TENNECO INC
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31,
2010
OR
| o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-12387
TENNECO INC.
(Exact name of registrant as
specified in its charter)
|
Delaware
(State or other jurisdiction of incorporation or organization) |
76-0515284
(I.R.S. Employer Identification No.) |
|
|
500 North Field Drive
Lake Forest, IL (Address of principal executive offices) |
60045
(Zip Code) |
Registrant’s telephone number, including area
code: (847) 482-5000
Securities registered pursuant to Section 12(b) of the Act:
|
Name of each Exchange
|
||
|
Title of each class
|
on which registered
|
|
|
Common Stock, par value $.01 per share
|
New York and Chicago Stock Exchanges |
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities
Act. Yes
No
ü
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
ü
Note
—
Checking the box above will not relieve any registrant required
to file reports pursuant to Section 13 or 15(d) of the
Exchange Act from their obligations under those Sections.
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
ü
No
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
ü
Indicate
by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes
No
Indicate
by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
| Large accelerated filer ü | Accelerated filer | Non-accelerated filer | Smaller reporting company |
(Do not check if a smaller
reporting company)
Indicate
by check mark whether the registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange
Act). Yes
No
ü
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day
of the registrant’s most recently completed second fiscal
quarter.
|
Class of Common Equity and Number of Shares
|
||
|
held by Non-affiliates at June 30, 2010
|
Market Value held by Non-affiliates* | |
|
Common Stock, 57,802,789 shares
|
$1,217,326,736 |
* Based upon the closing sale
price on the New York Stock Exchange Composite Tape for the
Common Stock on June 30, 2010.
INDICATE
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE
REGISTRANT’S CLASSES OF COMMON STOCK, AS OF THE LATEST
PRACTICABLE DATE. Common Stock, par value $.01 per share,
60,265,974 shares outstanding as of February 21, 2011.
Documents Incorporated by
Reference:
|
Part of the Form 10-K
|
||
|
Document
|
into which incorporated | |
| Portions of Tenneco Inc.’s Definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 2011 | Part III |
Table of Contents
CAUTIONARY
STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Annual Report contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995 concerning, among other things, our prospects and business
strategies. These forward-looking statements are included in
various sections of this report, including the section entitled
“Outlook” appearing in Item 7 of this report. The
words “may,” “will,” “believe,”
“should,” “could,” “plan,”
“expect,” “anticipate,”
“estimate,” 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, including without limitation any deterioration in the global economic environment, including the potential impact thereof on labor unrest, supply chain disruptions, weakness in demand and the collectability of any accounts receivable due to us; | |
| • | our ability to source and procure needed materials, components and other products and services in accordance with customer demand and at competitive prices; | |
| • | changes in capital availability or costs, including increases in our cost of borrowing (i.e., interest rate increases), the amount of our debt, our ability to access capital markets at favorable rates, and the credit ratings of our debt; | |
| • | changes in consumer demand, prices and our ability to have our products included on top selling vehicles, including any shifts in consumer preferences away from light trucks, which tend to be higher margin products for our customers and us, to other lower margin vehicles, for which we may or may not have supply contracts, and other factors impacting the cyclicality of automotive and commercial vehicle production and the sales of such vehicles which include our products, and the potential negative impact on our revenues and margins from such products; | |
| • | changes in automotive and commercial vehicle manufacturers’ production rates and their actual and forecasted requirements for our products, such as the significant production cuts during 2008 and 2009 by automotive manufacturers in response to difficult economic conditions; | |
| • | the overall highly competitive nature of the automobile and commercial vehicle parts industry, and any resultant inability to realize the sales represented by our awarded book of business (which is based on anticipated pricing and volumes for the applicable program over its life, and is subject to increases or decreases due to changes in customer requirements, customer and consumer preferences, and the number of vehicles actually produced by customers); | |
| • | the loss of any of our large original equipment manufacturer (“OEM”) customers (on whom we depend for a substantial portion of our revenues), or the loss of market shares by these customers if we are unable to achieve increased sales to other OEMs; | |
| • | industrywide strikes, labor disruptions at our facilities or any labor or other economic disruptions at any of our significant customers or suppliers or any of our customers’ other suppliers (such as the 2008 strike at American Axle, which disrupted our supply of products for significant General Motors platforms); | |
| • | increases in the costs of raw materials, including our ability to successfully reduce the impact of any such cost increases through materials substitutions, cost reduction initiatives, low cost country sourcing, and price recovery efforts with aftermarket and OE customers; | |
| • | the cyclical nature of the global vehicle industry, including the performance of the global aftermarket sector and the longer product lives of vehicle parts; | |
| • | our ability to successfully execute cash management, restructuring and other cost reduction plans and to realize anticipated benefits from these plans; |
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Table of Contents
| • | costs related to product warranties and other customer satisfaction actions; | |
| • | the impact of consolidation among vehicle parts suppliers and customers on our ability to compete; | |
| • | changes in distribution channels or competitive conditions in the markets and countries where we operate, including the impact of changes in distribution channels for aftermarket products on our ability to increase or maintain aftermarket sales; | |
| • | the negative impact of higher fuel prices on transportation and logistics costs, raw material costs and discretionary purchases of vehicles or aftermarket products; | |
| • | the cost and outcome of existing and any future legal proceedings, including, but not limited to, proceedings against us or our customers relating to intellectual property rights; | |
| • | economic, exchange rate and political conditions in the 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; | |
| • | our ability to successfully integrate any acquisitions that we complete and effectively manage our joint ventures and other third-party partnerships; | |
| • | changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies; | |
| • | changes in accounting estimates and assumptions, including changes based on additional information; | |
| • | potential legislation, regulatory changes and other governmental actions, including the ability to receive regulatory approvals and the timing of such approvals, as well as any changes by International Standards Organization (ISO), Technical Specifications (TS) and other such committees in their certification processes for processes and products, which may have the effect of delaying or hindering our ability to bring new products to market; | |
| • | the impact of changes in and compliance with laws and regulations, including environmental laws and regulations, which may result in our incurrence of environmental liabilities in excess of the amount reserved, the adoption of the current mandated timelines for worldwide emission regulation, which could impact the demand for certain of our products, and any changes to the timing of the funding requirements for our pension and other postretirement benefit liabilities; | |
| • | decisions by federal, state and local governments to provide (or discontinue) incentive programs related to automobile or other vehicle purchases; | |
| • | the potential impairment in the carrying value of our long-lived assets and goodwill or our deferred tax assets; | |
| • | potential volatility in our effective tax rate; | |
| • | acts of war and/or terrorism, as well as actions taken or to be taken by the United States and other governments as a result of further acts or threats of terrorism, and the impact of these acts on economic, financial and social conditions in the countries where we operate; and | |
| • | the timing and occurrence (or non-occurrence) of other transactions, events and circumstances which may be beyond our control. |
The risks included here are not exhaustive. Refer to
“Part I, Item 1A — Risk Factors”
of this report for further discussion regarding our exposure to
risks. Additionally, new risk factors emerge from time to time
and it is not possible for us to predict all such risk factors,
nor to assess the impact such risk factors might have on our
business or the extent to which any factor or combination of
factors may cause actual results to differ materially from those
contained in any forward-looking statements. Given these risks
and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
ii
TABLE OF
CONTENTS
iii
Table of Contents
PART I
| ITEM 1. | BUSINESS. |
TENNECO
INC.
General
Our company, Tenneco Inc., is one of the world’s largest
producers of emission control and ride control products and
systems for light, commercial and specialty vehicle
applications. Our company serves both original equipment vehicle
manufacturers (“OEMs”) and the repair and replacement
markets, or aftermarket, worldwide. As used herein, the term
“Tenneco,” “we,” “us,”
“our,” or the “Company” refers to Tenneco
Inc. and its consolidated subsidiaries.
We were incorporated in Delaware in 1996. In 2005, we changed
our name from Tenneco Automotive Inc. to Tenneco Inc. The name
Tenneco better represents the expanding number of markets we
serve through our commercial and specialty vehicle businesses.
Building a stronger presence in these markets complements our
core businesses of supplying ride control and emission control
products and systems for light vehicles to automotive original
equipment and aftermarket customers worldwide. Our common stock
is traded on the New York Stock Exchange under the symbol
“TEN.”
Corporate
Governance and Available Information
We have established a comprehensive corporate governance plan
for the purpose of defining responsibilities, setting high
standards of professional and personal conduct and assuring
compliance with such responsibilities and standards. As part of
its annual review process, the Board of Directors monitors
developments in the area of corporate governance. Listed below
are some of the key elements of our corporate governance plan.
For more information about these matters, see our definitive
Proxy Statement for the Annual Meeting of Stockholders to be
held on May 18, 2011.
Independence
of Directors
| • | Seven of our nine directors are independent under the New York Stock Exchange (“NYSE”) listing standards. | |
| • | Independent directors are scheduled to meet separately in executive session after every regularly scheduled Board of Directors meeting. | |
| • | We have a lead independent director, Mr. Paul T. Stecko. |
Audit
Committee
| • | All members meet the independence standards for audit committee membership under the NYSE listing standards and applicable Securities and Exchange Commission (“SEC”) rules. | |
| • | Two members of the Audit Committee, Messrs. Charles Cramb and Dennis Letham, have been designated by the Board as “audit committee financial experts,” as defined in the SEC rules, and the remaining member of the Audit Committee satisfies the NYSE’s financial literacy requirements. | |
| • | The Audit Committee operates under a written charter which governs its duties and responsibilities, including its sole authority to appoint, review, evaluate and replace our independent auditors. | |
| • | The Audit Committee has adopted policies and procedures governing the pre-approval of all audit, audit-related, tax and other services provided by our independent auditors. |
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Compensation/Nominating/Governance
Committee
| • | All members meet the independence standards for compensation and nominating committee membership under the NYSE listing standards. | |
| • | The Compensation/Nominating/Governance Committee operates under a written charter that governs its duties and responsibilities, including the responsibility for executive compensation. | |
| • | We have an Executive Compensation Subcommittee which has the responsibility to consider and approve equity based compensation for our executive officers which is intended to qualify as “performance based compensation” under Section 162(m) of the Internal Revenue Code. |
Corporate
Governance Principles
| • | We have adopted Corporate Governance Principles, including qualification and independence standards for directors. |
Stock
Ownership Guidelines
| • | We have adopted Stock Ownership Guidelines to align the interests of our executives with the interests of stockholders and promote our commitment to sound corporate governance. | |
| • | The Stock Ownership Guidelines apply to the independent directors, the Chairman and Chief Executive Officer, and all other officers with a rank of Senior Vice President or higher. |
Communication
with Directors
| • | The Audit Committee has established a process for confidential and anonymous submission by our employees, as well as submissions by other interested parties, regarding questionable accounting or auditing matters. | |
| • | Additionally, the Board of Directors has established a process for stockholders to communicate with the Board of Directors, as a whole, or any independent director. |
Codes of
Business Conduct and Ethics
| • | We have adopted a Code of Ethical Conduct for Financial Managers, which applies to our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Controller and other key financial managers. This code is filed as Exhibit 14 to this report. | |
| • | We also operate under a Statement of Business Principles that applies to all directors, officers and employees and includes provisions ranging from restrictions on gifts to conflicts of interests. All salaried employees are required to affirm annually their acceptance of, and compliance with, these principles. |
Related
Party Transactions Policy
| • | We have adopted a Policy and Procedure for Transactions With Related Persons, under which our Board of Directors must generally pre-approve transactions involving more than $120,000 with our directors, executive officers, five percent or greater stockholders and their immediate family members. |
Equity
Award Policy
| • | We have adopted a written policy for all issuances by our company of compensatory awards in the form of our common stock or any derivative of the common stock. |
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Personal
Loans to Executive Officers and Directors
| • | We comply with and operate in a manner consistent with the legislation outlawing extensions of credit in the form of a personal loan to or for our directors or executive officers. |
Our Internet address is
http://
www.tenneco.com.
We make our proxy statements, annual report to stockholders,
annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, as filed with or furnished to
the SEC, available free of charge on our Internet website as
soon as reasonably practicable after submission to the SEC.
Securities ownership reports on Forms 3, 4 and 5 are also
available free of charge on our website as soon as reasonably
practicable after submission to the SEC. The contents of our
website are not, however, a part of this report. All such
statements and reports can also be found at the Internet site
maintained by the SEC at
http://www.sec.gov
.
Our Audit Committee, Compensation/Nominating/Governance
Committee and Executive Compensation Subcommittee Charters,
Corporate Governance Principles, Stock Ownership Guidelines,
Audit Committee policy regarding accounting complaints, Code of
Ethical Conduct for Financial Managers, Statement of Business
Principles, Policy and Procedures for Transactions with Related
Persons, Equity Award Policy, policy for communicating with the
Board of Directors and Audit Committee policy regarding the
pre-approval of audit, non-audit, tax and other services are
available free of charge on our website at
www.tenneco.com.
In addition, we will make a copy of any of these documents
available to any person, without charge, upon written request to
Tenneco Inc., 500 North Field Drive, Lake Forest, Illinois
60045, Attn: General Counsel. We intend to satisfy the
disclosure requirements under Item 5.05 of
Form 8-K
and applicable NYSE rules regarding amendments to, or waivers
of, our Code of Ethical Conduct for Financial Managers and
Statement of Business Principles by posting this information on
our website at
www.tenneco.com.
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Table of Contents
CONTRIBUTIONS
OF MAJOR BUSINESSES
For information concerning our operating segments, geographic
areas and major products or groups of products, see Note 11
to the consolidated financial statements of Tenneco Inc.
included in Item 8. The following tables summarize for each
of our reportable segments for the periods indicated:
(i) net sales and operating revenues; (ii) earnings
before interest expense, income taxes and noncontrolling
interests (“EBIT”); and (iii) expenditures for
plant, property and equipment. You should also read
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in
Item 7 for information about certain costs and charges
included in our results.
Net Sales and Operating Revenues:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollar Amounts in Millions) | ||||||||||||||||||||||||
|
North America
|
$ | 2,832 | 48 | % | $ | 2,099 | 45 | % | $ | 2,641 | 45 | % | ||||||||||||
|
Europe, South America and India
|
2,594 | 44 | 2,209 | 48 | 2,983 | 50 | ||||||||||||||||||
|
Asia Pacific
|
698 | 12 | 525 | 11 | 543 | 9 | ||||||||||||||||||
|
Intergroup sales
|
(187 | ) | (4 | ) | (184 | ) | (4 | ) | (251 | ) | (4 | ) | ||||||||||||
|
Total
|
$ | 5,937 | 100 | % | $ | 4,649 | 100 | % | $ | 5,916 | 100 | % | ||||||||||||
EBIT:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollar Amounts in Millions) | ||||||||||||||||||||||||
|
North America
|
$ | 155 | 55 | % | $ | 42 | 45 | % | $ | (107 | ) | NM | ||||||||||||
|
Europe, South America and India
|
76 | 27 | 20 | 22 | 85 | NM | ||||||||||||||||||
|
Asia Pacific
|
50 | 18 | 30 | 33 | 19 | NM | ||||||||||||||||||
|
Total
|
$ | 281 | 100 | % | $ | 92 | 100 | % | $ | (3 | ) | NM | ||||||||||||
Expenditures
for plant, property and equipment:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollar Amounts in Millions) | ||||||||||||||||||||||||
|
North America
|
$ | 59 | 38 | % | $ | 45 | 38 | % | $ | 108 | 49 | % | ||||||||||||
|
Europe, South America and India
|
66 | 43 | 58 | 49 | 89 | 40 | ||||||||||||||||||
|
Asia Pacific
|
29 | 19 | 15 | 13 | 24 | 11 | ||||||||||||||||||
|
Total
|
$ | 154 | 100 | % | $ | 118 | 100 | % | $ | 221 | 100 | % | ||||||||||||
Interest expense, income taxes, and noncontrolling interests
that were not allocated to our operating segments are:
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
Interest expense (net of interest capitalized)
|
$ | 149 | $ | 133 | $ | 113 | ||||||
|
Income tax expense
|
69 | 13 | 289 | |||||||||
|
Noncontrolling interests
|
24 | 19 | 10 | |||||||||
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Table of Contents
DESCRIPTION
OF OUR BUSINESS
We design, manufacture and sell emission control and ride
control systems and products for light, commercial and specialty
vehicle applications, and generated revenues of
$5.9 billion in 2010. We serve both original equipment
manufacturers (OEMs) and replacement markets worldwide through
leading brands, including
Monroe
®
,
Rancho
®
,
Clevite
®
Elastomers,
Marzocchi
®
and Fric
Rot
tm
ride control products and
Walker
®
,
Fonos
tm
,
and
Gillet
tm
emission control products.
As a parts supplier, we produce individual component parts for
vehicles as well as groups of components that are combined as
modules or systems within vehicles. These parts, modules and
systems are sold globally to most leading OEMs and throughout
all aftermarket distribution channels.
Overview
of Automotive Parts Industry and Adjacent Markets
The automotive parts industry is generally separated into two
categories: (1) “original equipment” or
“OE” in which parts are sold in large quantities
directly for use by OEMs; and (2) “aftermarket”
in which replacement parts are sold in varying quantities to a
wide range of wholesalers, retailers and installers. In the OE
market, parts suppliers are generally divided into
tiers — “Tier 1” suppliers that provide
their products directly to OEMs, and “Tier 2” or
“Tier 3” suppliers that sell their products
principally to other suppliers for combination into the other
supplier’s own product offerings.
Demand for automotive parts in the OE market is generally a
function of the number of new vehicles produced, which in turn
is a function of prevailing economic conditions and consumer
preferences. In 2010, the number of light vehicles produced by
region was 11.9 million in North America, 28.9 million
in Europe, South America and India and 33.4 million in Asia
Pacific. The term “light vehicles” is comprised of two
groups: (1) passenger cars and (2) light trucks. When
we refer to “light trucks,” we are including
sport-utility vehicles (SUV), crossover vehicles (CUV),
pick-up
trucks, vans and multi-purpose passenger vehicles. Worldwide
light vehicle production is forecasted to increase to
78.0 million units in 2011 from approximately
74.2 million units in 2010. Although OE demand is tied to
planned vehicle production, parts suppliers also have the
opportunity to grow through increasing their product content per
vehicle, by further expanding business with existing customers
and by serving new customers in existing or new markets.
Companies with global presence and advanced technology,
engineering, manufacturing and support capabilities, such as our
company, are better positioned to take advantage of these
opportunities.
These same competitive advantages have enabled suppliers such as
us to serve customers beyond the light vehicle market. Certain
automotive parts suppliers are now developing and producing
components and integrated systems for the commercial market of
medium- and heavy-duty trucks, buses, and non-road equipment as
well as the recreational segment for two-wheelers and
all-terrain vehicles. Tenneco foresees this market
diversification as a source of future growth.
Demand for aftermarket products is driven by general economic
conditions, the number of vehicles in operation, the age and
distance driven of the vehicle fleet, and the average useful
life and quality of vehicle parts. Although more vehicles are on
the road than ever before, the aftermarket has experienced
longer replacement cycles due to the improved quality of OE
parts and increases in the average useful life of automotive
parts as a result of technological innovation. Suppliers are
increasingly being required to deliver innovative aftermarket
products to drive increased aftermarket demand. Global economic
downturns generally impact aftermarket sales less adversely than
OE sales, as customers forego new vehicle purchases and keep
their vehicles longer, thereby increasing demand for repair and
maintenance services.
Industry
Trends
Currently, we believe several significant existing and emerging
trends are dramatically impacting the automotive industry and
the other markets we serve. As the dynamics of the markets we
serve change, so do
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the roles, responsibilities and relationships of the
participants. Key trends that we believe are affecting parts
suppliers include:
General
Economic Factors and Production Levels
The economic crisis in 2008 and 2009 materially and negatively
impacted the automotive industry and our customers’
businesses in the U.S. and elsewhere. Automakers around the
world experienced financial difficulties from a weakened
economy, tightening credit markets, low consumer confidence, and
reduced demand for their products. General Motors and Chrysler
reorganized under bankruptcy protection in 2009, and other OE
manufacturers took actions to improve profitability and remain
solvent. The automotive supply base in turn also faced severe
cash flow problems as a result of the significantly lower
production levels of light vehicles, increased costs of certain
raw materials, commodity and energy costs, and restricted access
to additional liquidity through the capital markets. Consumers
facing a weak job market and inadequate financing options were
reluctant to purchase durable goods such as automobiles.
As a result of the lack of consumer confidence caused by the
global economic downturn and credit market crisis, the industry
experienced a rapid decline in light vehicle purchases in 2008
and the first half of 2009. The industry began to recover during
the second half of 2009 when OE light vehicle production began
to stabilize and then strengthen, tracking more closely to
vehicle sales, and inventory levels began to be replenished. In
2010, light vehicle production continued to strengthen,
evidenced by North America, Asia Pacific and Europe light
vehicle production volumes increasing 39 percent,
30 percent and 15 percent, respectively in 2010 as
compared to 2009.
Increasing
Environmental Standards
OE manufacturers and their parts suppliers are designing and
developing products to respond to increasingly stringent
environmental requirements, growth in the diesel markets and
increased demands for better fuel economy. Government
regulations adopted over the past decade require substantial
reductions in vehicle tailpipe emissions, longer warranties on
parts of a vehicle’s pollution control equipment and
additional equipment to control fuel vapor emissions.
Manufacturers are responding with new technologies for gasoline-
and diesel-fueled vehicles that minimize pollution and improve
fuel economy.
As a leading supplier of emission control systems with strong
technical capabilities, we believe we are well positioned to
benefit from the more rigorous environmental standards being
adopted around the world. To meet stricter air quality
regulations, we have developed and sold diesel particulate
filters (DPFs) for the Mercedes Benz Sprinter and BMW 1 and 3
series passenger cars in Europe and for the GM Duramax engine
applications, the Ford Super Duty, the Dodge Ram and
International Truck and Engine Corporation’s medium-duty
trucks in North America. These particulate filters, coupled with
converters, reduce emissions of particulate matter by up to
90 percent and of nitrogen oxide by up to 85 percent.
In addition, we have development and production contracts for
our selective catalytic reduction (SCR) systems with light and
medium-duty truck manufacturers in North America, South America,
Europe and Asia. In China, we have development contracts for
complete turnkey SCR systems, including the
ELIM-NOx
®
urea dosing technology acquired in 2007, now sold globally under
the name
XNOx
tm
.
Customers have also purchased prototypes of our hydrocarbon
injector, a product acquired alongside the
XNOx
tm
technology, which is used to inject hydrocarbon directly into
the exhaust system to regenerate diesel particulate filters and
Lean NOx Traps. Lastly, for various non-road customers, we are
developing emission aftertreatment systems designed to meet
Tier 4A and Tier 4 Final environmental regulations.
Increasing
Technologically Sophisticated Content
As consumers continue to demand vehicles with improved
performance, safety and functionality at competitive prices, the
components and systems in these vehicles become technologically
more advanced and sophisticated. Mechanical functions are
replaced with electronics; and mechanical and electronic devices
are integrated into single systems. More stringent emission and
other regulatory standards increase the complexity of the
systems as well.
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Table of Contents
To remain competitive as a parts and systems supplier, we invest
in engineering, research and development, spending
$117 million in 2010, $97 million in 2009, and
$127 million in 2008, net of customer reimbursements. In
addition, we build prototypes and incur other costs on behalf of
our customers to further our technological capabilities. Such
expenses reimbursed by our customers totaled $109 million
in 2010, $104 million in 2009, and $120 million in
2008. We also fund and sponsor university research to advance
our emission control and ride control development.
By investing in technology, we can expand our product offerings
and penetrate new markets. We developed DPFs which were first
sold in Europe and then offered in North America. We
co-developed with Öhlins Racing AB a continuously
controlled electronic suspension system (CES) now offered by
Volvo, Audi, Ford, VW and Mercedes Benz in their vehicles.
Enhanced
Vehicle Safety
Vehicle safety and handling continue to gain increased industry
attention and play a critical role in consumer purchasing
decisions. The U.S. made electronic stability control (ESC)
systems mandatory by 2012 with the adoption of the Federal Motor
Vehicle Safety Standard 126 (FMVSS-126). OEMs, to serve the
needs of their customers and meet government mandates, are
seeking parts suppliers that invest in new technologies,
capabilities and products that advance vehicle safety, such as
roll-over protection systems, smart airbags, braking
electronics, computerized electronic suspension and safer, more
durable materials. Those suppliers able to offer such innovative
products and technologies have a distinct competitive advantage.
Tenneco co-developed CES and offers
Kinetic
®
ride control technology to improve vehicle stability and
handling. We are also developing other advanced suspension
systems like Actively Controlled Car (ACOCAR) that are being
designed to provide improved vehicle safety and control. In
addition to these efforts, we continue to promote the
“Safety Triangle” of Steering-Stopping-Stability to
educate consumers about the detrimental effect of worn shock
absorbers on vehicle steering and stopping distances. Further,
we introduced premium
Monroe
®
branded brakes to the aftermarket to further complement our
product offerings in the aftermarket space.
Outsourcing
and Demand for Systems and Modules
OEMs have steadily outsourced more of the design and
manufacturing of vehicle parts and systems to simplify the
assembly process, lower costs and reduce development times.
Furthermore, they have demanded fully integrated, functional
systems made possible with the development of advanced
electronics in addition to innovative, individual vehicle
components and parts that may not readily interface together. As
a result, successful parts suppliers offer a variety of
component products individually as well as integrated modules
and systems:
| • | “Modules” are groups of component parts arranged in close physical proximity to each other within a vehicle. Modules are often assembled by the supplier and shipped to the OEM for installation in a vehicle as a unit. Integrated shock and spring units, seats, instrument panels, axles and door panels are examples. | |
| • | “Systems” are groups of component parts located throughout a vehicle which operate together to provide a specific vehicle functionality. Emission control systems, anti-lock braking systems, safety restraint systems, roll control systems and powertrain systems are examples. |
This shift towards fully integrated systems created the role of
the Tier 1 systems integrator, a supplier responsible for
executing a broad array of activities, including design,
development, engineering, and testing of component parts,
systems and modules. With more than a decade of experience as an
established Tier 1 supplier, we have produced modules and
systems for various vehicle platforms produced worldwide,
supplying ride control modules for the GM Chevy Silverado, GM
Sierra and the GM Malibu, Impala and Cruze and emission control
systems for the Ford Super Duty, Ford Focus, GM Chevy Silverado,
GM Sierra, SmartForTwo, Opel Astra, and VW Passat and Golf. In
addition, we continue to design other modules and systems for
platforms yet to be introduced to the global marketplace.
