current liabilities accrued in the first six months of the current year are primary drivers to the increase. In June 2001, we entered into arrangements with two major OE customers in North America under which, in exchange for a discount, payments for product sales are made earlier than otherwise required under existing payment terms. These arrangements reduced accounts receivable by $88 million and $89 million as of June 30, 2004 and 2003, respectively. We have been informed that the financing company that supports this program intends to discontinue advance payments on behalf of the OE customers after December 31, 2005. Although we cannot assure you that another similar arrangement will be available for periods after December 2005 on commercially reasonable terms or at all, we intend to seek such an arrangement and presently believe that one will be available in the marketplace. In June 2003, we entered into a similar arrangement with a third major OE customer in North America. This arrangement further reduced accounts receivable by $15 million at June 30, 2004. In March 2004, we entered into another arrangement with a major OE customer in Europe. This arrangement reduced accounts receivable by $19 million at June 30, 2004. These arrangements can be cancelled at any time. Investing Activities Cash used for investing activities was $8 million lower in the first six months of 2004 compared to the same period a year ago. In the first six months of 2004, we received $11 million in cash from the sale of our Birmingham, U.K. facility. Capital expenditures were $54 million during the first six months of both 2004 and 2003. Financing Activities Cash flow from financing activities was a $3 million inflow in the first six months of 2004 compared to an inflow of $37 million in the same period of 2003. The primary reason for the change is attributable to the net increase in debt related to the $350 million bond offering in June of 2003. 49 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. On June 30, 2004, we had $988 million in long-term debt obligations that have fixed interest rates. Of that amount, $500 million is fixed through October 2009, and $480 million through July 2013, while the remainder was fixed over periods of 2005 through 2025. There were also $413 million in long-term debt obligations that have variable interest rates based on a current market rate of interest. In April 2004, we entered into three separate fixed-to-floating interest rate swaps with two separate financial institutions. These agreements swapped an aggregate of $150 million of fixed interest rate debt at a per annum rate of 10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus a spread of 5.68 percent. Each agreement requires semi-annual settlements through July 15, 2013. Based on the current LIBOR as determined under these agreements of 1.86 percent (which remains in effect until January 15, 2005), these swaps would reduce our annual interest expense by approximately $4 million. The swaps qualify as fair value hedges in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and as such are recorded on the balance sheet at market value with an offset to the underlying hedged item, which is long-term debt. As of June 30, 2004, the fair value of the interest rate swaps was approximately a negative $6 million, which has been recorded as a decrease to long-term debt and an increase to other long- term liabilities. We estimate that the fair value of our long-term debt at June 30, 2004 was about 108 percent of its book value and 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 $3 million after tax, excluding the effect of the interest rate swaps we completed in April 2004. A one percentage point increase or decrease in interest rates on the swaps we completed in April 2004 would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by approximately $1 million after tax. OUTLOOK North America light vehicle production rates for 2003 weakened slightly to an annualized rate of 15.9 million units or a three percent decline from the prior year. Additionally, North American heavy-duty truck production was down three percent from the prior year. North American OE light vehicle production was flat for the first six months of 2004 as compared to the previous year. We still expect North American OE light vehicle production to increase to approximately 16.0 million units in 2004, however we remain cautious due to continuing uncertainty in economic and political environments, as well as uncertainty about the willingness of the original equipment manufacturers to continue to support consumer vehicle sales through incentives. We saw a strong increase in heavy-duty truck production rates during the first six months of 2004. We expect that heavy-duty truck production rates could increase between 30 and 40 percent for all of 2004. In Europe, 2003 new light vehicle production rates were down one percent from 2002 levels. Expectations for 2004 indicate a slight increase in production rates, even though volumes were flat during the first six months. In the global aftermarket, issues that have impacted volumes in the past will likely continue to be a challenge throughout 2004. Customer consolidation and longer product replacement cycles are expected to continue to impact volumes. We saw signs of improvement in the North America aftermarket during the first six months of 2004 and are cautiously optimistic that these conditions will continue for the remainder of 2004. We expect our global presence on many of the world's top selling OE platforms as well as our increasing business with thriving Japanese platforms manufactured in North America should allow us to outperform general market conditions. In addition to economic uncertainties, continued processed metal and raw carbon steel price increases are becoming a concern. While we believe we are in a good position overall on materials prices, pressure on carbon steel prices are expected to continue into the foreseeable future. We are working hard to address this situation by evaluating alternative materials and aggressively pursuing recovery of higher costs from our customers. We 50 are hopeful that these actions and recent increases in new business awards will be effective in containing margin pressures. 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, 2004, we are designated as a potentially responsible party in one Superfund site. We have estimated our share of the remediation costs for this site to be less than $1 million in the aggregate. In addition to the Superfund site, we may have the obligation to remediate current or former facilities, and we estimate our share of remediation costs at these facilities to be approximately $11 million. For the Superfund site and the current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund site, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at the Superfund site, and of other liable parties at our current and former facilities, has been considered, where appropriate, in our determination of our estimated liability. We believe that any potential costs associated with our current status as a potentially responsible party in the Superfund site, or as a liable party at our current or former facilities, will not be material to our results of operations or consolidated financial position. From time to time we are subject to product warranty claims whereby we are required to bear costs of repair or replacement of certain of our products. Warranty claims may range from individual customer claims to full recalls of all products in the field. See Note 4 to our consolidated financial statements included under Item 1 for information regarding our warranty reserves. We also from time to time are involved in legal proceedings or claims that are incidental to the conduct of our business. Some of these proceedings allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warnings issues, and other product liability related matters), employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. As another example, we are involved in litigation with the minority owner of one of our Indian joint ventures over various operational issues which involves a court-mandated bidding process. We vigorously defend ourselves against all of these claims. In future periods, we could be subjected to cash costs or non-cash charges to earnings if we are required to sell our interest in the joint venture on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will 51 have any material adverse impact on our future consolidated financial position or results of operations. In addition, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. Many of these cases involve significant numbers of individual claimants. However, only a small percentage of these claimants allege that they were automobile mechanics who were allegedly exposed to our former muffler products and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other evidence, it is unlikely that mechanics were exposed to asbestos by our former muffler products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number of each in some cases exceeding 200 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. On the other hand, we are experiencing an increasing number of these claims, likely due to bankruptcies of major asbestos manufacturers. We vigorously defend ourselves against these claims as part of our ordinary course of business. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolution in the form of a dismissal of the claim or a judgment in our favor. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future financial condition or results of operations. EMPLOYEE DEFINED CONTRIBUTION PLAN We have established Employee Defined Contribution Plans for the benefit of our employees. Under the plans, participants may elect to defer up to 50 percent of their salary through contributions to the plan, which are invested in selected mutual funds or used to buy our common stock. We currently match in cash 50 percent of each employee's contribution up to eight percent of the employee's salary. We recorded expense for these matching contributions of approximately $3 million for each of the six months ended June 30, 2004 and 2003, respectively. All contributions vest immediately. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding our exposure to interest rate risk, see the caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated herein by reference. ITEM 4. CONTROLS AND PROCEDURES An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the quarter covered by this report. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures are effective to ensure that information required to be disclosed by our company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in the internal control over financial reporting that occurred during the second quarter of 2004 that have materially affected, or are likely to materially affect, our internal control over financial reporting. 52 PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our annual stockholders' meeting on May 11, 2004, to consider and vote on two separate proposals: (i) a proposal to elect Charles W. Cramb, Timothy R. Donovan, M. Kathryn Eickhoff, Mark P. Frissora, Frank E. Macher, Roger B. Porter, David B. Price, Jr., Dennis G. Severance and Paul T. Stecko as directors of our company for a term expiring at our next annual stockholders' meeting, and (ii) a proposal to ratify the appointment of Deloitte & Touche LLP as independent public accountants for 2004. The following sets forth the vote results with respect to these proposals at the meeting: ELECTION OF DIRECTORS
VOTES FOR VOTES WITHHELD ---------- -------------- Charles W. Cramb............................................ 30,297,745 810,359 Timothy R. Donovan.......................................... 30,409,594 698,510 M. Kathryn Eickhoff......................................... 30,295,569 812,535 Mark P. Frissora............................................ 30,126,260 981,844 Frank E. Macher............................................. 30,293,107 814,997 Roger B. Porter............................................. 29,664,084 1,444,020 David B. Price, Jr.......................................... 29,663,223 1,444,881 Dennis G. Severance......................................... 29,407,905 1,700,199 Paul T. Stecko.............................................. 24,711,714 6,396,390
RATIFICATION OF APPOINTMENT OF DELOITTE & TOUCHE LLP
VOTES FOR VOTES AGAINST VOTES ABSTAIN - ---------- ------------- ------------- 30,804,313.. 261,671 42,120
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 or furnished the following Current Reports on Form 8-K during the quarter ended June 30, 2004: Current Report on Form 8-K dated April 16, 2004, including pursuant to Item 5 certain information pertaining to the filing of a Registration Statement on Form S-3 relating to a proposed offering of common stock. Current Report on Form 8-K dated April 20, 2004, including pursuant to Item 5 certain information pertaining to the results of the Company's operations for the first quarter of 2004. Current Report on Form 8-K dated April 20, 2004, including pursuant to Item 12 certain information pertaining to the results of the Company's operations for the first quarter of 2004. Current Report on Form 8-K dated April 30, 2004, including pursuant to Item 5 certain information pertaining to the commencement of a cash tender offer and consent solicitation for the Company's $500,000,000 aggregate principal amount of 11 5/8% Senior Subordinated Notes due 2009. Current Report on Form 8-K dated May 5, 2004, including pursuant to Item 5 certain information pertaining to the Company's 2004 annual stockholder's meeting. Current Report on Form 8-K dated May 13, 2004, including pursuant to Item 5 certain information pertaining to (i) the Company's receipt of requisite consents from the holders of its $500,000,000 aggregate principal amount of the 11 5/8% Senior Subordinated Notes due 2009 to adopt proposed amendments to the indenture 53 governing the notes and that a supplemental indenture adopting the proposed amendments had been executed, and (ii) the beginning of the Company's road show for its public offering of approximately $150 million, or approximately 11.9 million shares, of its common stock. Current Report on Form 8-K dated May 20, 2004, including pursuant to Item 5 certain information pertaining to the amendment of the Company's previously announced cash tender offer to seek approximated $130,000,000 aggregate principal amount of its 11 5/8% Senior Subordinated Notes due 2009, rather than the full outstanding $500,000,000 aggregate principal amount previously sought. Current Report on Form 8-K dated May 24, 2004, including pursuant to Item 5 certain information pertaining to the Company not proceeding with its proposed public offering of approximately $150 million, or 11.9 million shares, of its common stock as previously announced on April 16, 2004; and the withdrawal of its tender offer seeking approximately $130,000,000 aggregate principal amount of its 11 5/8 percent Senior Subordinated Notes due in 2009. Current Report on Form 8-K dated June 2, 2004, including pursuant to Item 5 certain information pertaining to the commencement of an offer to exchange up to $125 million principal amount of 10.25% Senior Secured Notes due 2013, which have been registered under the Securities Act of 1933, for a like amount of the Company's existing 10.25% Senior Secured Notes due 2013, which were issued on December 12, 2003 in a private placement. 54 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, Tenneco Automotive Inc. has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TENNECO AUTOMOTIVE INC. By: /s/ KENNETH R. TRAMMELL ------------------------------------ Kenneth R. Trammell Senior Vice President and Chief Financial Officer Dated: August XX, 2004 55 INDEX TO EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR QUARTER ENDED JUNE 30, 2004
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2 -- None. 3.1(a) -- Restated Certificate of Incorporation of the registrant dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(a) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(b) -- Certificate of Amendment, dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(c) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(c) -- Certificate of Ownership and Merger, dated July 8, 1997 (incorporated herein by reference from Exhibit 3.1(d) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(d) -- Certificate of Designation of Series B Junior Participating Preferred Stock dated September 9, 1998 (incorporated herein by reference from Exhibit 3.1(d) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 3.1(e) -- Certificate of Elimination of the Series A Participating Junior Preferred Stock of the registrant dated September 11, 1998 (incorporated herein by reference from Exhibit 3.1(e) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 3.1(f) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(f) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(g) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(g) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(h) -- Certificate of Ownership and Merger merging Tenneco Automotive Merger Sub Inc. with and into the registrant, dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(h) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(i) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated May 9, 2000 (incorporated herein by reference from Exhibit 3.1(i) of the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 1-12387). *3.2 -- By-laws of the registrant, as amended July 13, 2004. 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).