7
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Global
Reach of OE Customers
Changing market dynamics are driving OE manufacturers and their
parts suppliers to expand their global reach:
| • | Growing Importance of Developing Markets: Because the North American and Western European automotive markets are relatively mature, OEMs are increasingly focusing on developing markets for growth opportunities, particularly Brazil, Russia, India and China, collectively known as the BRIC economies, as well as Thailand. As OEMs have penetrated new regions, growth opportunities for suppliers have emerged. | |
| • | Governmental Tariffs and Local Parts Requirements: Many governments around the world require vehicles sold within their country to contain specified percentages of locally produced parts. Additionally, some governments place high tariffs on imported parts. | |
| • | Location of Production Closer to End Markets: As OE manufacturers and parts suppliers have shifted production globally to be closer to their end markets, suppliers have expanded their reach, capturing sales in developing markets and taking advantage of relatively lower labor costs. |
Because of these trends, OE manufacturers are increasingly
seeking suppliers capable of supporting vehicle platforms being
introduced globally. They want suppliers like Tenneco with
design, production, engineering and logistics capabilities that
can be accessed not just in North America and Europe but also in
the developing markets.
Global
Rationalization of OE Vehicle Platforms
OE manufacturers continue to standardize on “global
platforms,” designing basic mechanical structures that are
each suited for a number of similar vehicle models and able to
accommodate different features for more than one region. Light
vehicle platforms of over one million units are expected to grow
from 42 percent to 50 percent of global OE production
from 2010 to 2015.
With such global platforms, OE manufacturers realize significant
economies of scale by limiting variations in items such as
steering columns, brake systems, transmissions, axles, exhaust
systems, support structures and power window and door lock
mechanisms. The shift towards standardization can also benefit
automotive parts suppliers. They can experience greater
economies of scale, lower material costs, and reduced investment
expenses for molds, dies and prototype development.
Extended
Product Life of Automotive Parts
The average useful life of automotive parts, both OE and
replacement, has been steadily increasing in recent years due to
technological innovations. As a result, although there are more
vehicles on the road than ever before, the global aftermarket
has not kept pace with that growth. Accordingly, aftermarket
suppliers have focused on reducing costs and providing product
differentiation through advanced technology and recognized brand
names. With our long history of technological innovation, brand
awareness and operational effectiveness, we believe we are well
positioned to leverage our products and technology.
Changing
Aftermarket Distribution Channels
From 2000 to 2010, the number of retail outlets supplying
aftermarket parts increased significantly while the number of
jobber stores declined 12 percent in the U.S. Major
aftermarket retailers, such as AutoZone and Advance Auto Parts,
attempted to expand their commercial sales by selling directly
to parts installers, which had historically purchased from their
local warehouse distributors and jobbers, as they continued to
market to individual retail consumers. Retailers now have the
option to offer premium brands which are often preferred by
their commercial customers in addition to standard products
which are often selected by their individual store buyers. We
believe we are well positioned to respond to this trend because
we continue to produce high-quality, premium brands and
products. As distribution channels continue to consolidate, both
wholesalers and
8
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retailers can realize the benefits of sourcing products from a
supplier like Tenneco with our breadth of suspension and
emissions control products.
Contracting
Supplier Base
Over the past few years, as OEMs expanded geographically,
pricing pressures grew and outsourcing increased, parts
suppliers fought to remain competitive through consolidation,
investing or restructuring to broaden their global reach,
offering integrated products and services and gaining economies
of scale. Additionally, a number of suppliers took significant
restructuring actions or became insolvent, which has resulted in
a substantial portion of the supply base’s manufacturing
capacity being taken out of the marketplace. We believe that a
supplier’s viability in this marketplace will depend, in
part, on its ability to maintain and increase operating
efficiencies, provide value-added services and secure a stable
source of components and raw materials.
Analysis
of Revenues
The table below provides, for each of the years 2008 through
2010, information relating to our net sales and operating
revenues, by primary product lines and customer categories.
|
Net Sales
|
||||||||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
Emission Control Systems & Products
|
||||||||||||
|
Aftermarket
|
$ | 318 | $ | 315 | $ | 358 | ||||||
|
Original Equipment
|
||||||||||||
|
OE Value-add
|
2,223 | 1,638 | 2,128 | |||||||||
|
OE Substrate(1)
|
1,284 | 966 | 1,492 | |||||||||
| 3,507 | 2,604 | 3,620 | ||||||||||
| 3,825 | 2,919 | 3,978 | ||||||||||
|
Ride Control Systems & Products
|
||||||||||||
|
Aftermarket
|
851 | 721 | 761 | |||||||||
|
Original Equipment
|
1,261 | 1,009 | 1,177 | |||||||||
| 2,112 | 1,730 | 1,938 | ||||||||||
|
Total Revenues
|
$ | 5,937 | $ | 4,649 | $ | 5,916 | ||||||
| (1) | See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 for a discussion of substrate sales. |
Brands
In each of our operating segments, we manufacture and market
products with leading brand names.
Monroe
®
ride control products and
Walker
®
exhaust products are two of the most recognized brands in the
industry. We emphasize product value differentiation with brands
such as Monroe
Sensa-Trac
®
and
Reflex
®
(shock absorbers and struts),
Quiet-Flow
®
(mufflers),
DynoMax
®
(performance exhaust products),
Rancho
®
(ride control products for the high performance light truck
market),
Clevite
®
Elastomers (elastomeric vibration control components),
Marzocchi
®
(forks and suspensions for the two-wheeler market) and
Lukey
tm
(performance exhaust and filters). In Europe, our
Gillet
tm
brand is recognized as a leader in highly engineered exhaust
systems for OE customers.
9
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Customers
We have developed long-standing business relationships with our
customers around the world. In each of our operating segments,
we work together with our customers in all stages of production,
including design, development, component sourcing, quality
assurance, manufacturing and delivery. With a diverse mix of OE
and aftermarket products and facilities in major markets
worldwide, we believe we are well positioned to meet customer
needs. We believe we have a strong, established reputation with
customers for providing high-quality products at competitive
prices, as well as for timely delivery and customer service.
Worldwide we serve more than 64 different OEMs, and our products
or systems are included on nine of the top 10 passenger models
produced in Europe and nine of the top 10 light truck models
produced in North America for 2010. During 2010, our OEM
customers included:
| North America | Europe | Asia | ||
| AM General | AvtoVAZ | Beijing Automotive | ||
| Caterpillar | BMW | BMW | ||
| Chrysler | Daimler AG | Brilliance Automobile | ||
| Club Car | Ducati Motor | Changan Automotive | ||
| Daimler AG | Fiat Group | Daimler AG | ||
| Fiat Group | Ford Motor | Dongfeng Motor | ||
| Ford Motor | Geely Automobile | First Auto Works | ||
| General Motors | General Motors | Fiat Group | ||
| Harley-Davidson | Harley-Davidson | Ford Motor | ||
| Honda Motor | Mazda Motor | Geely Automobile | ||
| John Deere | Nissan Motor | General Motors | ||
| Mazda Motor | Paccar | Great Wall Motor | ||
| Navistar International | Porsche | Isuzu Motors | ||
| Nissan Motor | PSA Peugeot Citroën | Jiangling Motors | ||
| Oshkosh Truck | Renault | Mazda Motor | ||
| Paccar | Suzuki Motor | Nissan Motor | ||
| Toyota Motor | Saab Spyker | SAIC Motor Corp. | ||
| Volkswagen Group | Tata Motors | Toyota Motor | ||
| Volvo Global Truck | Toyota Motor | Volkswagen Group | ||
| Volkswagen Group | ||||
| Volvo Global Truck |
| Australia | South America | India | ||
| Club Car | Daimler AG | Club Car | ||
| Fiat Group | Fiat Group | General Motors | ||
| Ford Motor | Ford Motor | Mahindra & Mahindra | ||
| General Motors | General Motors | Nissan Motor | ||
| Mazda Motor | MAN SE | Suzuki Motor | ||
| Toyota Motor | Navistar International | Tata Motors | ||
| Nissan Motor | Toyota Motor | |||
| PSA Peugeot Citroën | TVS Motors | |||
| Renault | Volkswagen Group | |||
| Toyota Motor | ||||
| Volkswagen Group |
The following customers accounted for 10 percent or more of
our net sales in any of the last three years.
|
Customer
|
2010 | 2009 | 2008 | |||||||||
|
General Motors
|
19 | % | 16 | % | 20 | % | ||||||
|
Ford
|
13 | % | 14 | % | 11 | % | ||||||
During 2010, our aftermarket customers were comprised of
full-line and specialty warehouse distributors, retailers,
jobbers, installer chains and car dealers. These customers
included National Auto Parts Association (NAPA), Advance Auto
Parts, Uni-Select, Pep Boys and O’Reilly Automotive in
North America, Temot
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Autoteile GmbH, Autodistribution International, Group Auto
Union, and Auto Teile Ring in Europe and Rede Presidente in
South America. We believe our revenue mix is balanced, with our
top 10 aftermarket customers accounting for 46 percent of
our net aftermarket sales and our aftermarket sales representing
20 percent of our total net sales in 2010.
Competition
We operate in highly competitive markets. Customer loyalty is a
key element of competition in these markets and is developed
through long-standing relationships, customer service, high
quality value-added products and timely delivery. Product
pricing and services provided are other important competitive
factors.
In both the OE light vehicle market and aftermarket, we compete
with the vehicle manufacturers, some of which are also customers
of ours, and numerous independent suppliers. In the OE market,
we believe that we rank among the top two suppliers in the
markets we serve throughout the world for both emission control
and ride control products and systems for light vehicles. In the
aftermarket, we believe that we are the market share leader in
the supply of both emission control and ride control products
for light vehicles in the markets we serve throughout the world.
Seasonality
Our OE and aftermarket businesses are somewhat seasonal. OE
production is historically higher in the first half of the year
compared to the second half. It decreases in the third quarter
due to OE plant shutdowns; and softens in the fourth quarter due
to reduced consumer demand for new vehicles during the holiday
season and the winter months in North America and Europe
generally. Our aftermarket operations, also affected by
seasonality, experience relatively higher demand during the
Spring as vehicle owners prepare for the Summer driving season.
While seasonality does impact our business, actual results may
vary from the above trends due to global and local economic
dynamics as well as industry-specific platform launches and
other production-related events. During periods of economic
recession, OE sales traditionally decline due to reduced
consumer demand for automobiles and other capital goods.
Aftermarket sales tend not to be as adversely affected during
periods of economic downturn, as consumers forego new vehicle
purchases and keep their vehicles longer, thereby increasing
demand for repair and maintenance services. By participating in
both the OE and aftermarket segments, we generally see a smaller
revenue decline than the overall change in OE production.
During the recent global recession that began in 2008, seasonal
OE plant closures were longer and more pronounced and
aftermarket inventory levels remained leaner than normal. As the
industry began to recover, the effects of seasonality were
somewhat masked during the later half of 2009 through 2010, as
OE sales and inventories improved from their depressed levels as
consumers began spending again on the maintenance and repair of
their vehicles.
Emission
Control Systems
Vehicle emission control products and systems play a critical
role in safely conveying noxious exhaust gases away from the
passenger compartment and reducing the level of pollutants and
engine exhaust noise emitted to acceptable levels. Precise
engineering of the exhaust system — extending from the
manifold that connects an engine’s exhaust ports to an
exhaust pipe, to the catalytic converter that eliminates
pollutants from the exhaust, and to the muffler that modulates
noise and emissions — leads to a pleasant, tuned
engine sound, reduced pollutants and optimized engine
performance.
We design, manufacture and distribute a variety of products and
systems designed to reduce pollution and optimize engine
performance, acoustic tuning and weight, including the following:
| • | Catalytic converters and diesel oxidation catalysts — Devices consisting of a substrate coated with precious metals enclosed in a steel casing used to reduce harmful gaseous emissions, such as carbon monoxide; |
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| • | Diesel Particulate Filters (DPFs) — Devices to capture and regenerate particulate matter emitted from diesel engines; | |
| • | Burner systems — Devices which actively combust fuel and air inside the exhaust system to create extra heat for DPF regeneration, or for improved efficiency of SCR systems; | |
| • | Hydrocarbon vaporizers and injectors — Devices to add fuel to a diesel exhaust system in order to regenerate diesel particulate filters or Lean NOx traps; | |
| • | Lean NOx traps — Devices which reduce Nitrogen Oxide (NOx) emissions from diesel powertrains using capture and store technology; | |
| • | Selective Catalytic Reduction (SCR) systems — Devices which reduce NOx emissions from diesel powertrains using injected reductants such as AdBLue tm or Diesel Exhaust Fluid (DEF); | |
| • | Alternative NOx reduction technologies — Devices which reduce NOx emissions from diesel powertrains, by using alternative reductants such as diesel fuel, E85 (85% ethanol, 15% gasoline), or solid ammonium carbamate; | |
| • | Mufflers and resonators — Devices to provide noise elimination and acoustic tuning; | |
| • | Exhaust manifolds — Components that collect gases from individual cylinders of a vehicle’s engine and direct them into a single exhaust pipe; | |
| • | Pipes — Utilized to connect various parts of both the hot and cold ends of an exhaust system; | |
| • | Hydroformed assemblies — Forms in various geometric shapes, such as Y-pipes or T-pipes, which provide optimization in both design and installation as compared to conventional pipes; | |
| • | Hangers and isolators — Used for system installation and elimination of noise and vibration, and for the improvement of useful life; and | |
| • | Aftertreatment control units — Computerized electronic devices that utilize embedded software to regulate the performance of active aftertreatment system, including the control of sensors, injectors, vaporizers, pumps, heaters, valves, actuators, wiring harnesses, relays and other mechatronic components. |
For the catalytic converters we sell, we either buy completed
catalytic converters systems themselves or procure substrates
coated with precious metals which we incorporate into entire
systems. We obtain from third parties or directly from OE
manufacturers these components and systems, often at the
OEM’s discretion. See Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” for more information on our sales of these
products.
We supply our emission control offerings to 41 vehicle makers
for use on over 200 vehicle models, including five of the top 10
passenger cars produced in Europe and seven of the top 10 light
truck models produced in North America for 2010. We also
delivered emission control products to heavy-duty truck and
specialty vehicle manufacturers including Harley-Davidson, BMW
Motorcycle, Daimler Trucks, and International Truck and Engine
Corporation (Navistar).
We entered the emission control market in 1967 with the
acquisition of Walker Manufacturing Company, which was founded
in 1888, and became one of Europe’s leading OE emission
control systems suppliers with the acquisition of Heinrich
Gillet GmbH & Co. in 1994. Throughout this document,
the term “Walker” refers to our subsidiaries and
affiliates that produce emission control products and systems.
In the aftermarket, we manufacture, market and distribute
replacement mufflers for virtually all North American, European,
and Asian makes of light vehicles under brand names including
Quiet-Flow
®
,
Tru_Fit
®
and Aluminox
Pro
tm
,
in addition to offering a variety of other related products such
as pipes and catalytic converters
(Walker
®
Perfection). We also serve the specialty exhaust aftermarket
with offerings that include
Mega-Flow
®
exhaust products for heavy-duty vehicle applications and
DynoMax
®
high performance exhaust
12
Table of Contents
products. We continue to emphasize product-value differentiation
with other aftermarket brands such as
Thrush
®
and
Fonos
tm
.
The following table provides, for each of the years 2008 through
2010, information relating to our sales of emission control
products and systems for certain geographic areas:
|
Percentage of Net Sales
|
||||||||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
United States
|
||||||||||||
|
Aftermarket
|
11 | % | 17 | % | 12 | % | ||||||
|
OE market
|
89 | 83 | 88 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
|
Foreign Sales
|
||||||||||||
|
Aftermarket
|
7 | % | 8 | % | 8 | % | ||||||
|
OE market
|
93 | 92 | 92 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
|
Total Sales by Geographic Area
|
||||||||||||
|
United States
|
39 | % | 31 | % | 32 | % | ||||||
|
Foreign
|
61 | 69 | 68 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
Ride
Control Systems
Superior ride control is governed by a vehicle’s suspension
system, including its shock absorbers and struts. Shock
absorbers and struts serve to maintain the vertical loads placed
on the vehicle’s tires and thus, help keep the tires in
contact with the road. A vehicle’s ability to steer, brake,
accelerate and operate safely depends on the contact between the
vehicle’s tires and the road. Worn shocks and struts can
allow excess transfer of the vehicle’s weight —
either from side to side which is called “roll;” from
front to rear which is called “pitch;” or up and down,
which is called “bounce.” Shock absorbers are designed
to control the vertical loads placed on tires and thereby
provide resistance to vehicle roll, pitch and bounce. They not
only function as safety components but also provide a
comfortable ride.
We design, manufacture and distribute a variety of ride control
products and systems. Our ride control offerings include:
| • | Shock absorbers — A broad range of mechanical shock absorbers and related components for light- and heavy-duty vehicles, including twin-tube and monotube shock absorbers; | |
| • | Struts — A complete line of struts and strut assemblies for light vehicles; | |
| • | Vibration control components (Clevite ® Elastomers) — Generally, rubber-to-metal bushings and mountings to reduce vibration between metal parts of a vehicle. Offerings include a broad range of suspension arms, rods and links for light- and heavy-duty vehicles; | |
| • | Kinetic ® Suspension Technology — A suite of roll-control and nearly equal wheel-loading systems ranging from simple mechanical systems to complex hydraulic ones featuring proprietary and patented technology. The Kinetic ® Suspension Technology was incorporated on the Citroën World Rally Car that was featured in the World Rally Championship 2003, 2004 and 2005. Additionally, the Kinetic ® Suspension Technology was offered on the Lexus GX 470 sport utility vehicle which resulted in our winning the PACE Award; | |
| • | Advanced suspension systems — Shock absorbers and suspension systems that electronically adjust a vehicle’s performance based on inputs such as steering and braking; and |
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Table of Contents
| • | Other — We also offer other ride control products such as load assist products, springs, steering stabilizers, adjustable suspension systems, suspension kits and modular assemblies. |
We supply our ride control offerings to over 62 vehicle-makers
for use on over 220 vehicle models, including five of the top 10
passenger cars produced in Europe and eight of the top 10 light
truck models produced in North America for 2010. We also supply
OE ride control products and systems to a range of heavy-duty
and specialty vehicle manufacturers including Volvo Truck,
Scania, International Truck and Engine Corporation (Navistar),
and PACCAR.
In the ride control aftermarket, we manufacture, market and
distribute replacement shock absorbers for virtually all North
American, European and Asian makes of light vehicles under
several brand names including Gas
Matic
®
,
Sensa-Trac
®
,
Monroe
Reflex
®
and Monroe
Adventure
tm
,
as well as
Clevite
®
Elastomers for elastomeric vibration control components. We also
sell ride control offerings for the heavy-duty, non-road and
specialty aftermarket, such as our
Gas-Magnum
®
shock absorbers for the North American heavy-duty category and
Marzocchi front forks for two-wheelers.
We entered the ride control product line in 1977 with the
acquisition of Monroe Auto Equipment Company, which was founded
in 1916, and introduced the world’s first modern tubular
shock absorber in 1930. When the term “Monroe” is used
in this document it refers to our subsidiaries and affiliates
that produce ride control products and systems.
The following table provides, for each of the years 2008 through
2010, information relating to our sales of ride control
equipment for certain geographic areas:
|
Percentage of Net Sales
|
||||||||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
United States
|
||||||||||||
|
Aftermarket
|
59 | % | 60 | % | 53 | % | ||||||
|
OE market
|
41 | 40 | 47 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
|
Foreign Sales
|
||||||||||||
|
Aftermarket
|
30 | % | 32 | % | 32 | % | ||||||
|
OE market
|
70 | 68 | 68 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
|
Total Sales by Geographic Area
|
||||||||||||
|
United States
|
35 | % | 36 | % | 34 | % | ||||||
|
Foreign
|
65 | 64 | 66 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
Financial
Information About Geographic Areas
Refer to Note 11 of the consolidated financial statements
of Tenneco Inc. included in Item 8 of this report for
financial information about geographic areas.
Sales,
Marketing and Distribution
We have separate and distinct sales and marketing efforts for
our OE and aftermarket businesses.
For OE sales, our sales and marketing team is an integrated
group of professionals, including skilled engineers and program
managers, who are organized by customer and product type (e.g.,
ride control and emission control). Our sales and marketing team
provides the appropriate mix of operational and technical
expertise needed to interface successfully with the OEMs. Our
new business “capture process” involves working
closely with the OEM platform engineering and purchasing teams.
Bidding on OE automotive platforms typically encompasses many
months of engineering and business development activity.
Throughout
14
Table of Contents
the process, our sales team, program managers and product
engineers assist the OE customer in defining the project’s
technical and business requirements. A normal part of the
process includes our engineering and sales personnel working on
customers’ integrated product teams, and assisting with the
development of component/system specifications and test
procedures. Given that the OE business involves long-term
production contracts awarded on a
platform-by-platform
basis, our strategy is to leverage our engineering expertise and
strong customer relationships to obtain platform awards and
increase operating margins.
For aftermarket sales and marketing, our sales force is
generally organized by customer and region and covers multiple
product lines. We sell aftermarket products through four primary
channels of distribution: (1) the traditional three-step
distribution system of full-line warehouse distributors, jobbers
and installers; (2) the specialty two-step distribution
system of specialty warehouse distributors that carry only
specified automotive product groups and installers;
(3) direct sales to retailers; and (4) direct sales to
installer chains. Our aftermarket sales and marketing
representatives cover all levels of the distribution channel,
stimulating interest in our products and helping our products
move through the distribution system. Also, to generate demand
for our products from end-users, we run print and television
advertisements and offer pricing promotions. We were one of the
first parts manufacturers to offer
business-to-business
services to customers with TA-Direct, an on-line order entry and
customer service tool. In addition, we maintain detailed web
sites for each of
Walker
®
,
Monroe
®
,
Rancho
®
,
DynoMax
®
,
Monroe brake brands and our heavy-duty products.
Manufacturing
and Engineering
We focus on achieving superior product quality at the lowest
operating costs possible and generally use
state-of-the-art
manufacturing processes to achieve that goal. Our manufacturing
strategy centers on a lean production system designed to reduce
overall costs, while maintaining quality standards and reducing
manufacturing cycle time. In addition, we have implemented Six
Sigma in our processes to minimize product defects and improve
operational efficiencies. We deploy new technology to
differentiate our products from our competitors’ and to
achieve higher quality and productivity. We continue to adapt
our capacity to customer demand, both expanding capabilities in
growth areas as well as reallocating capacity away from demand
segments in decline.
Emission
Control
Our consolidated businesses operate 11 emission control
manufacturing facilities in the U.S. and 45 emission
control manufacturing facilities outside of the U.S. We
operate 16 of these international manufacturing facilities
through joint ventures in which we hold a controlling interest.
We operate five emission control engineering and technical
facilities worldwide and share two other such facilities with
our ride control operations. In addition, three joint ventures
in which we hold a noncontrolling interest operate a total of
three manufacturing facilities outside the U.S.
Within each of our emission control manufacturing facilities,
operations are organized by component (e.g., muffler, catalytic
converter, pipe, resonator and manifold). Our manufacturing
systems incorporate cell-based designs, allowing
work-in-process
to move through the operation with greater speed and
flexibility. We continue to invest in plant and equipment to
stay competitive in the industry. For instance, in our
Smithville, Tennessee, OE manufacturing facility, we have
developed a muffler assembly cell that utilizes laser welding.
This allows for quicker change-over times in the process as well
as less material used and less weight for the product. There is
also a reduced cycle time compared to traditional joining and
increased manufacturing precision for superior durability and
performance. In 2007, we introduced the Measured and Matched
Converter technique in North America. This allows us to maintain
the optimum GBD (Gap Bulk Density) in our converter
manufacturing operations with Tenneco proprietary processing.
This process, coupled with cold spinning of the converter body,
versus traditional cone to can welding, allows for more
effective use of material through reduced welding, lower cost,
and better performance of the product.
To strengthen our position as a Tier 1 OE systems supplier,
we have developed some of our emission control manufacturing
operations into
“just-in-time”
or “JIT” systems. In this system, a JIT facility
located close to our OE customer’s manufacturing plant
receives product components from both our manufacturing
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operations and independent suppliers, and then assembles and
ships products to the OEMs on an as-needed basis. To manage the
JIT functions and material flow, we have advanced computerized
material requirements planning systems linked with our
customers’ and supplier partners’ resource management
systems. We have three emission control JIT assembly facilities
in the United States and 22 throughout the rest of the world.
Our engineering capabilities include advanced predictive design
tools, advanced prototyping processes and
state-of-the-art
testing equipment. These technological capabilities make us a
“full system” integrator to the OEMs, supplying
complete emission control systems from the manifold to the
tailpipe, to provide full emission and noise control. We have
expanded our engineering capabilities with the 2007 acquisition
of Combustion Component Associates’
ELIM-NOx
®
,
mobile emission technology, now sold globally under the
XNOx
tm
name, that includes urea and hydrocarbon injection, and
electronic controls and software for selective catalytic
reduction. We also offer a complete suite of alternative full
system NOx aftertreatment technologies, including the
Hydrocarbon Lean NOx Catalyst (HC-LNC) technology under joint
development with General Electric, and
SOLID-SCR
tm
technology licensed from FEV, a Powertrain development and
engineering company based in Germany. We have also developed
advanced predictive engineering tools, including KBM&E
(Knowledge Based Manufacturing & Engineering). The
innovation of our KBM&E (which we call TEN-KBM&E) is a
modular toolbox set of CAD embedded applications for
manufacturing and engineering compliant design. The encapsulated
TEN-KBM&E content is driven by an analytical method which
continuously captures and updates the knowledge of our main
manufacturing and engineering processes. Our global engineering
capabilities are standardized through the use of the ATLAS
Global PDM (Product data management) system, enabling a more
efficient transfer of knowledge around the world.
Ride
Control
Our consolidated businesses operate seven ride control
manufacturing facilities in the U.S. and 23 ride control
manufacturing facilities outside the U.S. We operate two of
these international facilities through joint ventures in which
we hold a controlling interest. We operate seven engineering and
technical facilities worldwide and share two other such
facilities with our emission control operations.
Within each of our ride control manufacturing facilities,
operations are organized by product (e.g., shocks, struts and
vibration control products) and include computer numerically
controlled and conventional machine centers; tube milling and
drawn-over-mandrel
manufacturing equipment; metal inert gas and resistance welding;
powdered metal pressing and sintering; chrome plating; stamping;
and assembly/test capabilities. Our manufacturing systems
incorporate cell-based designs, allowing
work-in-process
to move through the operation with greater speed and flexibility.
To strengthen our position as a Tier 1 OE module supplier,
we have developed some of our manufacturing operations into JIT
systems. We have three JIT ride control facilities outside the
U.S.
In designing our shock absorbers and struts, we use advanced
engineering and test capabilities to provide product
reliability, endurance and performance. Our engineering
capabilities feature advanced computer-aided design equipment
and testing facilities. Our dedication to innovative solutions
has led to such technological advances as:
| • | Adaptive damping systems — adapt to the vehicle’s motion to better control undesirable vehicle motions; | |
| • | Electronically adjustable suspensions — change suspension performance based on a variety of inputs such as steering, braking, vehicle height, and velocity; and | |
| • | Air leveling systems — manually or automatically adjust the height of the vehicle. |
Conventional shock absorbers and struts generally compromise
either ride comfort or vehicle control. Our innovative
grooved-tube, gas-charged shock absorbers and struts provide
both ride comfort and vehicle control, resulting in improved
handling, reduced vibration and a wider range of vehicle
control. This technology can be found in our premium quality
Sensa-Trac
®
shock absorbers. We further enhanced this technology by adding
the
SafeTech
tm
fluon banded piston, which improves shock absorber performance
and durability. We
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introduced the Monroe
Reflex
®
shock absorber, which incorporates our Impact
Sensor
tm
device. This technology permits the shock absorber to
automatically switch in milliseconds between firm and soft
compression damping when the vehicle encounters rough road
conditions, thus maintaining better
tire-to-road
contact and improving handling and safety. We have also
developed an innovative computerized electronic suspension
system, which features dampers developed by Tenneco and
electronic valves designed by Öhlins Racing AB. The
continuously controlled electronic suspension (“CES”)
ride control system is featured on Audi, Volvo, Ford, VW and
Mercedes Benz vehicles.
Quality
Control
Quality control is an important part of our production process.
Our quality engineers establish performance and reliability
standards in the product’s design stage, and use prototypes
to confirm that the component/system can be manufactured to
specifications. Quality control is also integrated into the
manufacturing process, with shop operators being responsible for
quality control of their specific work product. In addition, our
inspectors test
work-in-progress
at various stages to ensure components are being fabricated to
meet customers’ requirements.
We believe our commitment to quality control and sound
management practices and policies is demonstrated by our
successful participation in the International Standards
Organization/Technical Specifications certification process
(“ISO/TS”). ISO/TS certifications are semi-annual or
annual audits that certify that a company’s facilities meet
stringent quality and business systems requirements. Without ISO
or TS certification, we would not be able to supply our products
for the aftermarket or the OE market, respectively, either
locally or globally. All of our manufacturing facilities where
we have determined that TS certification is required to serve
our customers or would provide us with an advantage in securing
additional business, have achieved ISO/TS 16949 certification.
Business
Strategy
We strive to strengthen our global market position by designing,
manufacturing, delivering and marketing technologically
innovative emission control and ride control products and
systems for OEMs and the aftermarket. We work toward achieving a
balanced mix of products, markets and customers by capitalizing
on emerging trends, specific regional preferences and changing
customer requirements. We target both mature and developing
markets for not just light vehicles, but also for commercial and
specialty vehicles. We further enhance our operations by
focusing on operational excellence in all functional areas.
The key components of our business strategy are described below:
Develop
and Commercialize Advanced Technologies
We develop and commercialize technologies that allow us to
expand into new, fast-growing markets and serve our existing
customers. By anticipating customer needs and preferences, we
design advanced technologies that meet global market needs. For
example, to meet the increasingly stringent emissions
regulations being introduced around the world, we offer several
technologies designed to reduce NOx emissions on passenger and
commercial vehicles. This includes an integrated Selective
Catalytic Reduction (SCR) system that incorporates our
ELIM-NOx
®
technology, now sold globally under the name
XNOx
tm
.
We also offer a NOx absorber and are developing a hydrocarbon
lean NOx catalyst system and a solid urea SCR system to address
NOx emissions. Additionally, we offer thermal management
solutions, including our
T.R.U.E.-Clean
®
active diesel particulate filter system.
We expect available content per vehicle to continue to rise over
the next several years. Advanced aftertreatment exhaust systems
will be required to comply with emissions regulations that
affect light and commercial vehicles as well as non-road,
locomotive and stationary engines. In addition, vehicle
manufacturers, we believe, will offer greater comfort, handling
and safety features by offering products such as electronic
suspension and adjustable dampers. Our Continuously Controlled
Electronic Suspension (CES) shock absorbers are now sold to
Volvo, Audi, Mercedes, VW, and Ford, among others, and our
engineered elastomers to manufacturers with unique requirements.
Our newest electronic suspension product
DRiV
tm
,
licensed from Sturman Industries, is the first industry example
of digital valves for ride control products, thereby offering
faster response, lighter weight, and reduced power consumption
compared to existing analog products.
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We continue to focus on developing highly engineered systems and
complex assemblies and modules designed to provide value-added
solutions to customers and increase vehicle content generally.
Having many of our engineering and manufacturing facilities
integrated electronically, we believe, has helped our products
continue to be selected for inclusion in top-selling vehicles.
In addition, our
just-in-time
and in-line sequencing manufacturing processes and distribution
capabilities have enabled us to be more responsive to our
customers’ needs.
Penetrate
Adjacent Markets
We seek to penetrate a variety of adjacent markets and achieve
growth in higher-margin businesses by applying our existing
design, engineering and manufacturing capabilities. For example,
we are aggressively leveraging our technology and engineering
leadership in emission and ride control into adjacent markets
for two wheelers, heavy-duty trucks, buses, agricultural
equipment, construction machinery and other commercial and
specialty vehicles. We are launching programs with 13 commercial
vehicle customers for on- and non-road equipment in China, North
America, Europe and South America. These customers include
Caterpillar, for whom we are their global diesel emission
control system integrator, as well as John Deere, Navistar,
Deutz, China National Heavy Truck Company, Shanghai Diesel
Engine Company, Weichai Power, FAW, and Guangxi Yuchai Machinery
Company. We plan to announce four additional customers when we
get approval to do so. Three of these customers are in South
America where Brazil regulations change in 2012, and one is in
China. Our 2010 revenue generated by our commercial and
specialty vehicle business was 9 percent of our total OE
revenue. In 2008, we added the ride control products and
technologies of Gruppo Marzocchi to our existing exhaust systems
business for two-wheelers. In addition, we are evaluating and
selectively pursuing retrofit opportunities which will allow us
to penetrate new markets or expand our products in existing
markets.
Expand
in Developing Economies
We continue to expand our global footprint into growth regions
around the world. Recently, we opened wholly-owned emission
control manufacturing facilities in Chennai, India and
Guangzhou, China, and a ride control facility in Chonburi,
Thailand. In addition, we opened new emission control facilities
in Changchun, China and in Beijing, China as a result of our new
joint venture agreements with FAW Sihuan and Beijing Hainachuan
Automotive Part Company Limited, respectively. As OEMs have
entered the fast-growing economies of Brazil, Russia, India,
China, and Thailand, we have followed, building our capabilities
to engineer and produce locally cost-competitive and
cutting-edge products and capturing new business.
Maintain
Our Aftermarket Leadership
We manufacture and market leading, brand-name products to a
diversified and global aftermarket customer base. Two of the
most recognized brand-name products in the automotive parts
industry are our
Monroe
®
ride control products and
Walker
®
emission control products, which have been offered to consumers
since the 1930s. We believe our brand equity in the aftermarket
is a key asset especially as customers consolidate and channels
of distribution converge.
We provide value differentiation by creating product extensions
bearing our various brands. For example, we offer Monroe
Reflex
®
and Monroe
Sensa-Trac
®
shock absorbers, Walker
Quiet-Flow
®
mufflers,
Rancho
®
ride control products,
DynoMax
®
exhaust products and Walker
Ultra
®
catalytic converters, and in European markets, Walker and
Aluminox
Pro
tm
mufflers. Further, we introduced Monroe
Springs
tm
and Monroe
Magnum
tm
(bus and truck shock line) in Europe and Monroe
Dynamics
®
and Monroe
Ceramics
®
brake pads in the United States. We continue to explore other
opportunities for developing new product lines that bear our
existing, well-known brands.
We strive to gain market share in the aftermarket business by
adding new product offerings and increasing our market coverage
of existing brands and products. To this end, we offer an
innovative, ride control product, the
Quick-Strut
®
,
that combines the spring and the upper mount into a single,
complete module and simplifies and shortens the installation
process, eliminating the need for the special tools and skills
required previously. We plan on adapting our products further
for use in foreign nameplate vehicles with the introduction of
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OESpectrum to our ride control line. We benefited from the
consolidation of, and regional expansion by, our customers and
gained business lost by competitors that encountered financial
difficulties.
Our success in the aftermarket business strengthens our
competitive position with OEMs. We gain timely market and
product knowledge that can be used to modify and enhance our
original equipment offerings for greater customer acceptance.
Execute
Focused Transactions
We have successfully identified and capitalized on strategic
acquisitions and alliances to achieve growth. Through these
acquisitions and alliances, we have (1) expanded our
product portfolio with complementary technologies;
(2) realized incremental business from existing customers;
(3) gained access to new customers; and (4) achieved
leadership positions in geographic markets outside North America.
We developed a strategic alliance with Futaba, a leading exhaust
manufacturer in Japan. We also created an alliance with Hitachi
(as successor to Tokico Ltd. following its acquisition of
Tokico), a leading Japanese ride control manufacturer. These
alliances help us grow our business with Japan-based OEMs by
leveraging the geographical reach of each partner to serve
global vehicle platforms of these OEMs.
We positioned ourselves as a leading exhaust supplier in the
rapidly growing Chinese market through majority-owned joint
venture operations in Dalian and Shanghai. In June 2009, we
formed a joint venture with Beijing Hainachuan Automotive Parts
Company Limited in Beijing that will produce emission-control
exhaust systems for Hyundai. In addition, we continue to serve
North American and European OEMs located in China; we supply
luxury cars produced by BMW and Audi through our joint venture
with Eberspächer International GmbH, and we supply various
Ford platforms through our joint venture with Chengdu Lingchuan
Mechanical Plant. We established a local engineering center in
Shanghai to develop automotive exhaust products when our joint
venture with Shanghai Tractor and Engine Company, a subsidiary
of Shanghai Automotive Industry Corp., was expanded. Also, we
increased our stake from 60 percent to 80 percent in
Tenneco Tongtai Exhaust Company Limited located in Dalian in
January 2010 and formed a new joint venture in March 2010 with
FAW Sihuan to supply emission control components and systems for
passenger and commercial vehicles.
In February 2009, we signed a joint development agreement with
GE Transportation, a unit of General Electric Company, to
develop a proprietary SCR and aftertreatment technology designed
to reduce and control diesel engine emissions for various
transportation and other applications. We are collaborating with
GE Transportation on the development and production of GE’s
Hydrocarbon Lean NOx catalyst technology (LNC), a diesel
aftertreatment innovation aimed at reducing harmful nitrogen
oxide (NOx) emissions as effectively as urea-based SCR systems.
We are working with others on alternative urea SCR technologies,
such as solid ammonium carbamate SCR.
We signed exclusive licensing agreements for T.R.U.E.
Clean
®
,
an exhaust aftertreatment technology used for automatic and
active regeneration of Diesel Particulate Filters (DPFs), with
Woodward Governor Company and for vaporizer technologies with
another company. These technologies, which complement our array
of existing emissions control products, allow us to provide
integrated exhaust aftertreatment systems to commercial vehicle
manufacturers and others.
We intend to continue to pursue strategic alliances, joint
ventures, acquisitions and other transactions that complement or
enhance our existing products, technology, systems development
efforts, customer base
and/or
global presence. We will align with companies that have proven
products, proprietary technology, advanced research
capabilities, broad geographic reach,
and/or
strong market positions to further strengthen our product
leadership, technological edge, international reach and customer
relationships.
Adapt
Cost Structure to Economic Realities
We aggressively respond to difficult economic environments,
aligning our operations to any resulting reductions in
production levels and replacement demand and executing
comprehensive restructuring and cost-reduction initiatives. In
the fourth quarter of 2008, we launched a global restructuring
program that is
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generating annual savings of about $58 million since being
fully implemented at the end of 2009. The restructuring program
included actions to permanently reduce our fixed cost base and
flex our costs, such as:
| • | Permanently eliminating 1,100 jobs worldwide, which is in addition to 1,150 jobs previously eliminated in 2008; | |
| • | Closing three North American manufacturing plants and an engineering facility in Australia; | |
| • | Suspending matching contributions to employee 401(k) programs (which we reinstituted in 2010); and | |
| • | Cutting spending on information technology, sales and marketing programs. |
During 2009, we further flexed our operations to address the
market conditions, implementing temporary layoffs of hourly
workers at our plants worldwide that were impacted by
customers’ plant shutdowns. We announced the closing of
another manufacturing facility. In North America, where customer
production cuts were the greatest, we also initiated salaried
employee furloughs. In Europe, we eliminated all temporary
positions and negotiated with various works councils to pursue
similar cost reduction efforts including reduced work hours. We
instituted cuts in salaries of at least 10 percent for
salaried employees effective April 1, 2009, and implemented
other actions to control employee costs. As economic and
industry-wide conditions improved, we restored salaries to their
prior levels effective October 1, 2009, and reinstated the
employer matching contributions to the employee 401(k) plans for
the year 2010.
In addition, we strategically reduced capital expenditures and
engineering investments where possible without compromising our
long-term growth prospects. We eliminated or postponed regional
expansion projects, deferred spending tied to delayed customer
launches, redeployed assets where feasible, and eliminated all
discretionary capital spending. We focused on developing
technologies and capabilities tied to business launching within
the next two to three years, making exceptions in instances
where the customer agreed to pay upfront for engineering and
advance technology developments for programs launching in 2012
and beyond. In this way, we were able to continue all programs
critical to our growth while limiting any near-term cash impact.
Strengthen
Operational Excellence
We will continue to focus on operational excellence by
optimizing our manufacturing footprint, enhancing our Six Sigma
processes and Lean productivity tools, developing further our
engineering capabilities, managing the complexities of our
global supply chain to realize purchasing economies of scale
while satisfying diverse and global requirements, and supporting
our businesses with robust information technology systems. We
will make investments in our operations and infrastructure as
required to achieve our strategic goals. We will be mindful of
the changing market conditions that might necessitate
adjustments to our resources and manufacturing capacity around
the world. We will remain committed to protecting the
environment as well as the health and safety of our employees.
Environmental
Matters
We estimate that we and our subsidiaries will make expenditures
for plant, property and equipment for environmental matters of
approximately $7 million in 2011 and $3 million in
2012.
For additional information regarding environmental matters, see
Item 3, “Legal Proceedings,” Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Environmental
and Other Matters,” Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources” and
Note 12 to the consolidated financial statements of Tenneco
Inc. included in Item 8.
Employees
As of December 31, 2010, we had approximately
22,000 employees of which approximately 50 percent
were covered by collective bargaining agreements. European works
councils cover 20 percent of our total employees, a
majority of whom are also included under collective bargaining
agreements. Several of our
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existing labor agreements in the United States and Mexico are
scheduled for renegotiation in 2011. In addition, agreements are
expiring in 2011 in Europe and South America covering plants in
Spain, Poland, Portugal and Argentina. We regard our employee
relations as satisfactory.
Other
The principal raw material that we use is steel. We obtain steel
from a number of sources pursuant to various contractual and
other arrangements. We believe that an adequate supply of steel
can presently be obtained from a number of different domestic
and foreign suppliers. From 2004 through 2008, we experienced
higher steel prices which we addressed by evaluating alternative
materials and processes, increasing component and assembly
outsourcing to low cost countries and aggressively negotiating
with our customers to allow us to recover these higher costs
from them. As global economies continue to recover, we expect
increasing price pressure on key commodities, including rubber,
oil and steel.
We hold a number of domestic and foreign patents and trademarks
relating to our products and businesses. We manufacture and
distribute our products primarily under the
Walker
®
and
Monroe
®
brand names, which are well-recognized in the marketplace and
are registered trademarks. We also sell certain of our emission
control products to OE manufacturers under the names
SOLID-SCR
tm
and
XNOx
tm
.
The patents, trademarks and other intellectual property owned by
or licensed to us are important in the manufacturing, marketing
and distribution of our products.
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| ITEM 1A. | RISK FACTORS. |
Future
deterioration or prolonged difficulty in economic conditions
could have a material adverse impact on our business, financial
position and liquidity.
The economic crisis in 2008 and 2009 and the related worldwide
financial industry turmoil resulted in a severe and global
tightening of credit and liquidity. These conditions led to low
consumer confidence, which resulted in delayed and reduced
purchases of durable consumer goods such as automobiles. As a
result, our OEM customers significantly reduced their production
schedules. While light vehicle production has been increasing
since the second half of 2009 and is forecasted to increase
globally in 2011 as compared to 2010, production is still at low
levels, particularly in the United States and Western Europe. We
cannot assure you that production levels will continue to
increase or that they may not decline. Future deterioration or
prolonged difficulty in economic conditions could have a
material adverse effect on our business, financial position and
liquidity.
For example, as we saw in 2008 and 2009, disruptions in the
financial markets may adversely impact the availability and cost
of credit which could materially and negatively affect our
company. Future disruptions in the capital and credit markets
could adversely affect our customers’ and our ability to
access the liquidity that is necessary to fund operations on
terms that are acceptable to us or at all.
In addition, financial or other difficulties at any of our major
customers could have a material adverse impact on us, including
as a result of lost revenues, significant write offs of accounts
receivable, significant impairment charges or additional
restructurings beyond our current global plans. Severe financial
or other difficulties at any of our major suppliers could have a
material adverse effect on us if we are unable to obtain on a
timely basis on similar economic terms the quantity and quality
of components we require to produce our products.
Moreover, severe financial or operating difficulties at any
automotive manufacturer or other supplier could have a
significant disruptive effect on the entire automotive industry,
leading to supply chain disruptions and labor unrest, among
other things. These disruptions could force automotive
manufacturers and, in turn, other suppliers, including us, to
shut down production at plants. While the difficulties facing
our customers and suppliers over the last several years have
been primarily financial in nature, other difficulties, such as
an inability to meet increased demand as the economy recovers,
could also result in supply chain and other disruptions.
Factors
that reduce demand for our products or reduce prices could
materially and adversely impact our financial condition and
results of operations.
Demand for and pricing of our products are subject to economic
conditions and other factors present in the various domestic and
international markets where the products are sold. Demand for
our OE products is subject to the level of consumer demand for
new vehicles that are equipped with our parts. The level of new
light vehicle purchases is cyclical, affected by such factors as
general economic conditions, interest rates and availability of
credit, consumer confidence, patterns of consumer spending, fuel
cost and the automobile replacement cycle. Consumer preferences
also impact the demand for new light vehicle purchases. For
example, if consumers increasingly prefer electric vehicles,
demand for the vehicles equipped with our emission control
products would decrease.
Demand for our aftermarket, or replacement, products varies
based upon such factors as general economic conditions; the
level of new vehicle purchases, which initially displaces demand
for aftermarket products; the severity of winter weather, which
increases the demand for certain aftermarket products; and other
factors, including the average useful life of parts and number
of miles driven.
The highly cyclical nature of the automotive industry presents a
risk that is outside our control and that cannot be accurately
predicted. Decreases in demand for automobiles and automotive
products generally, or in the demand for our products in
particular, could materially and adversely impact our financial
condition and results of operations.
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We are
dependent on large customers for future revenue. The loss of all
or a substantial portion of our sales to any of these customers
or the loss of market share by these customers could have a
material adverse impact on us.
We depend on major vehicle manufacturers for a substantial
portion of our net sales. For example, during fiscal year ended
December 31, 2010, GM and Ford accounted for
19 percent and 13 percent of our net sales,
respectively. The loss of all or a substantial portion of our
sales to any of our large-volume customers could have a material
adverse effect on our financial condition and results of
operations by reducing cash flows and our ability to spread
costs over a larger revenue base. We may make fewer sales to
these customers for a variety of reasons, including but not
limited to: (1) loss of awarded business; (2) reduced
or delayed customer requirements; (3) strikes or other work
stoppages affecting production by the customers; or
(4) reduced demand for our customers’ products.
In addition, our OE customers compete intensively against each
other and other OE manufacturers. The loss of market share by
any of our significant OE customers could have a material
adverse effect on our business unless we are able to achieve
increased sales to other OE manufacturers.
We may
be unable to realize sales represented by our awarded business,
which could materially and adversely impact our financial
condition and results of operations.
The realization of future sales from awarded business is
inherently subject to a number of important risks and
uncertainties, including the number of vehicles that our OE
customers will actually produce, the timing of that production
and the mix of options that our OE customers and consumers may
choose. For several years prior to 2008, substantially all of
our North American vehicle manufacturing customers had slowed or
maintained at relatively flat levels new vehicle production. In
2009, new vehicle production decreased dramatically in many
geographic regions as a result of the global economic crisis.
During the second half of 2009 and in 2010, new vehicle
production stabilized and began to strengthen from these low
production levels, though not to the levels seen in recent
history. In addition to the risks inherent in the cyclicality of
vehicle production, our customers generally have the right to
replace us with another supplier at any time for a variety of
reasons and have demanded price decreases over the life of
awarded business. Accordingly, we cannot assure you that we will
in fact realize any or all of the future sales represented by
our awarded business. Any failure to realize these sales could
have a material adverse effect on our financial condition,
results of operations, and liquidity.
In many cases, we must commit substantial resources in
preparation for production under awarded OE business well in
advance of the customer’s production start date. In certain
instances, the terms of our OE customer arrangements permit us
to recover these pre-production costs if the customer cancels
the business through no fault of our company. Although we have
been successful in recovering these costs under appropriate
circumstances in the past, we can give no assurance that our
results of operations will not be materially impacted in the
future if we are unable to recover these types of pre-production
costs related to OE cancellation of awarded business.
Our
level of debt makes us more sensitive to the effects of economic
downturns; our level of debt and provisions in our debt
agreements could limit our ability to react to changes in the
economy or our industry.
Our level of debt makes us more vulnerable to changes in our
results of operations because a substantial portion of our cash
flow from operations is dedicated to servicing our debt and is
not available for other purposes. Our level of debt could have
other negative consequences to us, including the following:
| • | limiting our ability to borrow money or sell stock for our working capital, capital expenditures, debt service requirements or other general corporate purposes; | |
| • | limiting our flexibility in planning for, or reacting to, changes in our operations, our business or the industry in which we compete; and |
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| • | our leverage may place us at a competitive disadvantage by limiting our ability to invest in the business or in further research and development. |
Our ability to make payments on our indebtedness depends on our
ability to generate cash in the future. If we do not generate
sufficient cash flow to meet our debt service and working
capital requirements, we may need to seek additional financing
or sell assets. This may make it more difficult for us to obtain
financing on terms that are acceptable to us, or at all. Without
any such financing, we could be forced to sell assets to make up
for any shortfall in our payment obligations under unfavorable
circumstances. If necessary, we may not be able to sell assets
quickly enough or for sufficient amounts to enable us to meet
our obligations.
In addition, our senior credit facility and our other debt
agreements contain covenants that limit our flexibility in
planning for or reacting to changes in our business and our
industry, including limitations on incurring additional
indebtedness, making investments, granting liens and merging or
consolidating with other companies. Complying with these
covenants may impair our ability to finance our future
operations or capital needs or to engage in other favorable
business activities.
Our
failure to comply with the covenants contained in our senior
credit facility or the indentures for our other debt
instruments, including as a result of events beyond our control,
could result in an event of default, which could materially and
adversely affect our operating results and our financial
condition.
Our senior credit facility and receivables securitization
program in the U.S. require us to maintain certain
financial ratios. Our senior credit facility and our other debt
instruments require us to comply with various operational and
other covenants. If there were an event of default under any of
our debt instruments that was not cured or waived, the holders
of the defaulted debt could cause all amounts outstanding with
respect to that debt to be due and payable immediately. We
cannot assure you that our assets or cash flow would be
sufficient to fully repay borrowings under our outstanding debt
instruments, either upon maturity or if accelerated, upon an
event of default, or that we would be able to refinance or
restructure the payments on those debt instruments.
For example, in February 2009, we sought an amendment to our
senior credit facility to revise the financial ratios we are
required to maintain thereunder. If, in the future, we are
required to obtain similar amendments as a result of our
inability to meet the required financial ratios, there can be no
assurance that those amendments will be available on
commercially reasonable terms or at all. If, as or when
required, we are unable to repay, refinance or restructure our
indebtedness under our senior credit facility, or amend the
covenants contained therein, the lenders under our senior credit
facility could elect to terminate their commitments thereunder,
cease making further loans and institute foreclosure proceedings
against our assets. Under such circumstances, we could be forced
into bankruptcy or liquidation. In addition, any event of
default or declaration of acceleration under one of our debt
instruments could also result in an event of default under one
or more of our other financing agreements, including our other
debt instruments
and/or
the
agreements under which we sell certain of our accounts
receivable. This would have a material adverse impact on our
liquidity, financial position and results of operations.
Our
working capital requirements may negatively affect our liquidity
and capital resources.
Our working capital requirements can vary significantly,
depending in part on the level, variability and timing of our
customers’ worldwide vehicle production and the payment
terms with our customers and suppliers. If our working capital
needs exceed our cash flows from operations, we would look to
our cash balances and availability for borrowings under our
borrowing arrangements to satisfy those needs, as well as
potential sources of additional capital, which may not be
available on satisfactory terms and in adequate amounts, if at
all.
The
hourly workforce in the automotive industry is highly unionized
and our business could be adversely affected by labor
disruptions.
A portion of our hourly workforce in North America and the
majority of our hourly workforce in Europe is unionized.
Although we consider our current relations with our employees to
be satisfactory, if major work
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disruptions were to occur, our business could be adversely
affected by, for instance, a loss of revenues, increased costs
or reduced profitability. We have not experienced a material
labor disruption in our recent history, but there can be no
assurance that we will not experience a material labor
disruption at one of our facilities in the future in the course
of renegotiation of our labor arrangements or otherwise.
In addition, substantially all of the hourly employees of
General Motors, Ford and Chrysler in North America and many
of their other suppliers are represented by the United
Automobile, Aerospace and Agricultural Implement Workers of
America under collective bargaining agreements. Vehicle
manufacturers and such suppliers and their employees in other
countries are also subject to labor agreements. A work stoppage
or strike at one of our production facilities, at those of a
customer, or at or impacting a supplier of ours or any of our
customers, such as the 2008 strike at American Axle which
resulted in 30 GM facilities in North America being idled for
several months, could have an adverse impact on us by disrupting
demand for our products
and/or
our
ability to manufacture our products.
In the
past, we have experienced significant increases in raw materials
pricing; and future changes in the prices of raw materials or
utilities could have a material adverse impact on
us.