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.5 -- Certificate of Incorporation of TMC Texas Inc. ("TMC") (incorporated herein by reference to Exhibit 3.5 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.6 -- By-laws of TMC (incorporated herein by reference to Exhibit 3.6 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.7 -- Amended and Restated Certificate of Incorporation of Tenneco International Holding Corp. ("TIHC") (incorporated herein by reference to Exhibit 3.7 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.8 -- Amended and Restated By-laws of TIHC (incorporated herein by reference to Exhibit 3.8 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.9 -- Certificate of Incorporation of Clevite Industries Inc. ("Clevite"), as amended (incorporated herein by reference to Exhibit 3.9 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.10 -- By-laws of Clevite (incorporated herein by reference to Exhibit 3.10 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.11 -- Amended and Restated Certificate of Incorporation of the Pullman Company ("Pullman") (incorporated herein by reference to Exhibit 3.11 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.12 -- By-laws of Pullman (incorporated herein by reference to Exhibit 3.12 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.13 -- Certificate of Incorporation of Tenneco Automotive Operating Company Inc. ("Operating") (incorporated herein by reference to Exhibit 3.13 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.14 -- By-laws of Operating (incorporated herein by reference to Exhibit 3.14 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 4.1(a) -- Rights Agreement dated as of September 8, 1998, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.1 of the registrant's Current Report on Form 8-K dated September 24, 1998, File No. 1-12387). 4.1(b) -- Amendment No. 1 to Rights Agreement, dated March 14, 2000, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 1-12387). 4.1(c) -- Amendment No. 2 to Rights Agreement, dated February 5, 2001, by and between the registrant and First Union National Bank, as Rights Agent (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Post-Effective Amendment No. 3, dated February 26, 2001, to its Registration Statement on Form 8-A dated September 17, 1998). 4.2(a) -- Indenture, dated as of November 1, 1996, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of the registrant's Registration Statement on Form S-4, Registration No. 333-14003). 4.2(b) -- First Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(b) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(c) -- Second Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(c) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387).
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.2(d) -- Third Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(d) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(e) -- Fourth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(e) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(f) -- Eleventh Supplemental Indenture, dated October 21, 1999, to Indenture dated November 1, 1996 between The Chase Manhattan Bank, as Trustee, and the registrant (incorporated herein by reference from Exhibit 4.2(l) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.3 -- Specimen stock certificate for Tenneco Automotive Inc. common stock (incorporated herein by reference from Exhibit 4.3 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-12387). 4.4(a) -- Indenture dated October 14, 1999 by and between the registrant and The Bank of New York, as trustee (incorporated herein by reference from Exhibit 4.4(a) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.4(b) -- Supplemental Indenture dated November 4, 1999 among Tenneco Automotive Operating Subsidiary Inc. (formerly Tenneco Automotive Inc.), Tenneco International Holding Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite Industries Inc. and TMC Texas Inc. in favor of The Bank of New York, as trustee (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.4(c) -- Subsidiary Guarantee dated as of October 14, 1999 from Tenneco Automotive Operating Subsidiary Inc. (formerly Tenneco Automotive Inc.), Tenneco International Holding Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite Industries Inc. and TMC Texas Inc. in favor of The Bank of New York, as trustee (incorporated herein by reference to Exhibit 4.4(c) to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 4.5(a) -- Amended and Restated Credit Agreement, dated as of December 12, 2003, among Tenneco Automotive Inc., the several banks and other financial institutions or entities from time to time parties thereto, Bank of America, N.A. and Citicorp North America, Inc., as co-documentation agents, Deutsche Bank Securities Inc., as syndication agent, and JP Morgan Chase Bank, as administrative agent (incorporated herein by reference to Exhibit 4.5(a) to the registrant's Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-12387). 4.5(b) -- Amended and Restated Guarantee And Collateral Agreement, dated as of November 4, 1999, by Tenneco Automotive Inc. and the subsidiary guarantors named therein, in favor of JPMorgan Chase Bank, as Administrative Agent (incorporated herein by reference from Exhibit 4.5(f) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.6(a) -- Indenture, dated as of June 19, 2003, among Tenneco Automotive Inc., the subsidiary guarantors named therein and Wachovia Bank, National Association (incorporated herein by reference from Exhibit 4.6(a) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387).