Significant increases in the cost of certain raw materials used
in our products or the cost of utilities required to produce our
products, to the extent they are not timely reflected in the
price we charge our customers or are otherwise mitigated, could
materially and adversely impact our results. For example, from
2004 through 2008, we experienced significant increases in
processed metal and steel prices. We addressed these increases
by evaluating alternative materials and processes, reviewing
material substitution opportunities, increasing component and
assembly outsourcing to low cost countries and aggressively
negotiating with our customers to allow us to recover these
higher costs from them. In addition to these actions, we
continue to pursue productivity initiatives and review
opportunities to reduce costs through restructuring activities.
During periods of economic recovery, the cost of raw materials
and utilities generally rise. Accordingly, we cannot assure you
that we will not face increased prices in the future or, if we
do, whether these actions will be effective in containing margin
pressures from any further raw material or utility price
increases.
We may
be unable to realize our business strategy of improving
operating performance, growing our business and generating
savings and improvements.
We regularly implement strategic and other initiatives designed
to improve our operating performance and grow our business. The
failure to achieve the goals of these initiatives could have a
material adverse effect on our business, particularly since we
rely on these initiatives to offset pricing pressures from our
suppliers and our customers, as described above, as well as to
manage the impacts of production cuts such as the significant
production decreases we experienced during 2008 and 2009 in
particular as a result of the recent global economic crisis.
Furthermore, the terms of our senior credit facility may
restrict the types of initiatives we undertake, as these
agreements restrict our uses of cash, certain of these
agreements require us to maintain financial ratios and otherwise
prohibit us from undertaking certain activities. In the past we
have been successful in obtaining the consent of our senior
lenders where appropriate in connection with our initiatives. We
cannot assure you, however, that we will be able to pursue,
successfully implement or realize the expected benefits of any
initiative or that we will be able to sustain improvements made
to date.
In addition, we believe that increasingly stringent
environmental standards for emissions have presented and will
continue to present an important opportunity for us to grow our
emissions control business. We cannot assure you, however, that
environmental standards for emissions will continue to become
more stringent or that the adoption of any new standards will
not be delayed beyond our expectations.
We may
incur material costs related to product warranties,
environmental and regulatory matters and other claims, which
could have a material adverse impact on our financial condition
and results of operations.
From time to time, we receive product warranty claims from our
customers, pursuant to which we may be required to bear costs of
repair or replacement of certain of our products. Vehicle
manufacturers are increasingly requiring their outside suppliers
to guarantee or warrant their products and to be responsible for
25
Table of Contents
the operation of these component products in new vehicles sold
to consumers. Warranty claims may range from individual customer
claims to full recalls of all products in the field. We cannot
assure you that costs associated with providing product
warranties will not be material, or that those costs will not
exceed any amounts reserved in our consolidated financial
statements. For a description of our accounting policies
regarding warranty reserves, see “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Critical Accounting Policies”
included in Item 7.
We are subject to extensive government regulations worldwide.
Foreign, Federal, state and local laws and regulations may
change from time to time and our compliance with new or amended
laws and regulations in the future may require a material
increase in our costs and could adversely affect our results of
operations and competitive position. For example, we are subject
to a variety of environmental and pollution control laws and
regulations in all jurisdictions in which we operate. Soil and
groundwater remediation activities are being conducted at
certain of our current and former real properties. We record
liabilities for these activities when environmental assessments
indicate that the remedial efforts are probable and the costs
can be reasonably estimated. On this basis, we have established
reserves that we believe are adequate for the remediation
activities at our current and former real properties for which
we could be held responsible. 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. In future periods, we could
be subject to charges to earnings if we are required to
undertake material additional remediation efforts based on the
results of our ongoing analyses of the environmental status of
our properties, as more information becomes available to us.
We also from time to time are involved in legal proceedings,
claims or investigations that are incidental to the conduct of
our business. Some of these proceedings allege damages against
us relating to environmental liabilities, intellectual property
matters, personal injury claims, taxes, employment matters or
commercial or contractual disputes. For example, 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. Many of these cases also involve numerous
defendants, with the number of defendants in some cases
exceeding 100 defendants from a variety of industries. As major
asbestos manufacturers or other companies that used asbestos in
their manufacturing processes continue to go out of business, we
may experience an increased number of these claims.
We vigorously defend ourselves in connection with all of the
matters described above. We cannot, however, assure you that the
costs, charges and liabilities associated with these matters
will not be material, or that those costs, charges and
liabilities will not exceed any amounts reserved for them in our
consolidated financial statements. In future periods, we could
be subject to cash costs or charges to earnings if any of these
matters are resolved unfavorably to us. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Environmental
and Other Matters” included in Item 7.
We may
have difficulty competing favorably in the highly competitive
automotive parts industry.
The automotive parts industry is highly competitive. Although
the overall number of competitors has decreased due to ongoing
industry consolidation, we face significant competition within
each of our major product areas, including from new competitors
entering the markets which we serve. The principal competitive
factors include price, quality, service, product performance,
design and engineering capabilities, new product innovation,
global presence and timely delivery. As a result, many suppliers
have established or are establishing themselves in emerging,
low-cost markets to reduce their costs of production and be more
conveniently located for customers. Although we are also
pursuing a low-cost country production strategy and otherwise
continue to seek process improvements to reduce costs, we cannot
assure you that we will be able to continue to compete favorably
in this competitive market or that increased competition will
not have a material adverse effect on our business by reducing
our ability to increase or maintain sales or profit margins.
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The
decreasing number of automotive parts customers and suppliers
could make it more difficult for us to compete
favorably.
Our financial condition and results of operations could be
adversely affected because the customer base for automotive
parts is decreasing in both the original equipment market and
aftermarket. As a result, we are competing for business from
fewer customers. Due to the cost focus of these major customers,
we have been, and expect to continue to be, requested to reduce
prices as part of our initial business quotations and over the
life of vehicle platforms we have been awarded. We cannot be
certain that we will be able to generate cost savings and
operational improvements in the future that are sufficient to
offset price reductions requested by existing customers and
necessary to win additional business.
Furthermore, the trend toward consolidation and bankruptcies
among automotive parts suppliers is resulting in fewer, larger
suppliers who benefit from purchasing and distribution economies
of scale. If we cannot achieve cost savings and operational
improvements sufficient to allow us to compete favorably in the
future with these larger companies, our financial condition and
results of operations could be adversely affected due to a
reduction of, or inability to increase, sales.
We may
not be able to successfully respond to the changing distribution
channels for aftermarket products.
Major automotive aftermarket retailers, such as AutoZone and
Advance Auto Parts, are attempting to increase their commercial
sales by selling directly to automotive parts installers in
addition to individual consumers. These installers have
historically purchased from their local warehouse distributors
and jobbers, who are our more traditional customers. We cannot
assure you that we will be able to maintain or increase
aftermarket sales through increasing our sales to retailers.
Furthermore, because of the cost focus of major retailers, we
have occasionally been requested to offer price concessions to
them. Our failure to maintain or increase aftermarket sales, or
to offset the impact of any reduced sales or pricing through
cost improvements, could have an adverse impact on our business
and operating results.
Longer
product lives of automotive parts are adversely affecting
aftermarket demand for some of our products.
The average useful life of automotive parts has steadily
increased in recent years due to innovations in products and
technologies. The longer product lives allow vehicle owners to
replace parts of their vehicles less often. As a result, a
portion of sales in the aftermarket has been displaced. This has
adversely impacted, and could continue to adversely impact, our
aftermarket sales. Also, any additional increases in the average
useful lives of automotive parts would further adversely affect
the demand for our aftermarket products. Aftermarket sales
represented approximately 20 percent and 22 percent of
our net sales in the fiscal years ended December 31, 2010
and 2009, respectively.
Assertions
against us or our customers relating to intellectual property
rights could materially impact our business.
We and others in our industry hold a number of patents and other
intellectual property rights that are critical to our respective
businesses. On occasion, third parties may assert claims against
us and our customers and distributors alleging our products or
technology infringe upon third-party intellectual property
rights. Similarly, we may assert claims against third-parties
who are taking actions that we believe are infringing on our
intellectual property rights. These claims, regardless of their
merit or resolution, are frequently costly to prosecute, defend
or settle and divert the efforts and attention of our management
and employees. Claims of this sort also could harm our
relationships with our customers and might deter future
customers from doing business with us. If any such claim were to
result in an adverse outcome, we could be required to take
actions which may include: cease the manufacture, use or sale of
the infringing products; pay substantial damages to third
parties, including to customers to compensate them for their
discontinued use or replace infringing technology with
non-infringing technology; or expend significant resources to
develop or license non-infringing products. Any of the foregoing
results could have a material adverse effect on our business,
financial condition and results of operations.
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Any
acquisitions we make could disrupt our business and seriously
harm our financial condition.
We may, from time to time, consider acquisitions of
complementary companies, products or technologies. Acquisitions
involve numerous risks, including difficulties in the
assimilation of the acquired businesses, the diversion of our
management’s attention from other business concerns and
potential adverse effects on existing business relationships
with current customers and suppliers. In addition, any
acquisitions could involve the incurrence of substantial
additional indebtedness. We cannot assure you that we will be
able to successfully integrate any acquisitions that we pursue
or that such acquisitions will perform as planned or prove to be
beneficial to our operations and cash flow. Any such failure
could seriously harm our business, financial condition and
results of operations.
We are
subject to risks related to our international
operations.
We have manufacturing and distribution facilities in many
regions and countries, including Australia, Asia, North America,
Europe, South Africa and South America, and sell our products
worldwide. For the fiscal year ended December 31, 2010,
approximately 52 percent of our net sales were derived from
operations outside North America. International operations are
subject to various risks which could have a material adverse
effect on those operations or our business as a whole, including:
| • | exposure to local economic conditions; | |
| • | exposure to local political conditions, including the risk of seizure of assets by a foreign government; | |
| • | exposure to local social unrest, including any resultant acts of war, terrorism or similar events; | |
| • | exposure to local public health issues and the resultant impact on economic and political conditions; | |
| • | currency exchange rate fluctuations; | |
| • | hyperinflation in certain foreign countries; | |
| • | controls on the repatriation of cash, including imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries; and | |
| • | export and import restrictions. |
Exchange
rate fluctuations could cause a decline in our financial
condition and results of operations.
As a result of our international operations, we are subject to
increased risk because we generate a significant portion of our
net sales and incur a significant portion of our expenses in
currencies other than the U.S. dollar. For example, where
we have a greater portion of costs than revenues generated in a
foreign currency, we are subject to risk if the foreign currency
in which our costs are paid appreciates against the currency in
which we generate revenue because the appreciation effectively
increases our cost in that country.
The financial condition and results of operations of some of our
operating entities are reported in foreign currencies and then
translated into U.S. dollars at the applicable exchange
rate for inclusion in our consolidated financial statements. As
a result, appreciation of the U.S. dollar against these
foreign currencies generally will have a negative impact on our
reported revenues and operating profit while depreciation of the
U.S. dollar against these foreign currencies will generally
have a positive effect on reported revenues and operating
profit. For example, our European operations were positively
impacted in 2007 due to the strengthening of the Euro against
the U.S. dollar. However, in 2008 through 2010, the dollar
strengthened against the Euro which had negative effects on our
results of operations. Our South American operations were
negatively impacted by the devaluation in 2000 of the Brazilian
currency as well as by the devaluation of the Argentine currency
in 2002. We do not generally seek to mitigate this translation
effect through the use of derivative financial instruments. To
the extent we are unable to match revenues received in foreign
currencies with costs paid in the same currency, exchange rate
fluctuations in that currency could have a material adverse
effect on our business.
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Entering
new markets poses new competitive threats and commercial
risks.
As we have expanded into markets beyond light vehicles, we
expect to diversify our product sales by leveraging technologies
being developed for the light vehicle segment. Such
diversification requires investments and resources which may not
be available as needed. We cannot guarantee that we will be
successful in leveraging our capabilities into new markets and
thus, in meeting the needs of these new customers and competing
favorably in these new markets. Further, a significant portion
of our growth potential is dependent on our ability to increase
sales to commercial vehicle customers. While we believe that we
can achieve our growth targets with the production contracts
that have been awarded to us, our future prospects will be
negatively affected if those customers underlying these
contracts experience reduced demand for their production or
financial difficulties.
Impairment
in the carrying value of long-lived assets and goodwill could
negatively affect our operating results.
We have a significant amount of long-lived assets and goodwill
on our consolidated balance sheet. Under generally accepted
accounting principles, long-lived assets are required to be
reviewed for impairment whenever adverse events or changes in
circumstances indicate a possible impairment. If business
conditions or other factors cause profitability and cash flows
to decline, we may be required to record non-cash impairment
charges. Goodwill must be evaluated for impairment annually or
more frequently if events indicate it is warranted. If the
carrying value of our reporting units exceeds their current fair
value as determined based on the discounted future cash flows of
the related business, the goodwill is considered impaired and is
reduced to fair value by a non-cash charge to earnings. Events
and conditions that could result in impairment in the value of
our long-lived assets and goodwill include changes in the
industries in which we operate, particularly the impact of a
downturn in the global economy, as well as competition and
advances in technology, adverse changes in the regulatory
environment, or other factors leading to reduction in expected
long-term sales or profitability. For example, during the fiscal
year ended December 31, 2008, we were required to record a
$114 million asset impairment charge to write-off the
remaining goodwill related to our 1996 acquisition of Clevite
Industries.
The
value of our deferred tax assets could become impaired, which
could materially and adversely affect our operating
results.
As of December 31, 2010, we had approximately
$67 million in net deferred tax assets. These deferred tax
assets include net operating loss carryovers that can be used to
offset taxable income in future periods and reduce income taxes
payable in those future periods. Each quarter, we determine the
probability of the realization of deferred tax assets, using
significant judgments and estimates with respect to, among other
things, historical operating results, expectations of future
earnings and tax planning strategies. For example, we were
required to record charges during the fiscal year ended
December 31, 2008 for a valuation allowance against our
U.S. deferred tax assets. These charges were attributable
to the significant decline in production which resulted from the
global economic crisis which began in 2008, and the accounting
requirement to project that the negative operating environment
will continue through the expiration of the net operating loss
carry-forward periods. If we determine in the future that there
is not sufficient positive evidence to support the valuation of
these assets, due to the risk factors described herein or other
factors, we may be required to further adjust the valuation
allowance to reduce our deferred tax assets. Such a reduction
could result in material non-cash expenses in the period in
which the valuation allowance is adjusted and could have a
material adverse effect on our results of operations.
Our
expected annual effective tax rate could be volatile and
materially change as a result of changes in mix of earnings and
other factors.
Our overall effective tax rate is equal to our total tax expense
as a percentage of our total profit or loss before tax. However,
tax expenses and benefits are determined separately for each tax
paying entity or group of entities that is consolidated for tax
purposes in each jurisdiction. Losses in certain jurisdictions
may provide no current financial statement tax benefit. As a
result, changes in the mix of profits and losses between
jurisdictions, among other factors, could have a significant
impact on our overall effective tax rate.
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| ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
| ITEM 2. | PROPERTIES. |
We lease our principal executive offices, which are located at
500 North Field Drive, Lake Forest, Illinois, 60045.
Walker’s consolidated businesses operate 11 manufacturing
facilities in the U.S. and 45 manufacturing facilities
outside of the U.S. Walker consolidated businesses also
operate five engineering and technical facilities worldwide and
share two other such facilities with Monroe. Twenty-seven of
these manufacturing plants are JIT facilities. In addition,
three joint ventures in which we hold a noncontrolling interest
operate a total of three manufacturing facilities outside the
U.S., all of which are JIT facilities.
Monroe’s consolidated businesses operate seven
manufacturing facilities in the U.S. and 23 manufacturing
facilities outside the U.S. Monroe’s consolidated
businesses also operate seven engineering and technical
facilities worldwide and share two other such facilities with
Walker. Three of these manufacturing plants are JIT facilities.
The above-described manufacturing locations outside of the
U.S. are located in Argentina, Austria, Australia, Belgium,
Brazil, Canada, China, the Czech Republic, Denmark, France,
Germany, India, Italy, Korea, Mexico, New Zealand, Poland,
Portugal, Russia, Spain, South Africa, Sweden, Thailand, and the
United Kingdom. We also have sales offices located in Japan,
Singapore and Taiwan.
We own 52 of the properties described above and lease 60. We
hold 16 of the above-described international manufacturing
facilities through seven joint ventures in which we own a
controlling interest. In addition, three joint ventures in which
we hold a noncontrolling interest operate a total of three
manufacturing facilities outside the U.S. We also have
distribution facilities at our manufacturing sites and at a few
offsite locations, substantially all of which we lease.
We believe that substantially all of our plants and equipment
are, in general, well maintained and in good operating
condition. They are considered adequate for present needs and,
as supplemented by planned construction, are expected to remain
adequate for the near future.
We also believe that we have generally satisfactory title to the
properties owned and used in our respective businesses.
| ITEM 3. | LEGAL PROCEEDINGS. |
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 costs related to an
existing condition caused by past operations that do not
contribute to current or future revenue generation. We record
liabilities when environmental assessments indicate that
required 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, as discussed
in Footnote 12 — Commitments and
Contingency — Litigation, of our notes to consolidated
financial statements. 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 consolidated financial statements.
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As of December 31, 2010, we have the obligation to
remediate or contribute towards the remediation of certain
sites, including two existing Superfund sites. At
December 31, 2010, our aggregated estimated share of
environmental remediation costs for all these sites on a
discounted basis was approximately $16 million, of which
$5 million is recorded in other current liabilities and
$11 million is recorded in deferred credits and other
liabilities in our consolidated balance sheet. For those
locations in which the liability was discounted, the weighted
average discount rate used was 3.2 percent. The
undiscounted value of the estimated remediation costs was
$21 million. Our expected payments of environmental
remediation costs are estimated to be approximately
$5 million in 2011, $1 million in each year beginning
2012 through 2015 and $12 million thereafter. Based on
information known to us, we have established reserves that we
believe are adequate for these costs. Although we believe these
estimates of remediation costs are reasonable and are based on
the latest available information, the 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 towards the
remediation costs. In addition, certain environmental statutes
provide 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 these sites has been
considered, where appropriate, in our determination of our
estimated liability.
The $16 million noted above includes $5 million of
estimated environmental remediation costs that resulted from the
bankruptcy of Mark IV Industries in 2009. Prior to our 1996
acquisition of The Pullman Company, Pullman had sold certain
assets to Mark IV. As partial consideration for the purchase of
these assets, Mark IV agreed to assume Pullman’s and
its subsidiaries’ historical obligations to contribute to
the environmental remediation of certain sites. In April 2009,
Mark IV filed a petition for insolvency under
Chapter 11 of the United States Bankruptcy Code and
notified Pullman that it no longer intends to continue to
contribute toward the remediation of those sites. We are
continuing to conduct a thorough analysis and review of our
remediation obligations and it is possible that our estimate may
change as additional information becomes available to us.
We do not believe that any potential costs associated with our
current status as a potentially responsible party in the
Superfund sites, or as a liable party at the other locations
referenced herein, will be material to our consolidated results
of operations, financial position or cash flows.
We also from time to time are involved in legal proceedings,
claims or investigations that are incidental to the conduct of
our business. Some of these proceedings allege damages against
us relating to environmental liabilities (including toxic tort,
property damage and remediation), intellectual property matters
(including patent, trademark and copyright infringement, and
licensing disputes), personal injury claims (including injuries
due to product failure, design or warning issues, and other
product liability related matters), taxes, employment matters,
and commercial or contractual disputes, sometimes related to
acquisitions or divestitures. For example, one of our Argentine
subsidiaries is currently defending against a criminal complaint
alleging the failure to comply with laws requiring the proceeds
of export transactions to be collected, reported
and/or
converted to local currency within specified time periods. As
another example, we are subject to an audit in 11 states of
our practices with respect to the payment of unclaimed property
to those states. We are in the early stages of this audit, which
could cover over 30 years. We now have practices in place
which we believe ensure that we pay unclaimed property as
required. We vigorously defend ourselves against all of these
claims. In future periods, we could be subject to cash costs or
charges to earnings if any of these matters are resolved on
unfavorable terms. However, although the ultimate outcome of any
legal matter cannot be predicted with certainty, based on
current 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, results of
operations or cash flows.
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. In the early 2000’s we were
named in nearly 20,000 complaints, most of which were filed in
Mississippi state court and the vast majority of which made no
allegations of exposure to asbestos from our product categories.
Most of these claims have been dismissed and our current docket
of active and inactive cases is less than 500 cases nationwide.
A small number of claims have been asserted by railroad workers
alleging exposure to asbestos products in railroad cars
manufactured by
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The Pullman Company, one of our subsidiaries. The balance of the
claims is related to alleged exposure to asbestos in our
automotive emission control products. Only a small percentage of
the claimants allege that they were automobile mechanics 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 100
defendants from a variety of industries. Additionally, the
plaintiffs either do not specify any, or specify the
jurisdictional minimum, dollar amount for damages. As major
asbestos manufacturers continue to go out of business or file
for bankruptcy, we may experience an increased number of these
claims. We vigorously defend ourselves against these claims as
part of our ordinary course of business. In future periods, we
could be subject to charges to earnings if any of these matters
are resolved unfavorably to us. To date, with respect to claims
that have proceeded sufficiently through the judicial process,
we have regularly achieved favorable resolutions. Accordingly,
we presently believe that these asbestos-related claims will not
have a material adverse impact on our future consolidated
financial condition, results of operations or cash flows.
| ITEM 4. | (REMOVED AND RESERVED) |
| ITEM 4.1. | EXECUTIVE OFFICERS OF THE REGISTRANT. |
The following provides information concerning the persons who
serve as our executive officers as of February 25, 2011.
|
Name and Age
|
Offices Held | |
|
Gregg M. Sherrill (58)
|
Chairman and Chief Executive Officer | |
|
Hari N. Nair (51)
|
Chief Operating Officer | |
|
Kenneth R. Trammell (50)
|
Executive Vice President and Chief Financial Officer | |
|
Neal A. Yanos (49)
|
Executive Vice President, North America | |
|
Josep Fornos (58)
|
Senior Vice President, Europe, South America and India | |
|
Brent J. Bauer (55)
|
Senior Vice President and General Manager — North American Original Equipment Emission Control | |
|
Michael J. Charlton (52)
|
Senior Vice President, Global Supply Chain Management and Manufacturing | |
|
James D. Harrington (50)
|
Senior Vice President, General Counsel and Corporate Secretary | |
|
Timothy E. Jackson (54)
|
Senior Vice President and Chief Technology Officer | |
|
Barbara A. Kluth (54)
|
Vice President — Global Human Resources | |
|
Paul D. Novas (52)
|
Vice President and Controller |
Gregg M. Sherrill
— Mr. Sherrill was named
the Chairman and Chief Executive Officer of Tenneco in January
2007. Mr. Sherrill joined us from Johnson Controls Inc.,
where he served since 1998, most recently as President, Power
Solutions. From 2002 to 2003, Mr. Sherrill served as the
Vice President and Managing Director of Europe, South Africa and
South America for Johnson Controls’ Automotive Systems
Group. Prior to joining Johnson Controls, Mr. Sherrill held
various engineering and manufacturing assignments over a
22-year
span
at Ford Motor Company, including Plant Manager of Ford’s
Dearborn, Michigan engine plant, Chief Engineer, Steering
Systems and Director of Supplier Technical Assistance.
Mr. Sherrill became a director of our company in January
2007.
Hari N. Nair
— Mr. Nair was named Chief
Operating Officer in July 2010. Prior to that, he served as our
Executive Vice President and President — International
since March 2007. Previously, Mr. Nair served as Executive
Vice President and Managing Director of our business in Europe,
South America and India. Before that, he was Senior Vice
President and Managing Director — International. Prior
to December 2000, Mr. Nair was the Vice President and
Managing Director — Emerging Markets. Previously,
Mr. Nair was the Managing Director for Tenneco Automotive
Asia, based in Singapore and responsible for all operations and
development
32
Table of Contents
projects in Asia. He began his career with the former Tenneco
Inc. in 1987, holding various positions in strategic planning,
marketing, business development, quality systems and finance.
Prior to joining Tenneco, Mr. Nair was a senior financial
analyst at General Motors Corporation focusing on European
operations. Mr. Nair became a director of our company in
March 2009.
Kenneth R. Trammell
— Mr. Trammell has
served as our Executive Vice President and Chief Financial
Officer since January 2006. Mr. Trammell was named our
Senior Vice President and Chief Financial Officer in September
2003, having served as our Vice President and Controller since
September 1999. From April 1997 to November 1999, he served as
Corporate Controller of Tenneco Inc. He joined Tenneco Inc. in
May 1996 as Assistant Controller. Before joining Tenneco Inc.,
Mr. Trammell spent 12 years with the international
public accounting firm of Arthur Andersen LLP, last serving as a
senior manager.
Neal A. Yanos
— Mr. Yanos was named
Executive Vice President, North America in July 2008. Prior to
that, he served as our Senior Vice President and General
Manager — North American Original Equipment Ride
Control and North American Aftermarket since May 2003. He joined
our Monroe ride control division as a process engineer in 1988
and since that time has served in a broad range of assignments
including product engineering, strategic planning, business
development, finance, program management and marketing,
including Director of our North American Original Equipment
GM/VW business unit and most recently as our Vice President and
General Manager — North American Original Equipment
Ride Control from December 2000. Before joining our company,
Mr. Yanos was employed in various engineering positions by
Sheller Globe Inc. from 1985 to 1988.
Josep Fornos
— Josep Fornos was named Senior
Vice President, Europe, South America and India in July 2010.
Prior to this appointment, he had served as Vice President and
General Manager, Europe Original Equipment Emission Control
since March 2007. Mr. Fornos joined Tenneco in July 2000 as
Vice President and General Manager, Europe Original Equipment
Ride Control. Prior to joining Tenneco, Fornos spent a year at
Lear Corporation as General Manager of the company’s
seating and wire and harness business in France, following
Lear’s acquisition of United Technologies Automotive.
Mr. Fornos spent 16 years with United Technologies
Automotive, holding several management positions in production,
engineering and quality control in Spain and later having
Europe-wide responsibility for engineering and quality control.
Brent J. Bauer
— Mr. Bauer has served as
the Senior Vice President and General Manager —
North American Original Equipment Emission Control since
May 2002. Prior to this appointment, Mr. Bauer was named
Vice President and General Manager — European and
North American Original Equipment Emission Control in July 2001.
Mr. Bauer joined Tenneco Automotive in August 1996 as a
Plant Manager and was named Vice President and General
Manager — European Original Equipment Emission Control
in September 1999. Prior to joining Tenneco, he was employed at
AeroquipVickers Corporation for 20 years in positions of
increasing responsibility serving most recently as Director of
Operations.
Michael J. Charlton
— Mr. Charlton has
served as our Senior Vice President, Global Supply Chain
Management and Manufacturing since January 2010.
Mr. Charlton served as our Vice President, Global Supply
Chain Management and Manufacturing from November 2008 through
December 2009. Mr. Charlton served as Tenneco’s
Managing Director for India from January 2008 until November
2008. Prior to that, he served as the operations director for
the Company’s emission control business in Europe since
2005. Prior to joining Tenneco in 2005, Mr. Charlton held a
variety of positions of increasing responsibility at TRW
Automotive, the most recent being Lead Director, European
Purchasing and Operations for the United Kingdom.
James D. Harrington
— Mr. Harrington has
served as our Senior Vice President, General Counsel and
Corporate Secretary since June 2009 and is responsible for
managing our worldwide legal affairs including corporate
governance and compliance. Mr. Harrington joined us in
January 2005 as Corporate Counsel and was named Vice
President — Law in July 2007. Prior to joining
Tenneco, he worked at Mayer Brown LLP in the firm’s
corporate and securities practice.
Timothy E. Jackson
— In March 2007,
Mr. Jackson was named our Chief Technology Officer. Prior
to this role, Mr. Jackson served as our Senior Vice
President — Global Technology and General Manager,
Asia Pacific since July 2005. From 2002 to 2005,
Mr. Jackson served as Senior Vice President —
Manufacturing,
33
Table of Contents
Engineering, and Global Technology. In August 2000, he was named
Senior Vice President — Global Technology, a role he
served in after joining us as Senior Vice President and General
Manager — North American Original Equipment and
Worldwide Program Management in June 1999. Mr. Jackson came
to Tenneco from ITT Industries where he was President of that
company’s Fluid Handling Systems Division. With over
30 years of management experience, 14 within the automotive
industry, he had also served as Chief Executive Officer for
HiSAN, a joint venture between ITT Industries and Sanoh
Industrial Company. Mr. Jackson has also held senior
management positions at BF Goodrich Aerospace and General Motors
Corporation.
Barbara A. Kluth
— Ms. Kluth currently
serves as Vice President, Global Human Resources, a position she
has held since April 2010. In December 2001, she was named
Executive Director, HR, North America after beginning her career
in human resources in 1988 as HR manager for our Marshall,
Michigan facility. She joined Tenneco in 1985 as an internal
auditor.
Paul D. Novas
— Mr. Novas was named our
Vice President and Controller in July 2006. Mr. Novas
served as Vice President, Finance and Administration for Tenneco
Europe from January 2004 until July 2006 and as Vice President
and Treasurer of Tenneco from November 1999 until January 2004.
Mr. Novas joined Tenneco in 1996 as assistant treasurer
responsible for corporate finance and North American treasury
operations. Prior to joining Tenneco, Mr. Novas worked in
the treasurer’s office of General Motors Corporation for
ten years.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our outstanding shares of common stock, par value $.01 per
share, are listed on the New York and Chicago Stock Exchanges.
The following table sets forth, for the periods indicated, the
high and low sales prices of our common stock on the New York
Stock Exchange Composite Transactions Tape.
| Sales Prices | ||||||||
|
Quarter
|
High | Low | ||||||
|
2010
|
||||||||
|
1st
|
$ | 25.00 | $ | 17.17 | ||||
|
2nd
|
27.50 | 19.06 | ||||||
|
3rd
|
31.46 | 19.29 | ||||||
|
4th
|
43.71 | 28.47 | ||||||
|
2009
|
||||||||
|
1st
|
$ | 4.14 | $ | 0.67 | ||||
|
2nd
|
11.19 | 1.56 | ||||||
|
3rd
|
18.11 | 8.14 | ||||||
|
4th
|
19.78 | 11.35 | ||||||
As of February 21, 2011, there were approximately 19,691
holders of record of our common stock, including brokers and
other nominees.
The declaration of dividends on our common stock is at the
discretion of our Board of Directors. The Board has not adopted
a dividend policy as such; subject to legal and contractual
restrictions, its decisions regarding dividends are based on all
considerations that in its business judgment are relevant at the
time. These considerations may include past and projected
earnings, cash flows, economic, business and securities market
conditions and anticipated developments concerning our business
and operations.
We are highly leveraged and restricted with respect to the
payment of dividends under the terms of our financing
arrangements. On January 10, 2001, we announced that our
Board of Directors eliminated the regular quarterly dividend on
the Company’s common stock. The Board took this action in
response to then-
34
Table of Contents
current industry conditions, primarily greater than anticipated
production volume reductions by OEMs in North America and
continued softness in the global aftermarket. We have not paid
dividends on our common stock since the fourth quarter of 2000.
There are no current plans to reinstate a dividend on our common
stock, as the Board of Directors intends to retain any earnings
for use in our business for the foreseeable future. For
additional information concerning our payment of dividends, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in
Item 7.
See “Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters” included in
Item 12 for information regarding securities authorized for
issuance under our equity compensation plans.
Purchase
of equity securities by the issuer and affiliated
purchasers
The following table provides information relating to our
purchase of shares of our common stock in fourth quarter of
2010. All these purchases reflect shares withheld upon vesting
of restricted stock for minimum tax withholding obligations.
|
Total Number of
|
Average Price
|
|||||||
|
Period
|
Shares Purchased | Paid | ||||||
|
October 2010
|
— | $ | — | |||||
|
November 2010
|
8,067 | 36.34 | ||||||
|
December 2010
|
3,279 | 21.68 | ||||||
|
Total
|
11,346 | $ | 32.10 | |||||
We presently have no publicly announced repurchase plan or
program, but intend to continue to allow participants to satisfy
statutory minimum tax withholding obligations in connection with
the vesting of outstanding restricted stock through the
withholding of shares.
Recent
Sales of Unregistered Securities
None.
35
Table of Contents
Share
Performance
The following graph shows a five year comparison of the
cumulative total stockholder return on Tenneco’s common
stock as compared to the cumulative total return of two other
indexes: a custom composite index (“Peer Group”) and
the Standard & Poor’s 500 Composite Stock Price
Index. The companies included in the Peer Group are:
ArvinMeritor Inc., American Axle & Manufacturing Co.,
Borg Warner Inc., Cummins Inc., Johnson Controls Inc., Lear
Corp., Magna International Inc. and TRW Automotive Holdings
Corp. These comparisons assume an initial investment of $100 and
the reinvestment of dividends.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Tenneco, Inc., The S&P 500 Index
And A Peer Group
| * |
$100 invested on 12/31/05 in stock or index, including
reinvestment of dividends.
Fiscal year ending December 31. |
Copyright
©
2011 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
| 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | |||||||||||||||||||||||||
|
Tenneco Inc.
|
100.00 | 126.06 | 132.94 | 15.04 | 90.41 | 209.89 | ||||||||||||||||||||||||
|
S&P 500
|
100.00 | 115.80 | 122.16 | 76.96 | 97.33 | 111.99 | ||||||||||||||||||||||||
|
Peer Group
|
100.00 | 116.24 | 154.85 | 67.91 | 117.41 | 220.13 | ||||||||||||||||||||||||
The graph and other information furnished in the section titled
“Share Performance” under this Part II,
Item 5 of this
Form 10-K
shall not be deemed to be “soliciting” material or to
be “filed” with the Securities and Exchange Commission
or subject to Regulation 14A or 14C, or to the liabilities
of Section 18 of the Securities Exchange Act of 1934, as
amended.
36
Table of Contents
| ITEM 6. | SELECTED FINANCIAL DATA. |
The following data should be read in conjunction with
Item 7 — “Management’s Discussion and
Analysis of Financial Condition and Operations” and our
consolidated financial statements in Item 8
— “Financial Statements and Supplementary
Data.” These items include discussions of factors affecting
comparability of the information shown below.
TENNECO
INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009(a) | 2008(b) | 2007 | 2006 | ||||||||||||||||
| (Millions Except Share and Per Share Amounts) | ||||||||||||||||||||
|
Statements of Income (Loss) Data:
|
||||||||||||||||||||
|
Net sales and operating revenues —
|
||||||||||||||||||||
|
North America
|
$ | 2,832 | $ | 2,099 | $ | 2,641 | $ | 2,910 | $ | 1,963 | ||||||||||
|
Europe, South America and India
|
2,594 | 2,209 | 2,983 | 3,135 | 2,387 | |||||||||||||||
|
Asia Pacific
|
698 | 525 | 543 | 560 | 436 | |||||||||||||||
|
Intergroup sales
|
(187 | ) | (184 | ) | (251 | ) | (421 | ) | (104 | ) | ||||||||||
| $ | 5,937 | $ | 4,649 | $ | 5,916 | $ | 6,184 | $ | 4,682 | |||||||||||
|
Earnings (loss) before interest expense, income taxes, and
noncontrolling interests
|
||||||||||||||||||||
|
North America
|
$ | 155 | $ | 42 | $ | (107 | ) | $ | 120 | $ | 103 | |||||||||
|
Europe, South America and India
|
76 | 20 | 85 | 99 | 81 | |||||||||||||||
|
Asia Pacific
|
50 | 30 | 19 | 33 | 12 | |||||||||||||||
|
Total
|
281 | 92 | (3 | ) | 252 | 196 | ||||||||||||||
|
Interest expense (net of interest capitalized)
|
149 | 133 | 113 | 164 | 136 | |||||||||||||||
|
Income tax expense
|
69 | 13 | 289 | 83 | 5 | |||||||||||||||
|
Net income (loss)
|
63 | (54 | ) | (405 | ) | 5 | 55 | |||||||||||||
|
Less: Net income attributable to noncontrolling interests
|
24 | 19 | 10 | 10 | 6 | |||||||||||||||
|
Net income (loss) attributable to Tenneco Inc.
|
$ | 39 | $ | (73 | ) | $ | (415 | ) | $ | (5 | ) | $ | 49 | |||||||
|
Weighted average shares of common stock outstanding —
|
||||||||||||||||||||
|
Basic
|
59,208,103 | 48,572,463 | 46,406,095 | 45,809,730 | 44,625,220 | |||||||||||||||
|
Diluted
|
60,998,694 | 48,572,463 | 46,406,095 | 45,809,730 | 46,755,573 | |||||||||||||||
|
Basic earnings (loss) per share of common stock
|
$ | 0.65 | $ | (1.50 | ) | $ | (8.95 | ) | $ | (0.11 | ) | $ | 1.11 | |||||||
|
Diluted earnings (loss) per share of common stock
|
$ | 0.63 | $ | (1.50 | ) | $ | (8.95 | ) | $ | (0.11 | ) | $ | 1.05 | |||||||
37
Table of Contents
| Years Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Millions Except Ratio and Percent Amounts) | ||||||||||||||||||||
|
Balance Sheet Data (at year end):
|
||||||||||||||||||||
|
Total assets
|
$ | 3,167 | $ | 2,841 | $ | 2,828 | $ | 3,590 | $ | 3,274 | ||||||||||
|
Short-term debt
|
63 | 75 | 49 | 46 | 28 | |||||||||||||||
|
Long-term debt
|
1,160 | 1,145 | 1,402 | 1,328 | 1,357 | |||||||||||||||
|
Redeemable noncontrolling interests
|
12 | 7 | 7 | 6 | 4 | |||||||||||||||
|
Total Tenneco Inc. shareholders’ equity
|
(4 | ) | (21 | ) | (251 | ) | 400 | 226 | ||||||||||||
|
Noncontrolling interests
|
39 | 32 | 24 | 25 | 24 | |||||||||||||||
|
Total equity
|
35 | 11 | (227 | ) | 425 | 250 | ||||||||||||||
|
Statement of Cash Flows Data:
|
||||||||||||||||||||
|
Net cash provided by operating activities
|
$ | 244 | $ | 241 | $ | 160 | $ | 158 | $ | 203 | ||||||||||
|
Net cash used by investing activities
|
(157 | ) | (119 | ) | (261 | ) | (202 | ) | (172 | ) | ||||||||||
|
Net cash provided (used) by financing activities
|
(30 | ) | 87 | 58 | (10 | ) | 12 | |||||||||||||
|
Cash payments for plant, property and equipment
|
(151 | ) | (120 | ) | (233 | ) | (177 | ) | (177 | ) | ||||||||||
|
Other Data:
|
||||||||||||||||||||
|
EBITDA including noncontrolling interests(c)
|
$ | 497 | $ | 313 | $ | 219 | $ | 457 | $ | 380 | ||||||||||
|
Ratio of EBITDA including noncontrolling interests to interest
expense
|
3.34 | 2.35 | 1.94 | 2.79 | 2.79 | |||||||||||||||
|
Ratio of net debt (total debt less cash and cash equivalents) to
EBITDA including noncontrolling interests(d)
|
1.99 | 3.36 | 6.05 | 2.60 | 3.11 | |||||||||||||||
|
Ratio of earnings to fixed charges(e)
|
1.79 | — | — | 1.46 | 1.35 | |||||||||||||||
NOTE: Our consolidated financial statements for the three years
ended December 31, 2010, which are discussed in the
following notes, are included in this
Form 10-K
under Item 8.
| (a) | We incurred no direct economic loss from the bankruptcy filing of Chrysler and General Motors plants in North America during the second and third quarters of 2009. In this regard, we collected substantially all of our pre-petition receivables from Chrysler Group LLC and Chrysler Group LLC has assumed substantially all of the contracts which we had with Chrysler LLC. We collected substantially all of our pre-petition receivables from General Motors Company and General Motors Company has assumed substantially all of the contracts which we had with General Motors Corporation. However, the vehicle production shutdowns at Chrysler and significant reductions in vehicle production volumes at General Motors plants in North America during the second quarter of 2009 that coincided with their bankruptcies did cause Tenneco’s revenue from those two customers in North America to decline to $123 million in the second quarter of 2009, down from $242 million in the second quarter of 2008. We believe that General Motors and Chrysler were able to meet any unmet demand for their vehicles resulting from their production volume reductions in the second quarter of 2009 during the second half of 2009 after they exited their respective bankruptcy proceedings. Accordingly, for the entire 2009 calendar year, we consider the vehicle production volume reductions at Chrysler and General Motors to have been primarily driven by the same severe deterioration in overall economic conditions that caused substantially all of our original equipment customers in North America to significantly reduce production volumes in response to lower purchases of new vehicles. | |
| (b) | During the fourth quarter of 2008, we recorded a goodwill impairment charge of $114 million related to our North American Original Equipment Ride Control reporting unit whose carrying value exceeded the estimated fair value. In addition, during the second half of 2008, we recorded tax expense of $190 million related to establishing a valuation allowance against our net deferred tax assets in the U.S. | |
| (c) | EBITDA including noncontrolling interests is a non-GAAP measure defined as net income before extraordinary items, cumulative effect of changes in accounting principle, interest expense, income taxes, depreciation and amortization and noncontrolling interests. We use EBITDA including noncontrolling interests, together with GAAP measures, to evaluate and compare our operating performance on a consistent basis between time periods and with other companies that compete in our markets but which may have different capital structures and tax positions, which can have an impact on the comparability of interest expense, noncontrolling interests and tax expense. We also believe that using this measure allows us to understand and compare operating performance both with and without depreciation expense, which can vary based on several factors. We believe EBITDA including noncontrolling interests is useful to our investors and other parties for these same reasons. |
38
Table of Contents
| EBITDA including noncontrolling interests should not be used as a substitute for net income or for net cash provided by operating activities prepared in accordance with GAAP. It should also be noted that EBITDA including noncontrolling interests may not be comparable to similarly titled measures used by other companies and, furthermore, that it excludes expenditures for debt financing, taxes and future capital requirements that are essential to our ongoing business operations. For these reasons, EBITDA including noncontrolling interests is of value to management and investors only as a supplement to, and not in lieu of, GAAP results. EBITDA including noncontrolling interests are derived from the statements of income (loss) as follows: |
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Net income (loss)
|
$ | 39 | $ | (73 | ) | $ | (415 | ) | $ | (5 | ) | $ | 49 | |||||||
|
Noncontrolling interests
|
24 | 19 | 10 | 10 | 6 | |||||||||||||||
|
Income tax expense
|
69 | 13 | 289 | 83 | 5 | |||||||||||||||
|
Interest expense, net of interest capitalized
|
149 | 133 | 113 | 164 | 136 | |||||||||||||||
|
Depreciation and amortization of other intangibles
|
216 | 221 | 222 | 205 | 184 | |||||||||||||||
|
Total EBITDA including noncontrolling interests
|
$ | 497 | $ | 313 | $ | 219 | $ | 457 | $ | 380 | ||||||||||
| (d) | We present the ratio of net debt (total debt less cash and cash equivalents) to EBITDA including noncontrolling interests because management believes it is a useful measure of Tenneco’s credit position and progress toward reducing leverage. The calculation is limited in that we may not always be able to use cash to repay debt on a dollar-for-dollar basis. | |
| (e) | For purposes of computing this ratio, earnings generally consist of income before income taxes and fixed charges excluding capitalized interest. Fixed charges consist of interest expense, the portion of rental expense considered representative of the interest factor and capitalized interest. Earnings were insufficient to cover fixed charges by $39 million and $121 million for the years ended December 31, 2009 and 2008, respectively. See Exhibit 12 to this Form 10-K for the calculation of this ratio. |
39
Table of Contents
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
As you read the following review of our financial condition and
results of operations, you should also read our consolidated
financial statements and related notes beginning on page 74.
Executive
Summary
We are one of the world’s leading manufacturers of
automotive emission control and ride control products and
systems for light, commercial and specialty vehicle
applications. We serve both original equipment (OE) vehicle
designers and manufacturers and the repair and replacement
markets, or aftermarket, globally through leading brands,
including
Monroe
®
,
Rancho
®
,
Clevite
®
Elastomers,
Marzocchi
®
and Fric
Rot
tm
ride control products and
Walker
®
,
Fonos
tm
,
and
Gillet
tm
emission control products. We serve more than 64 different
original equipment manufacturers, and our products or systems
are included on nine of the top 10 passenger models produced in
Europe and nine of the top 10 light truck models produced in
North America for 2010. Our aftermarket customers are comprised
of full-line and specialty warehouse distributors, retailers,
jobbers, installer chains and car dealers. As of
December 31, 2010, we operated 88 manufacturing facilities
worldwide and employed approximately 22,000 people to
service our customers’ demands.
Factors that continue to be critical to our success include
winning 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 and reducing overall costs. In addition, our ability
to adapt to key industry trends, such as a shift in consumer
preferences to other vehicles in response to higher fuel costs
and other economic and social factors, increasing
technologically sophisticated content, changing aftermarket
distribution channels, increasing environmental standards and
extended product life of automotive parts, also play a critical
role in our success. Other factors that are critical to our
success include adjusting to economic challenges such as
increases in the cost of raw materials and our ability to
successfully reduce the impact of any such cost increases
through material substitutions, cost reduction initiatives and
other methods.
The deterioration in the global economy and credit markets which
began in 2008 negatively impacted business activity in general,
and specifically the automotive industry in which we operate.
The market turmoil and tightening of credit led to a steep drop
in consumer confidence and consequently, a rapid decline in
light vehicle purchases in 2008 and the first half of 2009. The
industry began to recover during the second half of 2009 when OE
production started to stabilize and strengthen, tracking more
closely to vehicle sales, and inventory levels began to be
replenished. Light vehicle production in 2010 continued to
strengthen in all regions in which we operate. North American
light vehicle production was up 39 percent
year-over-year,
while in Europe, light vehicle production in 2010 was up
15 percent
year-over-year.
We have a substantial amount of indebtedness. 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 and Item 1A,
“Risk Factors” included in this Annual Report on
Form 10-K.
Total revenues for 2010 were $5.9 billion, a
28 percent increase from $4.6 billion in 2009.
Excluding the impact of currency and substrate sales, revenue
was up $955 million, or 26 percent, driven primarily
by higher OE production in all geographic regions, stronger
aftermarket sales, particularly in North and South America, and
new launches of light and commercial vehicle programs.
40
Table of Contents
Cost of sales: Cost of sales for 2010 was $4,900 million,
or 82.5 percent of sales, compared to $3,875 million,
or 83.4 percent of sales in 2009. The following table lists
the primary drivers behind the change in cost of sales
($ millions).
|
Year ended December 31, 2009
|
$ | 3,875 | ||
|
Volume and mix
|
976 | |||
|
Material
|
23 | |||
|
Currency
|
8 | |||
|
Restructuring
|
(6 | ) | ||
|
Other Costs
|
24 | |||
|
Year ended December 31, 2010
|
$ | 4,900 | ||
The increase in cost of sales was due primarily to the
year-over-year
increase in production volumes, higher material and other costs,
mainly manufacturing.
Gross margin: Gross margin for 2010 was 17.5 percent, up
0.9 percentage points from 16.6 percent in 2009. The
gross margin improvement was driven by manufacturing
efficiencies due to higher
year-over-year
OE production volumes, lower restructuring and related expenses,
material cost management and higher aftermarket revenues. A
higher mix of OE revenues which included a higher mix of
substrate sales, pricing, primarily related to contractual price
reductions, and unfavorable currency partially offset these
improvements.
Engineering, research and development: Engineering, research and
development expense was $117 million and $97 million
in 2010 and 2009, respectively. Increased spending related to
diesel aftertreatment technology development, higher
performance-based compensation costs and the elimination of
temporary cost reduction efforts which were in effect during
2009, including employee furloughs and salary and benefit cuts,
drove the increase in expense
year-over-year.
Selling, general and administrative: Selling, general and
administrative expense was up $73 million in 2010, at
$417 million, compared to $344 million in 2009. Higher
performance-based and stock indexed compensation costs, the
temporary cost reduction efforts of 2009, which included
employee furloughs and salary and benefit cuts that were
subsequently restored by the beginning of 2010, charges related
to an actuarial loss for lump-sum pension payments and increased
changeover costs due to new aftermarket business in North
America, drove the increase in expenses
year-over-year.
These pension charges relate to a non-qualified pension plan in
which one current and three former employees were participants.
Lump-sum pension payments are required when participants retire
or when they turn 55. Two former employees turned 55 in 2010.
Included in 2009 was $1 million of restructuring and
related expenses.
Depreciation and amortization: Depreciation and amortization
expense in 2010 was $216 million, compared to
$221 million in 2009.
Goodwill impairment: There were no goodwill impairment charges
in either 2010 or 2009.
Earnings before interest expense, taxes and noncontrolling
interests (“EBIT”) was $281 million for 2010, an
improvement of $189 million, when compared to
$92 million in 2009. Higher OE production volumes globally
and the related manufacturing efficiencies, materials cost
management, higher aftermarket sales, decreased restructuring
and related costs and $1 million of positive currency drove
the
year-over-year
increase. Partially offsetting the increase was higher selling,
general, administrative and engineering spending, which included
higher performance-based and stock indexed compensation costs
and the pension charges related to an actuarial loss for
lump-sum pension payments, increased changeover costs and
unfavorable pricing, primarily related to contractual price
reductions. Included in 2009 EBIT was a $5 million charge
related to an environmental reserve.
Results
from Operations
Net
Sales and Operating Revenues for Years 2010 and
2009
The following tables reflect our revenues for 2010 and 2009. 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
41
Table of Contents
effects of doing business in currencies other than the
U.S. dollar. We have not reflected any currency impact in
the 2009 table since this is the base period for measuring the
effects of currency during 2010 on our operations. We believe
investors find this information useful in understanding
period-to-period
comparisons in our revenues.
Additionally, we show the component of our revenue represented
by substrate sales in the following tables. While we generally
have primary design, engineering and manufacturing
responsibility for OE emission control systems, we do not
manufacture substrates. Substrates are porous ceramic filters
coated with a catalyst — precious metals such as
platinum, palladium and rhodium. These are supplied to us by
Tier 2 suppliers as directed by our OE customers. We
generally earn a small margin on these components of the system.
As the need for more sophisticated emission control solutions
increases to meet more stringent environmental regulations, and
as we capture more diesel aftertreatment business, these
substrate components have been increasing as a percentage of our
revenue. Changes in commodity prices as well as changes in the
mix of vehicles produced by our customers as a result of the
economic crisis have recently reduced the percentage of our
revenue related to substrates. While these substrates dilute our
gross margin percentage, they are a necessary component of an
emission control system. We view the growth of substrates as a
key indicator that our value-add content in an emission control
system is moving toward the higher technology hot-end gas and
diesel business.
Our value-add content in an emission control system includes
designing the system to meet environmental regulations through
integration of the substrates into the system, maximizing use of
thermal energy to heat up the catalyst quickly, efficiently
managing airflow to reduce back pressure as the exhaust stream
moves past the catalyst, managing the expansion and contraction
of the emission control system components due to temperature
extremes experienced by an emission control system, using
advanced acoustic engineering tools to design the desired
exhaust sound, minimizing the opportunity for the fragile
components of the substrate to be damaged when we integrate it
into the emission control system and reducing unwanted noise,
vibration and harshness transmitted through the emission control
system.
We present these substrate sales separately in the following
table because we believe investors utilize this information to
understand the impact of this portion of our revenues on our
overall business and because it removes the impact of
potentially volatile precious metals pricing from our revenues.