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.6(b) -- Collateral Agreement, dated as of June 19, 2003, by Tenneco Automotive Inc. and the subsidiary guarantors named therein in favor of Wachovia Bank, National Association (incorporated herein by reference from Exhibit 4.6(b) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.6(c) -- Registration Rights Agreement, dated as of June 19, 2003, among Tenneco Automotive Inc., the subsidiary guarantors named therein, and the initial purchasers named therein, for whom JPMorgan Securities Inc. acted as representative (incorporated herein by reference from Exhibit 4.6(c) to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 4.6(d) -- Supplemental Indenture, dated as of December 12, 2003, among Tenneco Automotive Inc., the subsidiary guarantors named therein and Wachovia Bank, National Association (incorporated herein by reference to Exhibit 4.6(d) to the registrant's Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-12387). 4.6(e) -- Registration Rights Agreement, dated as of December 12, 2003, among Tenneco Automotive Inc., the subsidiary guarantors named therein, and the initial purchasers named therein, for whom Banc of America Securities LLC acted as representative agent (incorporated herein by reference to Exhibit 4.5(a) to the registrant's Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-12387). 4.7 -- Intercreditor Agreement, dated as of June 19, 2003, among JPMorgan Chase Bank, as Credit Agent, Wachovia Bank, National Association, as Trustee and Collateral Agent, and Tenneco Automotive Inc. (incorporated herein by reference from Exhibit 4.7 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). 9 -- None. 10.1 -- Distribution Agreement, dated November 1, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 2 of the registrant's Form 10, File No. 1-12387). 10.2 -- Amendment No. 1 to Distribution Agreement, dated as of December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.2 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.3 -- Debt and Cash Allocation Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.3 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.4 -- Benefits Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.4 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.5 -- Insurance Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.5 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.6 -- Tax Sharing Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), Newport News Shipbuilding Inc., the registrant, and El Paso Natural Gas Company (incorporated herein by reference from Exhibit 10.6 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387).
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.7 -- First Amendment to Tax Sharing Agreement, dated as of December 11, 1996, among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, El Paso Natural Gas Company and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.7 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.8 -- Tenneco Automotive Inc. Value Added "TAVA" Incentive Compensation Plan (incorporated herein by reference from Exhibit 10.8 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 1-12387). 10.9 -- Tenneco Automotive Inc. Change of Control Severance Benefits Plan for Key Executives (incorporated herein by reference from Exhibit 10.13 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 10.10 -- Tenneco Automotive Inc. Stock Ownership Plan (incorporated herein by reference from Exhibit 10.10 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 10.11 -- Tenneco Automotive Inc. Key Executive Pension Plan (incorporated herein by reference from Exhibit 10.11 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.12 -- Tenneco Automotive Inc. Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.12 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.13 -- Tenneco Automotive Inc. Supplemental Executive Retirement Plan (incorporated herein by reference from Exhibit 10.13 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.14 -- Human Resources Agreement by and between Tenneco Automotive Inc. and Tenneco Packaging Inc. dated November 4, 1999 (incorporated herein by reference to Exhibit 99.1 to the registrant's Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 10.15 -- Tax Sharing Agreement by and between Tenneco Automotive Inc. and Tenneco Packaging Inc. dated November 3, 1999 (incorporated herein by reference to Exhibit 99.2 to the registrant's Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 10.16 -- Amended and Restated Transition Services Agreement by and between Tenneco Automotive Inc. and Tenneco Packaging Inc. dated as of November 4, 1999 (incorporated herein by reference from Exhibit 10.21 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 10.17 -- Assumption Agreement among Tenneco Automotive Operating Company Inc., Tenneco International Holding Corp., Tenneco Global Holdings Inc., The Pullman Company, Clevite Industries Inc., TMC Texas Inc., Salomon Smith Barney Inc. and the other Initial Purchasers listed in the Purchase Agreement dated as of November 4, 1999 (incorporated herein by reference from Exhibit 10.24 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 10.18 -- Amendment No. 1 to Change in Control Severance Benefits Plan for Key Executives (incorporated herein by reference from Exhibit 10.23 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.19 -- Letter Agreement dated July 27, 2000 between the registrant and Mark P. Frissora (incorporated herein by reference from Exhibit 10.24 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). 10.20 -- Letter Agreement dated July 27, 2000 between the registrant and Richard P. Schneider (incorporated herein by reference from Exhibit 10.26 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387).
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.21 -- Letter Agreement dated July 27, 2000 between the registrant and Timothy R. Donovan (incorporated herein by reference from Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-12387). 10.22 -- Form of Indemnity Agreement entered into between the registrant and the following directors of the registrant: Paul Stecko, M. Kathryn Eickhoff and Dennis Severance (incorporated herein by reference from Exhibit 10.29 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-12387). 10.23 -- Mark P. Frissora Special Appendix under Tenneco Automotive Inc. Supplemental Executive Retirement Plan (incorporated herein by reference from Exhibit 10.30 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-12387). 10.24 -- Letter Agreement dated as of June 1, 2001 between the registrant and Hari Nair (incorporated herein by reference from Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2001. File No. 1-12387). 10.25 -- Tenneco Automotive Inc. 2002 Long-Term Incentive Plan (As Amended and Restated Effective March 11, 2003) (incorporated herein by reference from Exhibit 10.26 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. File No. 1-12387). 10.26 -- Amendment to No. 1 Tenneco Automotive Inc. Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.27 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387). 10.27 -- Tenneco Automotive Inc. Supplemental Stock Ownership Plan (incorporated herein by reference from Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387). 11 -- None. *12 -- Computation of Ratio of Earnings to Fixed Charges. *15 -- Letter of Deloitte and Touche LLP regarding interim financial information. 18 -- None. 22 -- None. 23 -- None. 24 -- None. *31.1 -- Certification of Mark P. Frissora under Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 -- Certification of Kenneth R. Trammell under Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 -- Certification of Mark P. Frissora and Kenneth R. Trammell under Section 906 of the Sarbanes-Oxley Act of 2002. 99 -- None.