While our original
42
Table of Contents
equipment customers generally assume the risk of precious metals
pricing volatility, it impacts our reported revenues. Excluding
“substrate” catalytic converter and diesel particulate
filter sales removes this impact.
| Year Ended December 31, 2010 | ||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Substrate
|
Excluding
|
|||||||||||||||||||
|
Revenues
|
Sales
|
Currency and
|
||||||||||||||||||
|
Currency
|
Excluding
|
Excluding
|
Substrate
|
|||||||||||||||||
| Revenues | Impact | Currency | Currency | Sales | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
North America Original Equipment
|
||||||||||||||||||||
|
Ride Control
|
$ | 527 | $ | 11 | $ | 516 | $ | — | $ | 516 | ||||||||||
|
Emission Control
|
1,642 | 7 | 1,635 | 739 | 896 | |||||||||||||||
|
Total North America Original Equipment
|
2,169 | 18 | 2,151 | 739 | 1,412 | |||||||||||||||
|
North America Aftermarket
|
||||||||||||||||||||
|
Ride Control
|
484 | 4 | 480 | — | 480 | |||||||||||||||
|
Emission Control
|
168 | 2 | 166 | — | 166 | |||||||||||||||
|
Total North America Aftermarket
|
652 | 6 | 646 | — | 646 | |||||||||||||||
|
Total North America
|
2,821 | 24 | 2,797 | 739 | 2,058 | |||||||||||||||
|
Europe Original Equipment
|
||||||||||||||||||||
|
Ride Control
|
462 | (26 | ) | 488 | — | 488 | ||||||||||||||
|
Emission Control
|
1,121 | (40 | ) | 1,161 | 369 | 792 | ||||||||||||||
|
Total Europe Original Equipment
|
1,583 | (66 | ) | 1,649 | 369 | 1,280 | ||||||||||||||
|
Europe Aftermarket
|
||||||||||||||||||||
|
Ride Control
|
190 | (8 | ) | 198 | — | 198 | ||||||||||||||
|
Emission Control
|
141 | (7 | ) | 148 | — | 148 | ||||||||||||||
|
Total Europe Aftermarket
|
331 | (15 | ) | 346 | — | 346 | ||||||||||||||
|
South America & India
|
532 | 33 | 499 | 74 | 425 | |||||||||||||||
|
Total Europe, South America & India
|
2,446 | (48 | ) | 2,494 | 443 | 2,051 | ||||||||||||||
|
Asia
|
517 | 8 | 509 | 106 | 403 | |||||||||||||||
|
Australia
|
153 | 18 | 135 | 9 | 126 | |||||||||||||||
|
Total Asia Pacific
|
670 | 26 | 644 | 115 | 529 | |||||||||||||||
|
Total Tenneco
|
$ | 5,937 | $ | 2 | $ | 5,935 | $ | 1,297 | $ | 4,638 | ||||||||||
43
Table of Contents
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Substrate
|
Excluding
|
|||||||||||||||||||
|
Revenues
|
Sales
|
Currency and
|
||||||||||||||||||
|
Currency
|
Excluding
|
Excluding
|
Substrate
|
|||||||||||||||||
| Revenues | Impact | Currency | Currency | Sales | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
North America Original Equipment
|
||||||||||||||||||||
|
Ride Control
|
$ | 382 | $ | — | $ | 382 | $ | — | $ | 382 | ||||||||||
|
Emission Control
|
1,154 | — | 1,154 | 530 | 624 | |||||||||||||||
|
Total North America Original Equipment
|
1,536 | — | 1,536 | 530 | 1,006 | |||||||||||||||
|
North America Aftermarket
|
||||||||||||||||||||
|
Ride Control
|
406 | — | 406 | — | 406 | |||||||||||||||
|
Emission Control
|
150 | — | 150 | — | 150 | |||||||||||||||
|
Total North America Aftermarket
|
556 | — | 556 | — | 556 | |||||||||||||||
|
Total North America
|
2,092 | — | 2,092 | 530 | 1,562 | |||||||||||||||
|
Europe Original Equipment
|
||||||||||||||||||||
|
Ride Control
|
421 | — | 421 | — | 421 | |||||||||||||||
|
Emission Control
|
917 | — | 917 | 296 | 621 | |||||||||||||||
|
Total Europe Original Equipment
|
1,338 | — | 1,338 | 296 | 1,042 | |||||||||||||||
|
Europe Aftermarket
|
||||||||||||||||||||
|
Ride Control
|
181 | — | 181 | — | 181 | |||||||||||||||
|
Emission Control
|
154 | — | 154 | — | 154 | |||||||||||||||
|
Total Europe Aftermarket
|
335 | — | 335 | — | 335 | |||||||||||||||
|
South America & India
|
374 | — | 374 | 45 | 329 | |||||||||||||||
|
Total Europe, South America & India
|
2,047 | — | 2,047 | 341 | 1,706 | |||||||||||||||
|
Asia
|
380 | — | 380 | 85 | 295 | |||||||||||||||
|
Australia
|
130 | — | 130 | 10 | 120 | |||||||||||||||
|
Total Asia Pacific
|
510 | — | 510 | 95 | 415 | |||||||||||||||
|
Total Tenneco
|
$ | 4,649 | $ | — | $ | 4,649 | $ | 966 | $ | 3,683 | ||||||||||
44
Table of Contents
|
Year Ended December 31, 2010
|
||||||||||||||||
|
Versus Year Ended December 31, 2009
|
||||||||||||||||
| Dollar and Percent Increase (Decrease) | ||||||||||||||||
|
Revenues
|
||||||||||||||||
|
Excluding
|
||||||||||||||||
|
Currency and
|
||||||||||||||||
|
Substrate
|
||||||||||||||||
| Revenues | Percent | Sales | Percent | |||||||||||||
| (Millions Except Percent Amounts) | ||||||||||||||||
|
North America Original Equipment
|
||||||||||||||||
|
Ride Control
|
$ | 145 | 38 | % | $ | 134 | 35 | % | ||||||||
|
Emission Control
|
488 | 42 | % | 272 | 44 | % | ||||||||||
|
Total North America Original Equipment
|
633 | 41 | % | 406 | 40 | % | ||||||||||
|
North America Aftermarket
|
||||||||||||||||
|
Ride Control
|
78 | 19 | % | 74 | 18 | % | ||||||||||
|
Emission Control
|
18 | 12 | % | 16 | 10 | % | ||||||||||
|
Total North America Aftermarket
|
96 | 17 | % | 90 | 16 | % | ||||||||||
|
Total North America
|
729 | 35 | % | 496 | 32 | % | ||||||||||
|
Europe Original Equipment
|
||||||||||||||||
|
Ride Control
|
41 | 10 | % | 67 | 16 | % | ||||||||||
|
Emission Control
|
204 | 22 | % | 171 | 28 | % | ||||||||||
|
Total Europe Original Equipment
|
245 | 18 | % | 238 | 23 | % | ||||||||||
|
Europe Aftermarket
|
||||||||||||||||
|
Ride Control
|
9 | 6 | % | 17 | 10 | % | ||||||||||
|
Emission Control
|
(13 | ) | (9 | )% | (6 | ) | (4 | )% | ||||||||
|
Total Europe Aftermarket
|
(4 | ) | (1 | )% | 11 | 3 | % | |||||||||
|
South America & India
|
158 | 42 | % | 96 | 29 | % | ||||||||||
|
Total Europe, South America & India
|
399 | 20 | % | 345 | 20 | % | ||||||||||
|
Asia
|
137 | 36 | % | 108 | 37 | % | ||||||||||
|
Australia
|
23 | 18 | % | 6 | 4 | % | ||||||||||
|
Total Asia Pacific
|
160 | 31 | % | 114 | 27 | % | ||||||||||
|
Total Tenneco
|
$ | 1,288 | 28 | % | $ | 955 | 26 | % | ||||||||
Light Vehicle Industry Production by Region for Years
Ended December 31, 2010 and 2009
(According to IHS
Automotive, January, 2011)
|
Year Ended
|
||||||||||||||||
| December 31, |
Increase
|
|||||||||||||||
| 2010 | 2009 | (Decrease) | % Increase | |||||||||||||
| (Number of Vehicles in Thousands) | ||||||||||||||||
|
North America
|
11,912 | 8,566 | 3,346 | 39 | % | |||||||||||
|
Europe
|
19,290 | 16,844 | 2,446 | 15 | % | |||||||||||
|
South America
|
4,014 | 3,697 | 317 | 9 | % | |||||||||||
|
India
|
3,242 | 2,402 | 840 | 35 | % | |||||||||||
|
Total Europe, South America & India
|
26,546 | 22,943 | 3,603 | 16 | % | |||||||||||
|
China
|
16,786 | 12,886 | 3,900 | 30 | % | |||||||||||
|
Australia
|
239 | 222 | 17 | 8 | % | |||||||||||
45
Table of Contents
North American light vehicle production increased
39 percent, while industry Class 8 commercial vehicle
production was up 25 percent and industry
Class 4-7
commercial vehicle production was flat in 2010 when compared to
2009. Revenues from our North American operations increased in
2010 compared to last year due to higher OE and aftermarket
sales of both product lines. The increase in North American OE
revenues was primarily driven by improved production volumes of
Tenneco-supplied vehicles such as the Ford F-150 and Super-Duty
pick-ups,
GM’s crossover models and the GMT900 platform which
accounted for $655 million in revenues. Partially
offsetting the increase was unfavorable platform mix which
impacted revenue by $31 million
year-over-year.
The increase in aftermarket revenues for North America was
primarily due to higher customer demand for both product lines
which resulted in a combined increase in revenue of
$101 million.
Our European, South American and Indian segment’s revenues
increased in 2010 compared to last year, due to increased sales
in both Europe OE business units as well as in South America and
India. The full year total European light vehicle industry
production was up 15 percent, while industry Class 8
commercial vehicle production was up 55 percent and
industry
Class 4-7
commercial vehicle production was up 38 percent in 2010
when compared to 2009. Improved volumes due to our content on
better-selling vehicles such as the Ford Focus, VW Polo, Opel
Astra, Ford Mondeo and the Daimler Sprinter was the primary
driver of our increased Europe OE revenues and resulted in an
increase in revenue of $292 million, partially offset by a
decrease of $66 million due to foreign currency. Excluding
currency, European aftermarket revenues improved on higher ride
control sales volumes of $16 million, tied in part to heavy
duty sales, partially offset by lower emission control sales
volumes of $6 million. Light vehicle production increased
nine percent in South America and 35 percent in India for
2010 when compared to 2009. South American and Indian revenues
were higher in 2010 when compared to the prior year primarily
due to higher aftermarket sales in South America and stronger OE
production volumes in both regions, which increased revenue by
$112 million. Currency also added $33 million to South
American and Indian revenue.
Industry light vehicle production increased 30 percent and
8 percent
year-over-year
in China and Australia, respectively. Revenues from our Asia
Pacific segment, which includes Australia and Asia, increased
due to higher sales in both regions. Asian revenues for 2010
improved from last year, primarily due to $133 million from
stronger production volumes, particularly in China on key
Tenneco-supplied GM, VW and Audi platforms. A $9 million
impact on revenue due to stronger OE production volumes drove
the 2010 revenue increase for Australia over 2009. Currency
added $8 million to Asia revenue and $18 million to
Australia revenue.
46
Table of Contents
Net
Sales and Operating Revenues for Years 2009 and
2008
The following tables reflect our revenues for the years of 2009
and 2008. See “Net Sales and Operating Revenues for Years
2010 and 2009” for a description of why we present these
reconciliations of revenue.
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Substrate
|
Excluding
|
|||||||||||||||||||
|
Revenues
|
Sales
|
Currency and
|
||||||||||||||||||
|
Currency
|
Excluding
|
Excluding
|
Substrate
|
|||||||||||||||||
| Revenues | Impact | Currency | Currency | Sales | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
North America Original Equipment
|
||||||||||||||||||||
|
Ride Control
|
$ | 382 | $ | (4 | ) | $ | 386 | $ | — | $ | 386 | |||||||||
|
Emission Control
|
1,154 | (2 | ) | 1,156 | 530 | 626 | ||||||||||||||
|
Total North America Original Equipment
|
1,536 | (6 | ) | 1,542 | 530 | 1,012 | ||||||||||||||
|
North America Aftermarket
|
||||||||||||||||||||
|
Ride Control
|
406 | (4 | ) | 410 | — | 410 | ||||||||||||||
|
Emission Control
|
150 | (2 | ) | 152 | — | 152 | ||||||||||||||
|
Total North America Aftermarket
|
556 | (6 | ) | 562 | — | 562 | ||||||||||||||
|
Total North America
|
2,092 | (12 | ) | 2,104 | 530 | 1,574 | ||||||||||||||
|
Europe Original Equipment
|
||||||||||||||||||||
|
Ride Control
|
421 | (25 | ) | 446 | — | 446 | ||||||||||||||
|
Emission Control
|
917 | (178 | ) | 1,095 | 305 | 790 | ||||||||||||||
|
Total Europe Original Equipment
|
1,338 | (203 | ) | 1,541 | 305 | 1,236 | ||||||||||||||
|
Europe Aftermarket
|
||||||||||||||||||||
|
Ride Control
|
181 | (14 | ) | 195 | — | 195 | ||||||||||||||
|
Emission Control
|
154 | (16 | ) | 170 | — | 170 | ||||||||||||||
|
Total Europe Aftermarket
|
335 | (30 | ) | 365 | — | 365 | ||||||||||||||
|
South America & India
|
374 | (40 | ) | 414 | 50 | 364 | ||||||||||||||
|
Total Europe, South America & India
|
2,047 | (273 | ) | 2,320 | 355 | 1,965 | ||||||||||||||
|
Asia
|
380 | 6 | 374 | 84 | 290 | |||||||||||||||
|
Australia
|
130 | (20 | ) | 150 | 11 | 139 | ||||||||||||||
|
Total Asia Pacific
|
510 | (14 | ) | 524 | 95 | 429 | ||||||||||||||
|
Total Tenneco
|
$ | 4,649 | $ | (299 | ) | $ | 4,948 | $ | 980 | $ | 3.968 | |||||||||
47
Table of Contents
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Substrate
|
Excluding
|
|||||||||||||||||||
|
Revenues
|
Sales
|
Currency and
|
||||||||||||||||||
|
Currency
|
Excluding
|
Excluding
|
Substrate
|
|||||||||||||||||
| Revenues | Impact | Currency | Currency | Sales | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
North America Original Equipment
|
||||||||||||||||||||
|
Ride Control
|
$ | 493 | $ | — | $ | 493 | $ | — | $ | 493 | ||||||||||
|
Emission Control
|
1,591 | — | 1,591 | 773 | 818 | |||||||||||||||
|
Total North America Original Equipment
|
2,084 | — | 2,084 | 773 | 1,311 | |||||||||||||||
|
North America Aftermarket
|
||||||||||||||||||||
|
Ride Control
|
390 | — | 390 | — | 390 | |||||||||||||||
|
Emission Control
|
156 | — | 156 | — | 156 | |||||||||||||||
|
Total North America Aftermarket
|
546 | — | 546 | — | 546 | |||||||||||||||
|
Total North America
|
2,630 | — | 2,630 | 773 | 1,857 | |||||||||||||||
|
Europe Original Equipment
|
||||||||||||||||||||
|
Ride Control
|
479 | — | 479 | — | 479 | |||||||||||||||
|
Emission Control
|
1,487 | — | 1,487 | 539 | 948 | |||||||||||||||
|
Total Europe Original Equipment
|
1,966 | — | 1,966 | 539 | 1,427 | |||||||||||||||
|
Europe Aftermarket
|
||||||||||||||||||||
|
Ride Control
|
213 | — | 213 | — | 213 | |||||||||||||||
|
Emission Control
|
190 | — | 190 | — | 190 | |||||||||||||||
|
Total Europe Aftermarket
|
403 | — | 403 | — | 403 | |||||||||||||||
|
South America & India
|
389 | — | 389 | 55 | 334 | |||||||||||||||
|
Total Europe, South America and India
|
2,758 | — | 2,758 | 594 | 2,164 | |||||||||||||||
|
Asia
|
342 | — | 342 | 109 | 233 | |||||||||||||||
|
Australia
|
186 | — | 186 | 16 | 170 | |||||||||||||||
|
Total Asia Pacific
|
528 | — | 528 | 125 | 403 | |||||||||||||||
|
Total Tenneco
|
$ | 5,916 | $ | — | $ | 5,916 | $ | 1,492 | $ | 4,424 | ||||||||||
48
Table of Contents
|
Year Ended December 31, 2009
|
||||||||||||||||
|
Versus Year Ended December 31, 2008
|
||||||||||||||||
| Dollar and Percent Increase (Decrease) | ||||||||||||||||
|
Revenues
|
||||||||||||||||
|
Excluding
|
||||||||||||||||
|
Currency and
|
||||||||||||||||
|
Substrate
|
||||||||||||||||
| Revenues | Percent | Sales | Percent | |||||||||||||
| (Millions Except Percent Amounts) | ||||||||||||||||
|
North America Original Equipment
|
||||||||||||||||
|
Ride Control
|
$ | (111 | ) | (23 | )% | $ | (107 | ) | (22 | )% | ||||||
|
Emission Control
|
(437 | ) | (27 | )% | (192 | ) | (23 | )% | ||||||||
|
Total North America Original Equipment
|
(548 | ) | (26 | )% | (299 | ) | (23 | )% | ||||||||
|
North America Aftermarket
|
||||||||||||||||
|
Ride Control
|
16 | 4 | % | 20 | 5 | % | ||||||||||
|
Emission Control
|
(6 | ) | (4 | )% | (4 | ) | (3 | )% | ||||||||
|
Total North America Aftermarket
|
10 | 2 | % | 16 | 3 | % | ||||||||||
|
Total North America
|
(538 | ) | (20 | )% | (283 | ) | (15 | )% | ||||||||
|
Europe Original Equipment
|
||||||||||||||||
|
Ride Control
|
(58 | ) | (12 | )% | (33 | ) | (7 | )% | ||||||||
|
Emission Control
|
(570 | ) | (38 | )% | (158 | ) | (17 | )% | ||||||||
|
Total Europe Original Equipment
|
(628 | ) | (32 | )% | (191 | ) | (13 | )% | ||||||||
|
Europe Aftermarket
|
||||||||||||||||
|
Ride Control
|
(32 | ) | (15 | )% | (18 | ) | (8 | )% | ||||||||
|
Emission Control
|
(36 | ) | (19 | )% | (20 | ) | (11 | )% | ||||||||
|
Total Europe Aftermarket
|
(68 | ) | (17 | )% | (38 | ) | (9 | )% | ||||||||
|
South America & India
|
(15 | ) | (4 | )% | 30 | 9 | % | |||||||||
|
Total Europe, South America & India
|
(711 | ) | (26 | )% | (199 | ) | (9 | )% | ||||||||
|
Asia
|
38 | 11 | % | 57 | 25 | % | ||||||||||
|
Australia
|
(56 | ) | (30 | )% | (31 | ) | (18 | )% | ||||||||
|
Total Asia Pacific
|
(18 | ) | (3 | )% | 26 | 6 | % | |||||||||
|
Total Tenneco
|
$ | (1,267 | ) | (21 | )% | $ | (456 | ) | (10 | )% | ||||||
Light Vehicle Industry Production by Region for Years
Ended December 31, 2009 and 2008
(According to IHS
Automotive, January, 2011)
|
Year Ended
|
||||||||||||||||
| December 31, |
Increase
|
|||||||||||||||
| 2009 | 2008 | (Decrease) | % Increase | |||||||||||||
| (Number of Vehicles in Thousands) | ||||||||||||||||
|
North America
|
8,566 | 12,592 | (4,026 | ) | (32 | )% | ||||||||||
|
Europe
|
16,844 | 21,204 | (4,360 | ) | (21 | )% | ||||||||||
|
South America
|
3,697 | 3,765 | (68 | ) | (2 | )% | ||||||||||
|
India
|
2,402 | 2,045 | 357 | 17 | % | |||||||||||
|
Total Europe, South America & India
|
22,943 | 27,014 | (4,071 | ) | (15 | )% | ||||||||||
|
China
|
12,886 | 8,483 | 4,403 | 52 | % | |||||||||||
|
Australia
|
222 | 323 | (101 | ) | (31 | )% | ||||||||||
49
Table of Contents
North American light vehicle production decreased
32 percent in 2009 as compared to 2008. Industry
Class 8 commercial vehicle production was down
38 percent and industry
Class 4-7
commercial vehicle production was down 39 percent in 2009
compared to 2008. Revenues from our North American operations
decreased for 2009 compared to 2008; lower sales from both North
American OE business units were partially offset by higher
aftermarket revenues. North American OE revenues were down
mainly due to lower OE production volumes
year-over-year
and lower pricing, mainly a decrease in steel recovery due to
lower steel costs, which had a combined impact on OE revenues of
$552 million. Excluding unfavorable currency, aftermarket
revenues were up driven by stronger ride control volumes and
favorable pricing in both product lines, which impacted revenue
in total by $32 million partially offset by lower emission
control volumes of $15 million.
Our European, South American and Indian segment’s revenues
decreased in 2009 compared to 2008 due to lower sales in all
European business units and South America. The 2009 total
European light vehicle industry production was down
21 percent when compared to 2008. Europe OE emission
control revenues for 2009 were down compared to 2008 due to
unfavorable currency of $178 million and lower OE
production volumes and unfavorable pricing, primarily decreased
year-over-year
alloy surcharge recovery due to lower alloy surcharge costs,
which had a combined impact on revenue of $392 million.
Europe OE ride control revenues in 2009 were down from 2008, due
to unfavorable currency of $25 million and lower production
volumes, partially offset by new ride control launches including
new CES business, and a favorable vehicle mix weighted toward
the A/B segment vehicles, which were better sellers under the
2009 government incentive programs, which combined, impacted
revenues by $41 million. European aftermarket revenues
decreased for 2009 compared to 2008 due to unfavorable currency
of $30 million. The overall market declined but
particularly heavy duty ride control products and the ride
control market in Eastern Europe where economies were more
severely impacted by the economic crisis. Light vehicle
production decreased 2 percent in South America and
increased 17 percent in India for 2009 when compared to
2008. South American and Indian revenues were down during 2009
compared to 2008 due mainly to unfavorable currency of
$40 million. When unfavorable currency and substrates were
excluded, revenue was up compared to 2008. Our South American
and Indian operations benefited from improved OE production
volumes in India and favorable pricing in both regions.
Industry light vehicle production increased 52 percent in
China and decreased 31 percent in Australia in 2009
compared to 2008. Revenues from our Asia Pacific segment, which
includes Australia and Asia, decreased in 2009 compared to 2008
due to lower sales in Australia partially offset by higher sales
in Asia. Asian revenues were up from 2008 primarily due to
higher OE production volumes, mainly due to China, which
impacted revenue by $34 million. Full year 2009 revenues
for Australia decreased due to $20 million of unfavorable
currency and industry light vehicle production declines.
Earnings
before Interest Expense, Income Taxes and Noncontrolling
Interests (“EBIT”) for Years 2010 and
2009
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | Change | ||||||||||
| (Millions) | ||||||||||||
|
North America
|
$ | 155 | $ | 42 | $ | 113 | ||||||
|
Europe, South America and India
|
76 | 20 | 56 | |||||||||
|
Asia Pacific
|
50 | 30 | 20 | |||||||||
| $ | 281 | $ | 92 | $ | 189 | |||||||
50
Table of Contents
The EBIT results shown in the preceding table include the
following items, discussed below under “Restructuring and
Other Charges” and “Liquidity and Capital
Resources — Capitalization”, which have an effect
on the comparability of EBIT results between periods:
|
Year Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Millions) | ||||||||
|
North America
|
||||||||
|
Restructuring and related expenses
|
$ | 14 | $ | 17 | ||||
|
Pension Charges(1)
|
6 | — | ||||||
|
Environmental reserve(2)
|
— | 5 | ||||||
|
Europe, South America and India
|
||||||||
|
Restructuring and related expenses
|
3 | 4 | ||||||
|
Asia Pacific
|
||||||||
|
Restructuring and related expenses
|
2 | — | ||||||
| (1) | Represents charges related to an actuarial loss for lump-sum pension payments in a non-qualified pension plan in which one current and three former employees were participants. Lump-sum pension payments are required when participants retire or when they turn 55. Two former employees turned 55 in 2010. | |
| (2) | Represents a reserve related to environmental liabilities of a company Tenneco acquired in 1996, at locations never operated by Tenneco, and for which that acquired company had been indemnified by Mark IV Industries, which declared bankruptcy in the second quarter of 2009. |
EBIT for North American operations was $155 million in
2010, an increase of $113 million from $42 million one
year ago. The benefits to EBIT from significantly higher OE
production volumes, the related manufacturing efficiencies and
improved aftermarket revenues were partially offset by higher
selling, general, administrative and engineering costs, which
included higher performance-based compensation costs, the
temporary cost reduction efforts from 2009, which included
employee furloughs and salary and benefit cuts, that were
subsequently restored by the beginning of 2010, charges of
$6 million related to an actuarial loss for lump-sum
pension payments and increased aftermarket changeover costs
related to new aftermarket business. Currency had a
$13 million favorable impact on North American EBIT for
2010 when compared to 2009. Restructuring and related expenses
of $14 million were included in 2010 compared to
$17 million of restructuring and related expenses and an
environmental reserve charge of $5 million in 2009.
Our European, South American and Indian segment’s EBIT was
$76 million for 2010, up $56 million from
$20 million in 2009. The increase was driven by higher OE
production volumes and the related manufacturing efficiencies,
new platform launches, favorable platform mix in Europe and
material cost management activities. Increased selling, general,
administrative and engineering costs partially offset the
increase. Restructuring and related expenses of $3 million
were included in EBIT for 2010, versus $4 million from the
same period last year. Currency had a $13 million
unfavorable impact on EBIT for 2010.
EBIT for our Asia Pacific segment, which includes Asia and
Australia, increased $20 million to $50 million in
2010 from $30 million in the prior year. Higher volumes and
the related manufacturing efficiencies drove the EBIT
improvement. This increase was partially offset by increased
selling, general, administrative and engineering costs. Currency
had a $1 million favorable impact on 2010 EBIT for our Asia
Pacific segment.
Currency had a $1 million favorable impact on overall
company EBIT for 2010 as compared to the prior year.
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Table of Contents
EBIT
for Years 2009 and 2008
|
Year Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | Change | ||||||||||
| (Millions) | ||||||||||||
|
North America
|
$ | 42 | $ | (107 | ) | $ | 149 | |||||
|
Europe, South America and India
|
20 | 85 | (65 | ) | ||||||||
|
Asia Pacific
|
30 | 19 | 11 | |||||||||
| $ | 92 | $ | (3 | ) | $ | 95 | ||||||
The EBIT results shown in the preceding table include the
following items, discussed below under “Restructuring and
Other Charges” and “Liquidity and Capital
Resources — Capitalization”, which have an effect
on the comparability of EBIT results between periods:
|
Year Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (Millions) | ||||||||
|
North America
|
||||||||
|
Restructuring and related expenses
|
$ | 17 | $ | 16 | ||||
|
Environmental reserve(1)
|
5 | — | ||||||
|
New aftermarket customer changeover costs(2)
|
— | 7 | ||||||
|
Goodwill impairment charge(3)
|
— | 114 | ||||||
|
Europe, South America and India
|
||||||||
|
Restructuring and related expenses
|
4 | 22 | ||||||
|
Asia Pacific
|
||||||||
|
Restructuring and related expenses
|
— | 2 | ||||||
| (1) | Represents a reserve related to environmental liabilities of a company Tenneco acquired in 1996, at locations never operated by Tenneco, and for which that acquired company had been indemnified by Mark IV Industries, which declared bankruptcy in the second quarter of 2009. | |
| (2) | Represents costs associated with changing new aftermarket customers from their prior suppliers to an inventory of our products. Although our aftermarket business regularly incurs changeover costs, we specifically identify in the table above those changeover costs that, based on the size or number of customers involved, we believe are of an unusual nature for the period which they were incurred. | |
| (3) | Non-cash asset impairment charge related to goodwill for Tenneco’s 1996 acquisition of Clevite Industries. |
EBIT for North American operations was $42 million in 2009,
an increase of $149 million from a loss of
$107 million in 2008. The benefits to EBIT from new
platform launches, manufacturing efficiencies, reduced selling,
general, administrative and engineering spending, lower customer
changeover costs, restructuring savings, impairment charge and
customer recoveries were only partially offset by lower OE
production volumes and the related manufacturing fixed cost
absorption and increased restructuring and related expenses.