- --------------- * Filed herewith. 61 EX-3.2 2 c87293exv3w2.txt BY-LAWS OF THE REGISTRANT BY-LAWS OF TENNECO AUTOMOTIVE INC. AS AMENDED July 13, 2004 ARTICLE I PLACE OF STOCKHOLDER MEETINGS Section 1 - All meetings of the stockholders of the corporation shall be held at such place or places, within or without the State of Delaware, as may from time to time be fixed by the Board of Directors of the corporation (the "Board"), or as shall be specified or fixed in the respective notices or waivers of notice thereof. ANNUAL MEETING Section 2 - The Annual Meeting of Stockholders shall be held on such date and at such time as may be fixed by the Board and stated in the notice thereof, for the purposes of electing directors and for the transaction of only such other business as is properly brought before the meting in accordance with these By-Laws. SPECIAL MEETING Section 3 - Subject to the rights of the holders of any series of preferred stock, par value $.01 per share, of the corporation (the "Preferred Stock") to elect additional directors under specified circumstances, special meetings of the stockholders shall be called by the Board. The business transacted at a special meeting shall be confined to the purposes specified in the notice thereof. Special meetings shall be held at such date and at such time as the Board may designate. NOTICE OF MEETING Section 4 - Written notice of each meeting of stockholders, stating the place, date and hour of the meeting, and the purpose or purposes thereof, shall be mailed not less than ten nor more than sixty days before the date of such meeting to each stockholder entitled to vote thereat. QUORUM Section 5 - Unless otherwise provided by statute, the holders of shares of stock entitled to cast a majority of votes at a meeting, present either in person or by proxy, shall constitute a quorum at such meeting. The Secretary of the corporation or in his absence an Assistant Secretary or an appointee of the presiding officer of the meeting, shall act as the Secretary of the meeting. VOTING Section 6 - Except as otherwise provided by law or the Restated Certificate of Incorporation, each stockholder entitled to vote at any meeting shall be entitled to one vote, in person or by proxy, for each share held of record on the record date fixed as provided in Section 4 of Article V of these By-Laws for determining the stockholder entitled to vote at such meeting. At all meetings of stockholders for the election of directors, a plurality of the votes cast shall be sufficient to elect. All other elections and questions shall, unless otherwise provided by the Restated Certificate of Incorporation, these By-Laws, the rules or regulations of any stock exchange applicable to the corporation, or applicable law or pursuant to any regulation applicable to the corporation or its securities, be decided by the affirmative vote of the holders of a majority in voting power of the shares of stock of the corporation which are present in person or by proxy and entitled to vote thereon. Elections of directors need not be by written ballot; provided, however, that by resolution duly adopted, a vote by written ballot may be required. PROXIES Section 7 - Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary of the corporation. In order to be exercised at a meeting of stockholders, proxies shall be delivered to the Secretary of the corporation or his representative at or before the time of such meeting. INSPECTORS Section 8 - At each meeting of the stockholders the polls shall be opened and closed; the proxies and ballots shall be received and be taken in charge, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by at least one Inspector. The Inspector or Inspectors for each such meeting shall be appointed by the Board before the meeting, or in default thereof by the presiding officer at the meeting, and shall be sworn to the faithful performance of their duties. If any of the Inspectors previously appointed shall fail to attend or refuse or be unable to serve, substitutes shall be appointed by the presiding officer. In the event there is more than one Inspector for any meeting, a majority of the Inspectors for that meeting shall have power to make any decision of the Inspectors. CONDUCT OF MEETINGS Section 9 - The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the chairman of the meeting. The Board may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting, (ii) rules and procedures for maintaining order at the meeting and the safety of those present, (iii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof, and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. ADVANCE NOTICE Section 10 - A - (1) Nominations of persons for election to the Board and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (a) pursuant to the corporation's notice of meeting (or any supplement thereto), (b) by or at the direction of the Board or (c) by any stockholder of the corporation who was a stockholder of record of the corporation at the time the notice provided for in this Section 10 is delivered to the Secretary of the corporation, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 10. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 10, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation and any such proposed business other than the nominations of persons for election to the Board must constitute a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the ninetieth day nor earlier than the close of business on the one hundred twentieth day prior to the first anniversary of the preceding year's annual meeting (provided, however, that in the event that the date of the annual meeting is more than thirty days before or more than seventy days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the one hundred twentieth day prior to such annual meeting and not later than the close of business on the later of the ninetieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the corporation). In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth: (a) as to each person whom the stockholders proposes to nominate for election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder (and such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the By-Laws of the corporation, the language of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner, (ii) the class and number of shares of capital stock of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and (iv) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (a) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation's outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (b) otherwise to solicit proxies from stockholders in support of such proposal or nomination. The corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the corporation. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 10 to the contrary, in the event that the number of directors to be elected to the Board of the corporation at an annual meeting is increased and there is no public announcement by the corporation naming the nominees for the additional directorships at least one hundred days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 10 shall also be considered timely, but only with respect to nominees for the additional directorships, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the corporation. B - Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the corporation's notice of meeting. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (1) by or at the direction of the Board or (2) provided that the Board has determined that directors shall be elected at such meeting, by any stockholder of the corporation who is a stockholder of record at the time the notice provided for in this Section 10 is delivered to the Secretary of the corporation, who is entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in this Section 10. In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Section 10 shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the one hundred twentieth day prior to such special meeting and not later than the close of business on the later of the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. C - (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 10 shall be eligible to be elected an annual or special meeting of stockholders of the corporation to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 10. Except as otherwise provided by law, the chairman of the meeting shall have the power and duty (a) to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 10 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder's nominee or proposal in compliance with such stockholder's representation as required by clause (A)(2)(c)(iv) of this Section 10) and (b) if any proposed nomination or business was not made or proposed in compliance with this Section 10, to declare that such nomination shall be disregarded or that such proposed business shall not be transacted. Notwithstanding the foregoing provisions of this Section 10, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the corporation to present a nomination or business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the corporation. (2) For purposes of this Section 10, "public announcement" shall include disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 10, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 10. Nothing in this Section 10 shall be deemed to affect any rights (a) of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (b) of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the Restated Certificate of Incorporation. ARTICLE II BOARD OF DIRECTORS NUMBERS; METHOD OF ELECTION; TERMS OF OFFICE AND QUALIFICATION Section 1 - The business and affairs of the corporation shall be managed under the direction of the Board. The number of directors which shall constitute the entire Board shall not be less than eight nor more than sixteen and shall be determined from time to time by resolution adopted by a majority of the entire Board. Except as may otherwise be determined in the good faith judgement of the Board with respect to any particular person, after due consideration of all relevant factors (including, but not limited to, the particular individual at issue and the background and experience of the individual), no person who shall have attained the age of 72 shall be eligible for election or reelection, as the case may be, as a director of the corporation. MEETINGS Section 2 - The Board may hold its meetings and have an office in such place or places within or without the State or Delaware as the Board by resolution from time to time may determine. The Board may in its discretion provide for regular or stated meetings of the Board. Notice of regular or stated meetings need not be given. Special meetings of the Board shall be held whenever called by direction of the Chief Executive Officer, the President or any two of the directors. Notice of any special meeting shall be given by the Secretary to each director either by mail or by telegram, facsimile, telephone or other electronic communication or transmission. If mailed, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least three days before such meeting. If by telegram, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph corporation at least twenty-four hours before such meeting. If by facsimile, telephone, or other electronic communication or transmission, such notice shall be transmitted at least twenty-four hours before such meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Except as otherwise provided by applicable law, at any meeting at which every director shall be present, even though without notice, any business may be transacted. No notice of any adjourned meeting need be given. The Board shall meet immediately after election, following the Annual Meeting of Stockholders, for the purpose of organizing, for the election of corporate officers as hereinafter specified, and for the transaction of any other business which may come before it. No notice of such meeting shall be necessary. QUORUM Section 3 - Except as otherwise expressly required by these By-Laws or by statute, a majority of the directors then in office (but not less than one-third of the total number of directors constituting the entire Board) shall be present at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and the vote of a majority of the directors present at any such meeting at which quorum is present shall be necessary for the passage of any resolution or for an act to be the act of the Board. In the absence of a quorum, a majority of the directors present may adjourn such meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. COMPENSATION OF BOARD OF DIRECTORS Section 4 - Each director (other than a director who is a salaried officer of the corporation or of any subsidiary of the corporation), in consideration of his serving as such, shall be entitled to receive from the corporation such amount per annum and such fees for attendance at meetings of the Board or of any committee of the Board (a "Committee"), or both, as the Board shall from time to time determine. The Board may likewise provide that the corporation shall reimburse each director or member of a Committee for any expenses incurred by him on account of his attendance at any such meeting. Nothing contained in this Section shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE III COMMITTEES OF THE BOARD COMMITTEES Section 1 - The Board shall elect from the directors an Audit Committee and any other Committee which the Board may be resolution prescribe. Any such other Committee shall be comprised of such persons and shall possess such authority as shall be set forth in such resolution. PROCEDURE Section 2 - (1) Each Committee shall fix its own rules of procedure and shall meet where and as provided by such rules. Unless otherwise stated in these By-Laws, a majority of a Committee shall constitute a quorum. (2) In the absence or disqualification of a member of any Committee, the members of such Committee present at any meeting, and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Fees in connection with such appointments shall be established by the Board. REPORTS TO THE BOARD Section 3 - All completed actions by the Audit Committee shall be reported to the Board at the next succeeding Board meeting and shall be subject to revision or alteration by the Board, provided, that no acts or rights of third parties shall be affected by any such revision or alteration. AUDIT COMMITTEE Section 4 - The Board shall elect from among its members an Audit Committee consisting of at least three members. The Board shall appoint a chairman of said Committee who shall be one of its members. The Audit Committee shall have such authority and duties as the Board by resolution shall prescribe. In no event shall a director who is also an officer or employee of the corporation of any of its subsidiary companies serve as a member of such Committee. The Chief Executive Officer shall have the right to attend (but not vote at) each meeting of such Committee. ARTICLE IV OFFICERS GENERAL PROVISIONS Section 1 - The corporate officers of the corporation shall consist of a Chief Executive Officer, a Secretary and a Treasurer and such other officers as the Board may from time to time designate, including but not limited to the following: a Chairman who shall be chosen from the Board; one or more Vice Chairmen who shall be chosen from the Board; a President; one or more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents; a General Counsel; and one or more Assistant Secretaries, one or more Assistant Treasurers, and/or a Controller. Insofar as permitted by statute, the same person may hold two or more offices. All officers chosen by the Board shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. The Chief Executive Officer, the Secretary, the Treasurer and any other officers of the corporation shall be elected by the Board. Each such officer shall hold office until his successor is elected or appointed and qualified or until his earlier death, resignation or removal. Any officer may be removed, with or without cause, at any time by the Board. A vacancy in any office may be filled for the unexpired portion of the term in the same manner as provided in these By-Laws for election or appointment to such office. POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER Section 2 - The Chief Executive Officer shall have general charge and management of the affairs, property and business of the corporation, subject to the Board and the provisions of these By-Laws. The Chief Executive Officer or in his absence such other individual as the Board may select, shall preside at all meetings of the stockholders. He shall also preside at meetings of the Board and in his absence the Board shall appoint one of their number to preside. The Chief Executive Officer shall perform all duties assigned to him in these By-Laws and such other duties as may from time to time be assigned to him by the Board. He shall have the power to appoint and remove, with or without cause, such officers, other than those elected by the Board as provided for in these By-Laws, as in his judgment may be necessary or proper for the transaction of the business of the corporation, and shall determine their duties, all subject to ratification by the Board. POWERS AND DUTIES OF OTHER OFFICERS Section 3 - The Chairman, if any, shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 4 - Each Vice Chairman, if any, shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 5 - The President, if any, shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 