Currency had a $10 million favorable impact on North
American EBIT. Restructuring and related expenses of
$17 million and an environmental charge of $5 million
were included in 2009. Restructuring and related costs of
$16 million, a goodwill impairment charge of
$114 million and changeover costs for new aftermarket
customers of $7 million were included in 2008 EBIT.
Our European, South American and Indian segment’s EBIT was
$20 million for 2009, down $65 million from
$85 million in 2008. Significant OE production volume
declines, the related manufacturing fixed cost absorption and
lower aftermarket sales drove the decline in EBIT. Currency
further reduced EBIT by $14 million. These decreases were
partially offset by the impact of our new OE platform launches,
improved pricing, favorable material costs, savings from our
prior restructuring activities and reduced restructuring and
52
Table of Contents
related expenses. EBIT for 2009 included $4 million of
restructuring and related expenses compared to $22 million
in 2008.
EBIT for our Asia Pacific segment, which includes Asia and
Australia, increased $11 million to $30 million in
2009 compared to $19 million in 2008. Higher OE production
volumes in Asia, restructuring savings, manufacturing cost
improvements, material cost management and reduced restructuring
and related expenses drove the improvement. Lower OE production
volumes in Australia and the related manufacturing fixed cost
absorption partially offset these improvements. Unfavorable
currency of $3 million impacted Asia Pacific’s 2009
EBIT. Included in Asia Pacific’s 2008 EBIT was
$2 million in restructuring and related expenses.
Currency had a $7 million unfavorable impact on overall
company EBIT for 2009 as compared to 2008.
EBIT
as a Percentage of Revenue for Years 2010, 2009 and
2008
|
Year Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
North America
|
6 | % | 2 | % | (4 | )% | ||||||
|
Europe, South America and India
|
3 | % | 1 | % | 3 | % | ||||||
|
Asia Pacific
|
7 | % | 6 | % | 4 | % | ||||||
|
Total Tenneco
|
5 | % | 2 | % | — | |||||||
In North America, EBIT as a percentage of revenue for 2010 was
up four percentage points when compared to last year. The
increase in EBIT from higher OE production volumes and the
related manufacturing efficiencies, decreased restructuring and
related charges, higher aftermarket sales and favorable currency
was partially offset as a percentage of revenue by higher
selling, general, administrative and engineering expenses,
including higher aftermarket changeover costs, higher
performance-based compensation costs and charges for an
actuarial loss for lump-sum pension payments. In Europe, South
America and India, EBIT margin for 2010 was two percentage
points higher than prior year due to improved volumes, the
related manufacturing efficiencies, lower restructuring and
related expenses, favorable platform mix and material cost
management actions, partially offset by unfavorable currency and
increased selling, general, administrative and engineering
expenses. EBIT as a percentage of revenue for our Asia Pacific
segment increased one percentage point in 2010 versus the prior
year as higher volumes and the related manufacturing
efficiencies were partially offset by increased selling,
general, administrative and engineering expenses.
In North America, EBIT as a percentage of revenue for 2009 was
up six percentage points from 2008. The benefits to EBIT from
new platform launches, manufacturing efficiencies, reduced
selling, general, administrative and engineering spending, lower
customer changeover costs and goodwill impairment charges,
favorable currency, restructuring savings and customer
recoveries were only partially offset by lower OE production
volumes, the related manufacturing fixed cost absorption and an
environmental reserve. During 2009, North American results
included higher restructuring and related charges. In Europe,
South America and India, EBIT margin for 2009 was down two
percentage points from 2008. Lower OE production volumes and the
related manufacturing fixed cost absorption, aftermarket sales
declines and unfavorable currency impact were partially offset
by new platform launches, improved pricing, favorable material
costs and savings from our prior restructuring activities.
Restructuring and related expenses were lower in Europe, South
America and India’s 2009 EBIT compared to 2008. EBIT as a
percentage of revenue for our Asia Pacific segment increased two
percentage points in 2009 versus 2008. Higher OE production
volumes in Asia, restructuring savings, manufacturing cost
improvements, material cost management and reduced restructuring
and related expenses drove the improvement which was partially
offset by OE production volume decreases in Australia and the
related manufacturing fixed cost absorption and unfavorable
currency. Asia Pacific 2009 results included lower restructuring
and related expenses over 2008.
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Table of Contents
Interest
Expense, Net of Interest Capitalized
We reported interest expense in 2010 of $149 million net of
interest capitalized of $4 million ($146 million in
our U.S. operations and $3 million in our foreign
operations), up from $133 million net of interest
capitalized of $4 million ($130 million in our
U.S. operations and $3 million in our foreign
operations) in 2009. Included in 2010 was $27 million of
expense related to our refinancing activities and
$4 million of expense related to an accounting change
impacting our factored receivables. See “Liquidity and
Capital Resources” below for further discussion of the
accounting change. Excluding the refinancing expenses, interest
expense decreased in 2010 compared to the prior year as a result
of our lower average borrowings due to our operating cash
performance and last year’s equity offering.
We reported interest expense in 2009 of $133 million net of
interest capitalized of $4 million ($130 million in
our U.S. operations and $3 million in our foreign
operations), up from $113 million net of interest
capitalized of $6 million ($111 million in our
U.S. operations and $2 million in our foreign
operations) in 2008 primarily related to higher interest rates
due to the amendment of the senior credit facility in
February 2009. In addition, the requirement to mark to
market our interest rate swaps decreased interest expense by
$7 million in 2008.
On December 31, 2010, we had $1,011 million in
long-term debt obligations that have fixed interest rates.
$20 million was fixed through November 2014,
$250 million is fixed through November 2015,
$225 million is fixed through August 2018,
$500 million is fixed through December 2020 and the
remainder is fixed from 2011 through 2025. On January 7,
2011, we redeemed the remaining outstanding $20 million
principal amount of our
8
5
/
8
percent senior subordinated notes plus accrued and unpaid
interest. We also have $152 million in long-term debt
obligations that are subject to variable interest rates. For
more detailed explanations on our debt structure and senior
credit facility refer to “Liquidity and Capital
Resources — Capitalization” later in this
Management’s Discussion and Analysis.
Income
Taxes
Income tax expense was $69 million for 2010. The tax
expense recorded for 2010 differs from a statutory rate of
35 percent due to tax charges of $23 million primarily
related to the impact of recording a valuation allowance against
the tax benefit for losses in the U.S. and certain foreign
jurisdictions and charges related to adjustments to prior year
income taxes and tax contingencies, partially offset by income
generated in lower tax rate jurisdictions. In 2009, we recorded
income tax expense of $13 million. Computed using the
U.S. Federal statutory income tax rate of 35 percent,
income tax would be a benefit of $14 million. The
difference is due primarily to valuation allowances against
deferred tax assets generated by 2009 losses in the
U.S. and in certain foreign countries which we cannot
benefit, partially offset by adjustments to past valuation
allowances for deferred tax assets including a reversal of
$20 million of U.S. valuation allowance based on the
change in the fair value of a tax planning strategy. We reported
income tax expense of $289 million in 2008 which included
$244 million in tax charges primarily related to recording
a valuation allowance against our U.S. deferred tax assets,
repatriating cash from Brazil as a result of strong performance
in South America over the past several years and changes in
foreign tax rates.
Restructuring
and Other Charges
Over the past several years, we have adopted plans to
restructure portions of our operations. These plans were
approved by our Board of Directors and were designed to reduce
operational and administrative overhead costs throughout the
business. Our Board of Directors approved a restructuring
project in 2001, known as Project Genesis, which was designed to
lower our fixed costs, relocate capacity, reduce our work force,
improve efficiency and utilization, and better optimize our
global footprint. We have subsequently engaged in various other
restructuring projects related to Project Genesis. We incurred
$40 million in restructuring and related costs during 2008,
of which $17 million was recorded in cost of sales and
$23 million was recorded in selling, general,
administrative and engineering expense. In 2009, we incurred
$21 million in restructuring and related costs, of which
$16 million was recorded in cost of sales, $1 million
was recorded in selling, general, administrative and engineering
expense and $4 million was recorded in depreciation and
amortization expense.
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Table of Contents
In 2010, we incurred $19 million in restructuring and
related costs, of which $14 million was recorded in cost of
sales and $5 million was recorded in depreciation and
amortization expense.
Amounts related to activities that are part of our restructuring
plans are as follows:
|
December 31,
|
December 31,
|
|||||||||||||||||||
|
2009
|
2010
|
Impact of
|
2010
|
|||||||||||||||||
|
Restructuring
|
Cash
|
Exchange
|
Reserve
|
Restructuring
|
||||||||||||||||
| Reserve | Payments | Rates | Adjustments | Reserve | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Severance
|
$ | 15 | (7 | ) | — | (1 | ) | $ | 7 | |||||||||||
Under the terms of our amended and extended senior credit
agreement that took effect on June 3, 2010, we are allowed
to exclude $60 million of cash charges and expenses, before
taxes, related to cost reduction initiatives incurred after
June 3, 2010 from the calculation of the financial covenant
ratios required under our senior credit facility. As of
December 31, 2010, we have excluded $9 million in
cumulative allowable charges relating to restructuring
initiatives against the $60 million available under the
terms of the senior credit facility.
On September 22, 2009, we announced that we will be closing
our original equipment ride control plant in Cozad, Nebraska. We
estimate this closing will generate $8 million in
annualized cost savings once completed, incremental to the
$58 million of savings related to our October 2008
restructuring announcement. We expect the elimination of 500
positions at the Cozad plant and expect to record up to
$21 million in restructuring and related expenses, of which
approximately $16 million represents cash expenditures. We
originally planned to have completed the closing of this
facility by the end of 2010, however, as a result of the faster
than expected increase in light vehicle production in North
America and to better optimize the transfer of some of the
manufacturing activities, we plan to continue certain production
lines through the first half of 2011. We plan to hire at other
facilities as we move the production from Cozad to those
facilities, resulting in a net decrease of approximately 60
positions. During 2009 we recorded $11 million of
restructuring and related expenses related to this initiative.
For the twelve months ended December 31, 2010 we recorded
$10 million of restructuring and related expenses related
to this initiative.
At December 31, 2010, our restructuring reserve in Europe
was $1 million which relates to a number of restructuring
activities at certain European facilities.
Earnings
(Loss) Per Share
We reported net income of $39 million or $0.63 per diluted
common share for 2010. Included in the results for 2010 were
negative impacts from expenses related to our restructuring
activities, pension charges, costs related to our refinancing
activities and tax adjustments. The net impact of these items
decreased earnings per diluted share by $0.94. We reported a net
loss of $73 million or $1.50 per diluted common share for
2009. Included in the results for 2009 were negative impacts
from expenses related to our restructuring activities, an
environmental reserve and tax adjustments. The net impact of
these items decreased earnings per diluted share by $0.91. We
reported a net loss of $415 million or $8.95 per diluted
common share for 2008. Included in the results for 2008 were
negative impacts from expenses related to our restructuring
activities, new aftermarket customer changeover costs, a
goodwill impairment charge and tax adjustments. The net impact
of these items decreased earnings per diluted share by $9.37.
Dividends
on Common Stock
On January 10, 2001, our Board of Directors eliminated the
quarterly dividend on our common stock. There are no current
plans to reinstate a dividend on our common stock.
55
Table of Contents
Cash
Flows for 2010 and 2009
|
Year Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Millions) | ||||||||
|
Cash provided (used) by:
|
||||||||
|
Operating activities
|
$ | 244 | $ | 241 | ||||
|
Investing activities
|
$ | (157 | ) | (119 | ) | |||
|
Financing activities
|
$ | (30 | ) | (87 | ) | |||
Operating
Activities
For 2010, operating activities provided $244 million in
cash compared to $241 million in cash during the same
period last year. For 2010, cash used for working capital was
$71 million versus $65 million of cash provided from
working capital in 2009. Receivables were a use of cash of
$231 million compared to a cash use of $8 million in
the prior year. The change in cash flow from receivables was
partially due to higher
year-over-year
sales and a change in accounting in the first quarter of 2010.
This accounting change requires that North America accounts
receivable securitization programs be accounted for as secured
borrowings rather than as a sale of accounts receivables. As a
result, funding from the North America accounts receivable
securitization program is included in net cash provided by
financing activities on the statement of cash flows and was
previously reflected in net cash used by operating activities.
See “Liquidity and Capital Resources” below for
further discussion of the accounting change. Inventory
represented a cash outflow of $122 million during 2010,
compared to a cash inflow of $101 million in the prior
year. The
year-over-year
change to cash flow from inventory was primarily a result of
higher OE production levels. The higher production environment
also led to accounts payable providing cash of $238 million
in 2010, compared to a use of cash of $2 million in the
prior year. Cash taxes were $53 million for 2010 compared
to $38 million in the prior year.
One of our European subsidiaries receives payment from one of
its OE customers whereby the accounts receivable are satisfied
through the delivery of negotiable financial instruments. We may
collect these financial instruments before their maturity date
by either selling them at a discount or using them to satisfy
accounts receivable that have previously been sold to a European
bank. Any of these financial instruments which are not sold are
classified as other current assets as they do not meet our
definition of cash equivalents. The amount of these financial
instruments that were collected before their maturity date and
sold at a discount totaled $6 million as of
December 31, 2010, compared with $5 million at
December 31, 2009. No negotiable financial instruments were
held by our European subsidiary as of December 31, 2010 or
2009, respectively.
In certain instances several of our Chinese subsidiaries receive
payment from OE customers and satisfy vendor payments through
the receipt and delivery of negotiable financial instruments.
Financial instruments used to satisfy vendor payables and not
redeemed totaled $8 million and $15 million at
December 31, 2010 and 2009, respectively, and were
classified as notes payable. Financial instruments received from
OE customers and not redeemed totaled $11 million and
$15 million at December 31, 2010 and 2009,
respectively. We classify financial instruments received from
our OE customers as other current assets if issued by a
financial institution of our customers or as customer notes and
accounts, net if issued by our customer. We classified
$11 million and $15 million in other current assets at
December 31, 2010 and 2009, respectively. Some of our
Chinese subsidiaries that issue their own negotiable financial
instruments to pay vendors are required to maintain a cash
balance if they exceed certain credit limits with the financial
institution that guarantees those financial instruments. A
restricted cash balance was not required at those Chinese
subsidiaries at December 31, 2010 and 2009, respectively.
The negotiable financial instruments received by one of our
European subsidiaries and some of our Chinese subsidiaries are
checks drawn by our OE customers and guaranteed by their banks
that are payable at a future date. The use of these instruments
for payment follows local commercial practice. Because
negotiable financial instruments are financial obligations of
our customers and are guaranteed by our customers’ banks,
we believe they represent a lower financial risk than the
outstanding accounts receivable that they satisfy which are not
guaranteed by a bank.
56
Table of Contents
Investing
Activities
Cash used for investing activities was $38 million higher
in 2010 compared to a year ago. Cash payments for plant,
property, and equipment were $151 million in 2010 versus
payments of $120 million in 2009, an increase of
$31 million. This increase was due to deferring
discretionary projects in 2009, the investments for new business
launches, technology development and future growth
opportunities. Cash payments for software-related intangible
assets were $12 million in 2010 compared to $6 million
in 2009.
Financing
Activities
Cash flow from financing activities was an outflow of
$30 million in 2010 compared to an outflow of
$87 million in 2009. The 2010 outflow was primarily due to
debt issuance costs related to our refinancing activities. We
used $188 million in net proceeds from our common stock
offering in 2009 to pay down debt, primarily borrowings against
our revolving credit facility. We ended 2010 with no borrowings
under our revolving credit facility. As mentioned above in the
“Operating Activities” section of this cash flow
discussion, cash flow from financing activities was impacted by
the accounting change for the way we account for our North
American accounts receivable securitization programs. At
December 31, 2010, there were no borrowings outstanding
under the North American accounts receivable securitization
programs.
Cash
Flows for 2009 and 2008
|
Year Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (Millions) | ||||||||
|
Cash provided (used) by:
|
||||||||
|
Operating activities
|
$ | 241 | $ | 160 | ||||
|
Investing activities
|
(119 | ) | (261 | ) | ||||
|
Financing activities
|
(87 | ) | (58 | ) | ||||
Operating
Activities
In 2009, operating activities provided $241 million in cash
compared to $160 million in cash provided during 2008. In
2009, working capital provided cash of $65 million versus a
cash use of $31 million in 2008. Receivables were a use of
cash of $8 million compared to cash provided by receivables
of $126 million in 2008. This decrease in cash flow from
receivables was attributable to the revenue decline in the
fourth quarter of 2008 as compared to the revenue increase in
the fourth quarter of 2009 combined with reduced cash flow from
factored receivables which decreased receivable collections by
$42 million in 2009 compared to $22 million in
increased collections of receivables for 2008. Inventory cash
flow improved by $82 million as a result of our inventory
management efforts. Accounts payable used cash of
$2 million compared to $181 million in 2008, an
improvement of $179 million. Cash taxes were
$38 million for 2009, compared to $62 million in 2008,
reflecting lower 2009 taxable income in jurisdictions where we
were taxpayers.
One of our European subsidiaries receives payment from one of
its OE customers whereby the accounts receivable are satisfied
through the delivery of negotiable financial instruments. We may
collect these financial instruments before their maturity date
by either selling them at a discount or using them to satisfy
accounts receivable that have previously been sold to a European
bank. Any of these financial instruments which are not sold are
classified as other current assets as they do not meet our
definition of cash equivalents. The amount of these financial
instruments that were collected before their maturity date and
sold at a discount totaled $5 million as of
December 31, 2009, compared with $23 million at
December 31, 2008. No negotiable financial instruments were
held by our European subsidiary as of December 31, 2009 or
2008, respectively.
In certain instances several of our Chinese subsidiaries receive
payment from OE customers and satisfy vendor payments through
the receipt and delivery of negotiable financial instruments.
Financial instruments used to satisfy vendor payables and not
redeemed totaled $15 million and $6 million at
December 31, 2009 and 2008, respectively, and were
classified as notes payable. Financial instruments received from
OE
57
Table of Contents
customers and not redeemed totaled $15 million and
$6 million at December 31, 2009 and 2008,
respectively, and were classified as other current assets. Some
of our Chinese subsidiaries that issue their own negotiable
financial instruments to pay vendors are required to maintain a
cash balance if they exceed certain credit limits with the
financial institution that guarantees those financial
instruments. A restricted cash balance was not required at those
Chinese subsidiaries at December 31, 2009 and 2008,
respectively.
The negotiable financial instruments received by one of our
European subsidiaries and some of our Chinese subsidiaries are
checks drawn by our OE customers and guaranteed by their banks
that are payable at a future date. The use of these instruments
for payment follows local commercial practice. Because
negotiable financial instruments are financial obligations of
our customers and are guaranteed by our customers’ banks,
we believe they represent a lower financial risk than the
outstanding accounts receivable that they satisfy which are not
guaranteed by a bank.
Investing
Activities
Cash used for investing activities was $142 million lower
in 2009 compared to 2008. Cash payments for plant, property and
equipment were $120 million in 2009 versus payments of
$233 million in 2008, a reduction of $113 million.
This reduction was due to deferring discretionary projects,
redeploying assets and using existing capacity while continuing
to make the investments needed for new business launches,
technology development and future growth opportunities. Cash of
$19 million was used to acquire ride control assets at
Delphi’s Kettering, Ohio location during 2008. Also in
2008, we acquired Gruppo Marzocchi which resulted in a
$3 million cash inflow ($(1) million cash
consideration paid, net of $4 million cash acquired). Cash
payments for software-related intangible assets were
$6 million in 2009 compared to $15 million in 2008.
Financing
Activities
Cash flow from financing activities was an outflow of
$87 million in the fourth quarter of 2009 compared to an
inflow of $58 million in 2008. We used the
$188 million in net proceeds from our common stock offering
in the fourth quarter of 2009 to pay down debt, primarily
borrowings against our revolving credit facility. We ended 2009
with no borrowings under our revolving credit facility.
Outlook
We are well positioned to deliver revenue growth in 2011 as we
launch new business, ramp up programs that have already
launched, help our customers meet stricter emissions standards
for both on-road and non-road vehicles and take advantage of
volume increases while continuing to benefit from cost
reductions and operational improvements. We estimate that our
global original equipment revenues will be approximately
$5.9 billion in 2011 and $7.1 billion in 2012 with
substrate sales making up 29 percent of total OE revenue
each year. We expect our global original equipment revenue to
increase to between $9.5 billion and $11 billion by
2015, with substrate sales comprising 32 percent of total
OE revenue.
Between 2009 and 2012, we are launching multiple programs with
thirteen different commercial vehicle customers, both truck and
engine manufacturers, to help customers meet new emissions
regulations for on-road and non-road commercial vehicles. We
began to launch some of these programs in China at the end of
2009 with China National Heavy Truck Company, Shanghai Diesel
Engine Company and Weichai Power. Programs in North America,
Europe and South America primarily began to launch in the second
half of 2010. Our commercial vehicle emission control customers
also include Caterpillar, John Deere, Navistar, FAW, Deutz and
Guangxi Yuchai Machinery Company as well as four customers who
will be announced as programs launch. We will also be supplying
diesel aftertreatment systems, including selective catalytic
reduction, for next generation heavy-duty
pick-up
trucks in North America. Based on the current commercial vehicle
production forecasts mentioned above, we project that our
commercial and specialty vehicle revenue to be
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Table of Contents
$0.8 billion in 2011 and $1.6 billion in 2012 and
account for about 30 percent to 35 percent of our
global original equipment revenue by 2015.
The revenue estimates presented in this “Outlook” are
based on volume projections summarized in the following chart
and on original equipment manufacturers’ programs that have
been formally awarded to the company; programs where the company
is highly confident that it will be awarded business based on
informal customer indications consistent with past practices;
our status as supplier for existing programs and our
relationships and experience with the customer; and the actual
original equipment revenues achieved by the company for each of
the last several years compared to the amount of those revenues
that the company estimated it would generate at the beginning of
each year. Our revenue estimates are subject to increase or
decrease due to changes in customer requirements, customer and
consumer preferences, and the number of vehicles actually
produced by our customers. We update these estimates annually.
In the interim we do not intend to otherwise update the
estimates to reflect future changes in these assumptions. In
addition, our revenue estimate is based on our anticipated
pricing for each applicable program over its life. However, we
are under continuing pricing pressures from our OE customers. We
do not intend to update the amounts shown above for any price
changes. Finally, for our foreign operations, our revenue
estimate assumes fixed foreign currency values relative to the
U.S. dollar. These values are used to translate foreign
revenues to the U.S. dollar. Although such currency values
are subject to fluctuations based on the economic conditions in
each of our foreign operations, we do not intend to update the
annual revenue estimates shown above due to these fluctuations.
See “Cautionary Statement for Purposes of the ‘Safe
Harbor’ Provisions of the Private Securities Litigation
Reform Act of 1995” and Item 1A, “Risk
Factors”.
Light Vehicle Production
(According to IHS
Automotive, January, 2011)
|
|
2010A | 2011 | 2012 | 2015 | ||||||||||||
| (Number of Vehicles in Millions) | ||||||||||||||||
|
North America
|
11.9 | 12.7 | 13.9 | 16.6 | ||||||||||||
|
Europe
|
19.3 | 19.8 | 20.6 | 23.2 | ||||||||||||
|
China
|
16.8 | 18.0 | 19.9 | 24.3 | ||||||||||||
|
South America
|
4.0 | 4.5 | 4.6 | 5.4 | ||||||||||||
On-Road Commercial Vehicle Production
(Class 4-8)
(According to Power Systems Research, January, 2011)
|
|
2010A | 2011 | 2012 | 2015 | ||||||||||||
| (Number of Vehicles in Thousands) | ||||||||||||||||
|
North America
|
270 | 360 | 468 | 439 | ||||||||||||
|
Europe
|
387 | 499 | 643 | 708 | ||||||||||||
|
China
|
1,116 | 1,002 | 1,029 | 1,077 | ||||||||||||
|
Brazil
|
176 | 188 | 161 | 185 | ||||||||||||
Non-Road Commercial Vehicle Production (Agriculture,
Construction, Mining & Forestry)
(According to
Power Systems Research, January, 2011)
|
|
2010A | 2011 | 2012 | 2015 | ||||||||||||
| (Number of Vehicles in Thousands) | ||||||||||||||||
|
U.S.
(
³
25hp)
|
198 | 210 | 229 | 266 | ||||||||||||
|
Europe
(
³
50hp)
|
369 | 390 | 421 | 470 | ||||||||||||
We anticipate that the global aftermarket for 2011 will continue
to be a strong contributor to our business. We will continue to
support our strong brands and aggressively pursue new customers,
actions that we hope will help expand our market share globally.
We expect our capital expenditures for 2011 to be approximately
$190 million to $210 million. We expect our 2011
interest expense to be about $105 million and our 2011 cash
taxes to range between $75 million and $90 million.
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Table of Contents
Liquidity
and Capital Resources
Capitalization
|
Year Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | % Change | ||||||||||
| (Millions) | ||||||||||||
|
Short-term debt and maturities classified as current
|
$ | 63 | $ | 75 | (16 | )% | ||||||
|
Long-term debt
|
1,160 | 1,145 | 1 | |||||||||
|
Total debt
|
1,223 | 1,220 | — | |||||||||
|
Total redeemable noncontrolling interests
|
12 | 7 | 71 | |||||||||
|
Total noncontrolling interests
|
39 | 32 | 22 | |||||||||
|
Tenneco Inc. shareholders’ equity
|
(4 | ) | (21 | ) | 81 | |||||||
|
Total equity
|
35 | 11 | 218 | |||||||||
|
Total capitalization
|
$ | 1,270 | $ | 1,238 | (3 | ) | ||||||
General.
Short-term debt, which includes
maturities classified as current and borrowings by foreign
subsidiaries, was $63 million and $75 million as of
December 31, 2010 and 2009, respectively. We had no
borrowings outstanding under our revolving credit facilities,
which would otherwise be classified as long-term debt, as of
December 31, 2010 and, 2009, respectively.