6 - Each Executive Vice President shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 7 - Each Senior Vice President shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 8 - Each Vice President and Assistant Vice President shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer or any Senior Vice President. Section 9 - The General Counsel shall have general supervision and control of all of the corporation's legal business. He shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 10 - The Secretary or an Assistant Secretary shall record the proceedings of all meetings of the Board and the stockholders, in books kept for that purpose. The Secretary shall be the custodian of the corporate seal, and he or an Assistant Secretary shall affix the same to and countersign papers requiring such acts; and he and the Assistant Secretaries shall perform such other duties as may be required by the Board or the Chief Executive Officer. Section 11 - The Treasurer and Assistant Treasurers shall have care and custody of all funds of the corporation and disburse and administer the same under the direction of the Board or the Chief Executive Officer and shall perform such other duties as the Board or the Chief Executive Officer shall assign to them. Section 12 - The Controller shall maintain adequate records of all assets, liabilities and transactions of the corporation and see that audits thereof are currently and regularly made, and he shall perform such other duties as may be required by the Board or the Chief Executive Officer. SALARIES AND APPOINTMENTS Section 13 - The salaries of corporate officers shall be fixed by the Board or by any Committee of the Board to which the Board delegates such authority, except that the fixing of salaries below certain levels, determinable from time to time by the Board or any such Committee, may in the discretion of the Board or any such Committee be delegated to the Chief Executive Officer, subject to the approval of the Board or any such Committee. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 14 - (1) The corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an "Indemnittee") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, including appeals (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the corporation or, while a director of officer of the corporation is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise provided in paragraph (3) of this Section 14, the corporation shall be required to indemnify an Indemnitee in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the Board. (2) The corporation shall pay the expenses (including attorneys' fees) incurred by an Indemnitee in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Indemnitee to repay all amounts advanced if it should be ultimately determined that the Indemnitee is not entitled to be indemnified under this Section 14 or otherwise. (3) If a claim for indemnification or payment of expenses under this Section 14 is not paid in full within thirty days after a written claim therefor by the Indemnittee has been received by the corporation, the Indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the Indemnitee is not entitled to the requested indemnification or payment of expenses under applicable law. (4) The rights conferred on any Indemnitee by this Section 14 shall not be exclusive of any other rights which such Indemnitee may have or hereafter acquire under any statute, provision of the Restated Certificate of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested directors or otherwise. (5) The corporation's obligation, if any, to indemnify or to advance expenses to any Indemnitee who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by an amount such Indemnitee may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust enterprise or nonprofit enterprise. (6) Any repeal or modification of the foregoing provisions of this Section 14 shall not adversely affect any right or protection hereunder of any Indemnitee in respect of any act or omission occurring prior to the time of such repeal or modification. (7) This Section 14 shall not limit the right of the corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Indemnitees when as authorized by appropriate corporate action. ARTICLE V - CAPITAL STOCK CERTIFICATES OF STOCK Section 1 - Form. The shares of the corporation shall be represented by certificates; provided, however, that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the corporation's stock shall be uncertificated shares. Certificates of stock in the corporation, if any, shall be signed by or in the name of the corporation by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation Where a certificate is countersigned by a transfer agent, other than the corporation or an employee of the corporation, or by a registrar, the signatures of the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, the certificate may be issued by the corporation with the same effect as if such officer, transfer agent or registrar were such officer, transfer agent or registrar at the date of its issue. TRANSFER OF SHARES Section 2 - Transfers of shares shall be made only upon the books of the corporation by the holder, in person, or by power of attorney duly executed and filed with the Secretary of the corporation, and on the surrender of the certificate or certificates of such shares, properly assigned. The corporation may, if and whenever the Board shall so determine, maintain one or more offices or agencies, each in charge of an agent designated by the Board, where the shares of the capital stock of the corporation shall be transferred and/or registered. The Board may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. LOST, STOLEN OR DESTROYED CERTIFICATES Section 3 - The corporation may issue a new certificate of capital stock of the corporation in place of any certificate theretofore issued by the corporation, alleged to have been lost, stolen or destroyed, and the corporation may, but shall not be obligated to, require the owner of the alleged lost, stolen or destroyed certificate, or his legal representatives, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate, as the officers of the corporation may, in their discretion, require. FIXING OF RECORD DATE Section 4 - In order that the corporation may determine the stockholders entitled to notice of or to vote at the meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting or entitled to receive payment of any dividend or other distribution of allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty nor less than ten days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more then ten days from the date upon which the resolution fixing the record date is adopted by the Board; and (3) in the case of any other action, shall not be more than sixty days prior to such other action. If no record date is fixed by the Board: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meetings is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be determined in accordance with Article VI of these By-Laws; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. ARTICLE VI CONSENTS TO CORPORATE ACTION RECORD DATE Section 1 - The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be as fixed by the Board or as otherwise established under this Section. Any person seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall by written notice addressed to the Secretary and delivered to the corporation, request that a record date be fixed for such purpose. The Board may fix a record date for such purpose which shall be no more than 10 days after the date upon which the resolution is adopted. If the Board fails within 10 days after the corporation receives such notice to fix a record date for such purpose, the record date shall be the day on which the first written consent is delivered to the corporation in the manner described in Section 2 below unless prior action by the Board is required under the General Corporation Law of Delaware, in which event the record date shall be at the close of business on the day on which the Board adopts the resolution taking such prior action. PROCEDURES Section 2 - Every written consent purporting to take or authorizing the taking of corporate action and/or related revocations (each such written consent and related revocation is referred to in this Article VI as a "Consent") shall bear the date of signature of each stockholder who signs the Consent, and no Consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated Consent delivered in the manner required by this Section 2, Consents signed by a sufficient number of stockholders to take such action are delivered to the corporation. A Consent shall be delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery to the corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. In the event of the delivery of the corporation of a Consent, the Secretary of the corporation shall provide for the safe-keeping of such Consent and shall promptly conduct such ministerial review of the sufficiency of the Consents and of the validity of the action to be taken by shareholder consent as he deems necessary or appropriate, including, without limitation, whether the holders of a number of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent; provided, however, that if the corporate action to which the Consent relates is the removal or replacement of one or more members of the Board, the Secretary of the corporation shall promptly designate two persons, who shall not be members of the Board, to serve as Inspectors with respect to such Consent and such Inspectors shall discharge the functions of the Secretary of the corporation under this Section 2. If after such investigation the Secretary or the Inspectors (as the case may be) shall determine that the Consent is valid and that the action therein specified has been validly authorized, that fact shall forthwith be certified on the records of the corporation kept for the purpose of recording the proceedings of meetings or stockholders, and the Consent shall be filed in such records, at which time the Consent shall become effective as stockholder action. In conducting the investigation required by this Section 2, the Secretary or the Inspectors (as the case may be) may, at the expense of the corporation, retain special legal counsel and any other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate to assist them, and shall be fully protected in relying in good faith upon the opinion of such counsel of advisors. ARTICLE VII MISCELLANEOUS DIVIDENDS AND RESERVES Section 1 - Dividends upon the capital stock of the corporation may be declared as permitted by law by the Board at any regular or special meeting. Before payment of any dividend or making any distribution of profits, there may be set aside out of the surplus or net profits of the corporation such sum or sums as the Board, from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for such other purposes as the Board shall think conducive to the interests of the corporation, and any reserve so established may be abolished and restored to the surplus account by like action of the Board. SEAL Section 2 - The seal of the corporation shall bear the corporate name of the corporation, the year of its incorporation and the words "Corporate Seal, Delaware". WAIVER Section 3 - Whenever any notice whatever is required to be given by statute or under the provisions of the Restated Certificate of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders or the Board, as the case may be, need be specified in any waiver of notice of such meeting. FISCAL YEAR Section 4 - The fiscal year of the corporation shall begin with January first and end with December thirty-first. CONTRACTS Section 5 - Except as otherwise required by law, the Restated Certificate of Incorporation or these By-Laws, any contracts or other instruments may be executed and delivered in the name and on the behalf of the corporation by such officer or officers of the corporation as the Board may from time to time direct. Such authority may be general or confined to specific instances as the Board may determine. The Chief Executive Officer or any of the Chairman or the President and any Vice President may execute bonds, contracts, deeds, leases and other instruments to be made or executed for or on behalf of the corporation. Subject to any restrictions imposed by the Board, the Chief Executive Officer or any of the Chairman or the President or any Vice President of the corporation may delegate contractual powers to others under his jurisdiction, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power. PROXIES Section 6 - Unless otherwise provided by resolution adopted by the Board, the Chief Executive Officer or any of the Chairman or the President and any Vice President may from time to time appoint an attorney or attorneys or agent or agents of the corporation, in the name and on behalf of the corporation, to cast the votes which the corporation may be entitled to cast as the holder of stock or other securities in any other corporation or other entity, any of whose stock or other securities may be held by the corporation, at meetings of the holders of the stock or other securities of such other corporation or other entity, or to consent in writing, in the name of the corporation as such holder, to any action by such other corporation or other entity, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises. AMENDMENTS Section 7 - The Board from time to time shall have the power to make, alter, amend or repeal any and all of these By-Laws, but any By-Laws so made altered or repealed by the board may be amended, altered or repealed by the stockholders. EX-12 3 c87293exv12.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, -------------- 2004 2003 ----- ----- Net income.................................................. $ 28 $ 25 Add: Interest expense.......................................... 69 69 Amortization of interest capitalized...................... 1 1 Portion of rentals representative of the interest factor................................................. 5 5 Income tax benefit and other taxes on income.............. 9 1 Minority interest......................................... 3 3 Undistributed (earnings) losses of affiliated companies in which less than a 50% voting interest is owned......... -- 2 ----- ----- Earnings as defined.................................... $ 115 $ 106 ===== ===== Interest expense............................................ $ 69 $ 69 Interest capitalized........................................ 1 2 Portion of rentals representative of the interest factor.... 5 5 ----- ----- Fixed charges as defined............................... $ 75 $ 76 ===== ===== Ratio of earnings to fixed charges.......................... 1.53 1.39 ===== =====
EX-15 4 c87293exv15.txt LETTER OF DELOITTE AND TOUCHE LLP REGARDING INTERIM FINANCIAL INFORMATION EXHIBIT 15 August 6, 2004 Tenneco Automotive Inc. 500 North Field Drive Lake Forest, IL 60045 We have made a review, in accordance with standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of Tenneco Automotive Inc. and consolidated subsidiaries for the periods ended June 30, 2004 and 2003, as indicated in our report dated August 6, 2004; 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, 2004, 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, 333-58056, 333-101973 and 333-113705 on Form S-8, Registration Statement Nos. 333-24291 and 333-114520 on Form S-3 and Registration Statement Nos. 333-107953 and 333-114295 on Form S-4. 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 EX-31.1 5 c87293exv31w1.txt 302 CERTIFICATION EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Mark P. Frissora, Chairman, President and Chief Executive Officer of Tenneco Automotive Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tenneco Automotive Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of the registrant's internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ MARK P. FRISSORA -------------------------------------- Mark P. Frissora Chairman, President and Chief Executive Officer Dated: August 6, 2004 EX-31.2 6 c87293exv31w2.txt 302 CERTIFICATION EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Kenneth R. Trammell, Senior Vice President and Chief Financial Officer of Tenneco Automotive Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tenneco Automotive Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of the registrant's internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ KENNETH R. TRAMMELL -------------------------------------- Kenneth R. Trammell Senior Vice President and Chief Financial Officer Dated: August 6, 2004 EX-32.1 7 c87293exv32w1.txt 906 CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q of Tenneco Automotive Inc. (the "Company") for the period ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Mark P. Frissora, as Chief Executive Officer of the Company, and Kenneth R. Trammell, as Chief Financial Officer of the Company, hereby certify that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ MARK P. FRISSORA -------------------------------------- Mark P. Frissora Chief Executive Officer /s/ KENNETH R. TRAMMELL -------------------------------------- Kenneth R. Trammell Chief Financial Officer August 6, 2004 This certification shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exchange Act of 1934. In addition, this certification shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933 or the Securities Exchange Act of 1934. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----