The
2010 year-to-date
increase in total equity primarily resulted from net income
attributable to Tenneco Inc. of $39 million, a
$14 million increase in premium on common stock and other
capital surplus relating to common stock issued pursuant to
benefit plans, offset by a $24 million decrease caused by
the impact of changes in foreign exchange rates on the
translation of financial statements of our foreign subsidiaries
into U.S. dollars, a net decrease in premium on common
stock and other capital surplus relating to a $11 million
purchase of an additional 20 percent of equity interest
from a Chinese noncontrolling joint venture partner and a
$1 million decrease in additional liability for pension and
postretirement benefits.
Overview.
Our financing arrangements are
primarily provided by a committed senior secured financing
arrangement with a syndicate of banks and other financial
institutions. The arrangement is secured by substantially all
our domestic assets and pledges of up to 66 percent of the
stock of certain first-tier foreign subsidiaries, as well as
guarantees by our material domestic subsidiaries.
On June 3, 2010 we completed an amendment and extension of
our senior secured credit facility by extending the term of our
revolving credit facility and replacing our $128 million
term loan A with a larger and longer maturity term loan B
facility. As a result of the amendment and extension, as of
December 31, 2010, the senior credit facility provides us
with a total revolving credit facility size of $622 million
until March 16, 2012, when commitments of $66 million
will expire. After March 16, 2012, the extended revolving
credit facility will provide $556 million of revolving
credit and will mature on May 31, 2014. The extended
facility will mature earlier on December 15, 2013, if our
$130 million
tranche B-1
letter of credit/revolving loan facility is not refinanced by
that date. Prior to maturity, funds may be borrowed, repaid and
re-borrowed under the two revolving credit facilities without
premium or penalty. The leverage ratio (consolidated
indebtedness net of cash divided by consolidated EBITDA as
defined in the senior credit facility agreement) was decreased
from 5.00 to 4.50 for the second quarter of 2010; from 4.75 to
4.25 for the third quarter of 2010; and from 4.50 to 4.25 for
the fourth quarter of 2010 as a result of the June 3, 2010
amendment.
As of December 31, 2010, the senior credit facility also
provides a six-year, $150 million term loan B maturing in
June 2016, and a seven-year $130 million
tranche B-1
letter of credit/revolving loan facility maturing in March 2014.
We are required to make quarterly principal payments of $375
thousand on the term loan B, beginning on September 30,
2010 through March 31, 2016 with a final payment of
$141 million due June 3, 2016. The
tranche B-1
letter of credit/revolving loan facility requires repayment by
March 2014. We can enter into revolving loans and issue letters
of credit under the $130 million
tranche B-1
letter of credit/
60
Table of Contents
revolving loan facility. The
tranche B-1
letter of credit/revolving loan facility is reflected as debt on
our balance sheet only if we borrow money under this facility or
if we use the facility to make payments for letters of credit.
There is no additional cost to us for issuing letters of credit
under the
tranche B-1
letter of credit/revolving loan facility. However, outstanding
letters of credit reduce our availability to enter into
revolving loans under the facility. We pay the
tranche B-1
lenders interest equal to LIBOR plus a margin on all borrowings
under the facility. Funds deposited with the administrative
agent by the lenders and not borrowed by the Company earn
interest at an annual rate approximately equal to LIBOR less
25 basis points.
Beginning June 3, 2010 our term loan B and revolving credit
facility, bear interest at an annual rate equal to, at our
option, either (i) the London Interbank Offered Rate plus a
margin of 475 and 450 basis points, respectively, or
(ii) a rate consisting of the greater of (a) the
JPMorgan Chase prime rate plus a margin of 375 and
350 basis points, respectively, (b) the Federal Funds
rate plus 50 basis points plus a margin of 375 and
350 basis points, respectively, and (c) the Eurodollar
Rate plus 100 basis points plus a margin of 375 and
350 basis points, respectively. The margin we pay on these
borrowings will be reduced by 25 basis points following
each fiscal quarter for which our consolidated net leverage
ratio is less than 2.25 for extending lenders and for the term
loan B and will be further reduced by an additional
25 basis points following each fiscal quarter for which the
consolidated net leverage ratio is less than 2.0 for extending
lenders. The margin we pay on these borrowings for extending
lenders will increase by 50 basis points following each
fiscal quarter for which our consolidated net leverage ratio is
greater than or equal to 4.0 and will be further increased by an
additional 50 basis points following each fiscal quarter
for which the consolidated net leverage ratio is greater than or
equal to 5.0. Our consolidated net leverage ratio was 2.24 as of
December 31, 2010. Accordingly, in March of 2011 the margin
we pay on these borrowings will be reduced by 25 basis points
for extending lenders and will remain at such level for so long
as our consolidated net leverage ratio remains below 2.25 and
greater than or equal to 2.0.
The margin we pay on borrowings under our
tranche B-1
facility incurred interest at an annual rate equal to, at our
option, either (i) the London Interbank Offered Rate plus a
margin of 500 basis points, or (ii) a rate consisting
of the greater of (a) the JPMorgan Chase prime rate plus a
margin of 400 basis points, (b) the Federal Funds rate
plus 50 basis points plus a margin of 400 basis
points, and (c) the Eurodollar Rate plus 100 basis
points plus a margin of 400 basis points. The rate will
increase by 50 basis points following each fiscal quarter
for which our consolidated net leverage ratio is greater than or
equal to 5.0.
At December 31, 2010, we had unused borrowing capacity of
$699 million under the $752 million amount available
under the two revolving credit facilities within our senior
secured credit facility with no outstanding borrowings and
$53 million in letters of credit outstanding. As of
December 31, 2010 our outstanding debt also includes
$20 million of
8
5
/
8
percent
subordinated notes due January 7, 2011, $250 million
of
8
1
/
8
percent
senior notes due November 15, 2015, $149 million term
loan B due June 3, 2016, $225 million of
7
3
/
4
percent
senior notes due August 15, 2018, $500 million of
6
7
/
8
percent
senior notes due December 15, 2020, and $78 million of
other debt.
On December 9, 2010, we commenced a cash tender offer of
our outstanding $500 million
8
5
/
8
percent
senior subordinated notes due in 2014 and a consent solicitation
to amend the indenture governing these notes. The consent
solicitation expired on December 22, 2010 and the cash
tender offer expired on January 6, 2011. On
December 23, 2010, we issued $500 million of
6
7
/
8
percent senior notes due December 15, 2020. The net
proceeds of this transaction, together with cash and available
liquidity, was used to finance the purchase of our
8
5
/
8
percent senior subordinated notes pursuant to the tender offer
at a price of 103.25 percent of the principal amount, plus
accrued and unpaid interest for holders who tendered prior to
the expiration of the consent solicitation, and
100.25 percent of the principal amount, plus accrued and
unpaid interest, for other participants. On January 7,
2011, we redeemed all remaining senior subordinated notes that
were not previously tendered at a price of 102.875 percent
of the principal amount, plus accrued and unpaid interest. To
facilitate these transactions, we amended our senior credit
agreement to permit us to refinance our senior subordinated
notes with new senior unsecured notes. We did not incur any fee
in connection with this amendment. The new notes are general
senior obligations of Tenneco Inc. and are not secured by assets
of Tenneco Inc. or the guarantors. We recorded $20 million
of pre-tax charges in December 2010 and expect to
61
Table of Contents
record an additional $1 million of pre-tax charges in the
first quarter of 2011 related to our repurchase and redemption
of our
8
5
/
8
percent senior subordinated notes.
On August 3, 2010 we issued $225 million of
7
3
/
4
percent senior notes due August 15, 2018 in a private
offering. The net proceeds of this transaction, together with
cash and available liquidity, was used to finance the redemption
of our
10
1
/
4
percent senior secured notes due in 2013. We called the senior
secured notes for redemption on August 3, 2010, and
completed the redemption on September 2, 2010 at a price of
101.708 percent of the principal amount, plus accrued and
unpaid interest. We recorded $5 million of expense related
to our redemption of our
10
1
/
4
percent senior secured notes in the third quarter of 2010. The
new notes are general senior obligations of Tenneco Inc. and are
not secured by assets of Tenneco Inc. or the guarantors.
Senior Credit Facility — Interest Rates and
Fees.
Borrowings and letters of credit issued
under the senior credit facility bear interest at an annual rate
equal to, at our option, either (i) the London Interbank
Offered Rate plus a margin as set forth in the table below; or
(ii) a rate consisting of the greater of the JPMorgan Chase
prime rate, the Federal Funds rate plus 50 basis points or
the Eurodollar Rate plus 100 basis points, plus a margin as
set forth in the table below:
|
12/24/2008
|
2/23/2009
|
3/2/2009
|
5/15/2009
|
8/14/2009
|
3/1/2010
|
|||||||||||||||||||||||
|
thru
|
thru
|
thru
|
thru
|
thru
|
thru
|
Beginning
|
||||||||||||||||||||||
| 2/22/2009 | 3/1/2009 | 5/14/2009 | 8/13/2009 | 2/28/2010 | 6/2/2010 | 6/3/2010 | ||||||||||||||||||||||
|
Applicable Margin over LIBOR for Revolving Loans
|
3.00 | % | 5.50 | % | 4.50 | % | 5.00 | % | 5.50 | % | 4.50 | % | 4.50 | % | ||||||||||||||
|
Applicable Margin over LIBOR for Term Loan B Loans
|
— | — | — | — | — | — | 4.75 | % | ||||||||||||||||||||
|
Applicable Margin over LIBOR for Term Loan A Loans
|
3.00 | % | 5.50 | % | 4.50 | % | 5.00 | % | 5.50 | % | 4.50 | % | — | |||||||||||||||
|
Applicable Margin over LIBOR for
Tranche B-1
Loans
|
3.00 | % | 5.50 | % | 5.00 | % | 5.00 | % | 5.50 | % | 5.00 | % | 5.00 | % | ||||||||||||||
|
Applicable Margin over Prime-based Loans
|
2.00 | % | 4.50 | % | 3.50 | % | 4.00 | % | 4.50 | % | 3.50 | % | — | |||||||||||||||
|
Applicable Margin over Prime for Revolving Loans
|
— | — | — | — | — | — | 3.50 | % | ||||||||||||||||||||
|
Applicable Margin over Prime for Term Loan B Loans
|
— | — | — | — | — | — | 3.75 | % | ||||||||||||||||||||
|
Applicable Margin over Prime for
Tranche B-1
Loans
|
— | — | — | — | — | — | 4.00 | % | ||||||||||||||||||||
|
Applicable Margin over Federal Funds for Revolving Loans
|
— | — | — | — | — | — | 3.50 | % | ||||||||||||||||||||
|
Applicable Margin over Federal Funds for Term Loan B Loans
|
— | — | — | — | — | — | 3.75 | % | ||||||||||||||||||||
|
Applicable Margin over Federal Funds for
Tranche B-1
Loans
|
2.50 | % | 5.00 | % | 4.00 | % | 4.50 | % | 5.00 | % | 4.00 | % | 4.00 | % | ||||||||||||||
|
Commitment Fee
|
0.50 | % | 0.75 | % | 0.50 | % | 0.50 | % | 0.75 | % | 0.50 | % | 0.75 | % | ||||||||||||||
Senior Credit Facility — Other Terms and
Conditions.
Our senior credit facility requires
that we maintain financial ratios equal to or better than the
following consolidated net leverage ratio (consolidated
indebtedness net of cash divided by consolidated EBITDA, as
defined in the senior credit facility agreement), and
consolidated interest coverage ratio (consolidated EBITDA
divided by consolidated interest expense, as
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Table of Contents
defined under the senior credit facility agreement) at the end
of each period indicated. Failure to maintain these ratios will
result in a default under our senior credit facility. The
financial ratios required under the amended and restated senior
credit facility and, the actual ratios we achieved for four
quarters of 2010, are as follows:
| Quarter Ended | ||||||||||||||||||||||||||||||||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
|||||||||||||||||||||||||||||
| 2010 | 2010 | 2010 | 2010 | |||||||||||||||||||||||||||||
| Req. | Act. | Req. | Act. | Req. | Act. | Req. | Act. | |||||||||||||||||||||||||
|
Leverage Ratio (maximum)
|
5.50 | 2.77 | 4.50 | 2.42 | 4.25 | 2.41 | 4.25 | 2.24 | ||||||||||||||||||||||||
|
Interest Coverage Ratio (minimum)
|
2.00 | 3.04 | 2.25 | 3.70 | 2.30 | 3.97 | 2.35 | 3.99 | ||||||||||||||||||||||||
The financial ratios required under the senior credit facility
for 2011 and beyond are set forth below.
|
Interest
|
||||||||
|
Leverage
|
Coverage
|
|||||||
|
Period Ending
|
Ratio | Ratio | ||||||
|
March 31, 2011
|
4.00 | 2.55 | ||||||
|
June 30, 2011
|
3.75 | 2.55 | ||||||
|
September 30, 2011
|
3.50 | 2.55 | ||||||
|
December 31, 2011
|
3.50 | 2.55 | ||||||
|
Each quarter thereafter
|
3.50 | 2.75 | ||||||
The covenants in our senior credit facility agreement generally
prohibit us from repaying or refinancing our senior notes. So
long as no default existed, we would, however, under our senior
credit facility agreement, be permitted to repay or refinance
our senior notes: (i) with the net cash proceeds of
incremental facilities and permitted refinancing indebtedness
(as defined in the senior credit facility agreement);
(ii) with the net cash proceeds from the sale of shares of
our common stock; (iii) in exchange for permitted
refinancing indebtedness or in exchange for shares of our common
stock; (iv) with the net cash proceeds of any new senior or
subordinated unsecured indebtedness; (v) with the proceeds
of revolving credit loans (as defined in the senior credit
facility agreement); (vi) with the cash generated by the
operations of the company; and (vii) in an amount equal to
the sum of (A) the net cash proceeds of qualified stock
issued by the Company after March 16, 2007, plus
(B) the portion of annual excess cash flow (beginning with
excess cash flow for fiscal year 2010) not required to be
applied to payment of the credit facilities and which is not
used for other purposes, provided that the aggregate principal
amount of senior notes purchased and cancelled or redeemed
pursuant to clauses (v), (vi) and (vii), is capped as
follows based on the pro forma consolidated leverage ratio after
giving effect to such purchase, cancellation or redemption:
|
Aggregate Senior
|
||||
|
Note Maximum
|
||||
|
Proforma Consolidated Leverage Ratio
|
Amount | |||
| (Millions) | ||||
|
Greater than or equal to 3.0x
|
$ | 20 | ||
|
Greater than or equal to 2.5x
|
$ | 100 | ||
|
Less than 2.5x
|
$ | 125 | ||
Although the senior credit facility agreement would permit us to
repay or refinance our senior notes under the conditions
described above, any repayment or refinancing of our outstanding
notes would be subject to market conditions and either the
voluntary participation of noteholders or our ability to redeem
the notes under the terms of the applicable note indenture. For
example, while the senior credit agreement would allow us to
repay our outstanding notes via a direct exchange of the notes
for either permitted refinancing indebtedness or for shares of
our common stock, we do not, under the terms of the agreements
governing our outstanding notes, have the right to refinance the
notes via any type of direct exchange.
The senior credit facility agreement also contains other
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
senior credit facility agreement); (iii) liquidations and
dissolutions; (iv) incurring additional indebtedness or
guarantees; (v) investments and acquisitions;
63
Table of Contents
(vi) dividends and share repurchases; (vii) mergers
and consolidations; and (viii) refinancing of the senior
notes. 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 December 31, 2010, we were in compliance with
all the financial covenants and operational restrictions of the
facility. Our senior credit facility does not contain any terms
that could accelerate payment of the facility or affect pricing
under the facility as a result of a credit rating agency
downgrade.
Senior and Subordinated Notes.
As of
December 31, 2010, our outstanding debt also includes
$20 million of
8
5
/
8
percent senior subordindated notes due January 7, 2011,
$250 million of
8
1
/
8
percent senior notes due November 15, 2015,
$225 million of
7
3
/
4
percent senior notes due August 15, 2018 and
$500 million of
6
7
/
8
percent senior notes due December 15, 2020. Under the
indentures governing the notes, we are permitted to redeem some
or all of the remaining senior notes at any time after
November 15, 2011 in the case of the senior notes due 2015,
August 14, 2014 in the case of the senior notes due 2018,
and December 15, 2015 in the case of senior notes due 2020.
On January 7, 2011, we redeemed all remaining senior
subordinated notes at a price of 102.875 percent of
principal amount plus accrued and unpaid interest. If we sell
certain of our assets or experience specified kinds of changes
in control, we must offer to repurchase the notes. Under the
indentures governing the notes, we are permitted to redeem up to
35 percent of the senior notes due 2018, with the proceeds
of certain equity offerings completed before August 13,
2013 and up to 35 percent of the senior notes due 2020,
with the proceeds of certain equity offerings completed before
December 15, 2013.
Our senior notes require that, as a condition precedent to
incurring certain types of indebtedness not otherwise permitted,
our consolidated fixed charge coverage ratio, as calculated on a
pro forma basis, be greater than 2.00. The indentures also
contain restrictions on our operations, including limitations
on: (i) incurring additional indebtedness or liens;
(ii) dividends; (iii) distributions and stock
repurchases; (iv) investments; (v) asset sales and
(vi) mergers and consolidations. Subject to limited
exceptions, all of our existing and future material domestic
wholly owned subsidiaries fully and unconditionally guarantee
these notes on a joint and several basis. There are no
significant restrictions on the ability of the subsidiaries that
have guaranteed these notes to make distributions to us. As of
December 31, 2010, we were in compliance with the covenants
and restrictions of these indentures.
Accounts Receivable Securitization.
We also
securitize some of our accounts receivable on a limited recourse
basis in North America and Europe. As servicer under these
accounts receivable securitization programs, we are responsible
for performing all accounts receivable administration functions
for these securitized financial assets including collections and
processing of customer invoice adjustments. In
North America, we have an accounts receivable
securitization program with three commercial banks. We
securitize original equipment and aftermarket receivables on a
daily basis under the bank program. We had no outstanding third
party investments in our securitized accounts receivable bank
program as of December 31, 2010 and $62 million at
December 31, 2009. In February 2010, the North American
program was amended and extended to February 18, 2011, at a
maximum facility size of $100 million. As part of this
renewal, the margin we pay to our banks decreased. In March
2010, the North American program was further amended to extend
the revolving terms of the program to March 25, 2011, add
an additional bank and increase the available financing under
the facility by $10 million to a new maximum of
$110 million. In addition, we added a second priority
facility to the North American program, which provides up to an
additional $40 million of financing against accounts
receivable generated in the U.S. or Canada that would
otherwise be ineligible under the existing securitization
facility. This new second priority facility also expires on
March 25, 2011, and is subordinated to the existing
securitization facility.
Each facility contains customary covenants for financings of
this type, including restrictions related to liens, payments,
mergers or consolidation and amendments to the agreements
underlying the receivables pool. Further, each facility may be
terminated upon the occurrence of customary events (with
customary grace periods, if applicable), including breaches of
covenants, failure to maintain certain financial ratios,
inaccuracies of representations and warranties, bankruptcy and
insolvency events, certain changes in the rate of default or
delinquency of the receivables, a change of control and the
entry or other enforcement of material judgments. In addition,
each facility contains cross-default provisions, where the
facility could be terminated in the event
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of non-payment of other material indebtedness when due and any
other event which permits the acceleration of the maturity of
material indebtedness.
We also securitize receivables in our European operations with
regional banks in Europe. The amount of outstanding third party
investments in our securitized accounts receivable in Europe was
$91 million and $75 million at December 31, 2010
and December 31, 2009, respectively. The arrangements to
securitize receivables in Europe are provided under seven
separate facilities provided by various financial institutions
in each of the foreign jurisdictions. The commitments for these
arrangements are generally for one year, but some may be
cancelled with notice 90 days prior to renewal. In some
instances, the arrangement provides for cancellation by the
applicable financial institution at any time upon 15 days,
or less, notification.
If we were not able to securitize receivables under either the
North American or European securitization programs, our
borrowings under our revolving credit agreements might 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.
We adopted the amended accounting guidance under ASC Topic 860,
Accounting for Transfers of Financial Assets effective
January 1, 2010. Prior to the adoption of this new
guidance, we accounted for activities under our North American
and European accounts receivable securitization programs as
sales of financial assets to our banks. The new accounting
guidance changed the conditions that must be met for the
transfer of financial assets to be accounted for as a sale. The
new guidance adds additional conditions that must be satisfied
for transfers of financial assets to be accounted for as sales
when the transferor has not transferred the entire original
financial asset, including the requirement that no partial
interest holder have rights in the transferred asset that are
subordinate to the rights of other partial interest holders. In
our North American accounts receivable securitization
programs, we transfer a partial interest in a pool of
receivables and the interest that we retain is subordinate to
the transferred interest. Accordingly, beginning January 1,
2010, we account for our North American securitization program
as a secured borrowing. In our European programs we transfer
accounts receivables in their entirety to the acquiring entities
and satisfy all of the conditions established under amended ASC
Topic 860 to report the transfer of financial assets in their
entirety as a sale. The fair value of assets received as
proceeds in exchange for the transfer of accounts receivable
under our European securitization programs approximates the fair
value of such receivables. We recognized $4 million in
interest expense in 2010 relating to our North American
securitization program which effective January 1, 2010, is
accounted for as a secured borrowing arrangement under the
amended accounting guidance for transfers of financial assets.
In addition, we recognized a loss of $3 million,
$9 million and $10 million for the years ended 2010,
2009 and 2008, respectively, on the sale of trade accounts
receivable in both the North American and European accounts
receivable securitization programs, representing the discount
from book values at which these receivables were sold to our
banks. The discount rate varies based on funding costs incurred
by our banks, which averaged approximately four percent during
2010.
The impact of the new accounting rules on our consolidated
financial statements includes an increase of $4 million in
interest expense and a corresponding decrease in loss on sale of
receivables on our income statement in 2010. In 2010, there was
no cash flow impact as a result of the new accounting rules.
Funding levels provided by our European securitization programs
continue to be reflected as a change in receivables and included
in net cash provided (used) by operating activities as under the
previous accounting rules. Had the new accounting rules been in
effect prior to 2010, reported receivables and short-term debt
would both have been $62 million higher as of
December 31, 2009. The loss on sale of receivables would
have been $5 million lower, offset by a corresponding
$5 million increase to interest expense for 2009. The loss
on sales of receivables would have been $4 million lower,
offset by a corresponding $4 million increase to interest
expense for 2008. Additionally, our cash provided (used) by
operations would have decreased by $62 million with a
corresponding increase in cash provided by financing activities
for the same amount for 2009.
Capital Requirements.
We believe that cash
flows from operations, combined with our cash on hand and
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, including debt amortization,
capital expenditures, pension contributions, and other
operational
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requirements, for the following year. Our ability to meet the
financial covenants depends upon a number of operational and
economic factors, many of which are beyond our control. In the
event that we are unable to meet these financial covenants, we
would consider several options to meet our cash flow needs. Such
actions include additional restructuring initiatives and other
cost reductions, sales of assets, reductions to working capital
and capital spending, issuance of equity and 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 December 31, 2010 are shown in the following table:
| Payments due in: | ||||||||||||||||||||||||||||
|
Beyond
|
||||||||||||||||||||||||||||
| 2011(a) | 2012 | 2013 | 2014 | 2015 | 2015 | Total | ||||||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||||||
|
Obligations:
|
||||||||||||||||||||||||||||
|
Revolver borrowings
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Senior term loans
|
2 | 2 | 2 | 2 | 2 | 139 | 149 | |||||||||||||||||||||
|
Senior subordinated notes
|
20 | — | — | — | — | — | 20 | |||||||||||||||||||||
|
Senior notes
|
— | — | — | — | 250 | 725 | 975 | |||||||||||||||||||||
|
Customer notes
|
1 | 1 | 2 | — | — | — | 4 | |||||||||||||||||||||
|
Capital leases
|
1 | — | — | — | — | — | 1 | |||||||||||||||||||||
|
Other subsidiary debt
|
1 | 1 | 1 | 1 | 1 | 7 | 12 | |||||||||||||||||||||
|
Short-term debt
|
61 | — | — | — | — | — | 61 | |||||||||||||||||||||
|
Debt and capital lease obligations
|
86 | 4 | 5 | 3 | 253 | 871 | 1,222 | |||||||||||||||||||||
|
Operating leases
|
26 | 19 | 13 | 8 | 5 | 17 | 88 | |||||||||||||||||||||
|
Interest payments
|
104 | 97 | 84 | 60 | 73 | 366 | 784 | |||||||||||||||||||||
|
Capital commitments
|
48 | — | — | — | — | — | 48 | |||||||||||||||||||||
|
Total Payments
|
$ | 264 | $ | 120 | $ | 102 | $ | 71 | $ | 331 | $ | 1,254 | $ | 2,142 | ||||||||||||||
| Note: | (a) We have included in the 2011 payments, the redemption of all of the outstanding 8 5 / 8 percent senior subordinated notes that were not previously tendered. |
If we do not maintain compliance with the terms of our senior
credit facility or senior notes indentures 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
the 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 obligations, we have made
assumptions in calculating the amount of future interest
payments. Interest on our senior subordinated notes and senior
notes is calculated using the fixed rates of
7
3
/
4
percent,
6
7
/
8
percent,
and
8
1
/
8
percent
respectively. Interest on our variable rate debt is calculated
as LIBOR plus the applicable margin in effect at
December 31, 2010 for the Eurodollar, term loan B and
tranche B-1
loans and prime plus the applicable margin in effect on
December 31, 2010 on the prime-based loans. We have assumed
that both LIBOR and the prime rate will remain unchanged for the
outlying years. See “— Capitalization.”
We have also included an estimate of expenditures required after
December 31, 2010 to complete the projects authorized at
December 31, 2010, in which we have made substantial
commitments in connection
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with purchasing plant, property and equipment for our
operations. For 2011, we expect our capital expenditures to be
about $190 million to $210 million.
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
obligations.
We have not included material cash requirements for unrecognized
tax benefits or taxes as we are a taxpayer in certain foreign
jurisdictions, but not in the U.S. Additionally, it is
difficult to estimate taxes to be paid as changes in where we
generate income can have a significant impact on future tax
payments. We have also not included cash requirements for
funding pension and postretirement benefit costs. Based upon
current estimates, we believe we will be required to make
contributions of approximately $54 million to those plans
in 2011. Pension and postretirement contributions beyond 2011
will be required but those amounts will vary based upon many
factors, including the performance of our pension fund
investments during 2011. For additional information relating to
the funding of our pension and other postretirement plans, refer
to footnote 10 of our notes to consolidated financial
statements. In addition, we have not included cash requirements
for environmental remediation. Based upon current estimates we
believe we will be required to spend approximately
$21 million over the next 30 years. However, due to
possible modifications in remediation processes and other
factors, it is difficult to determine the actual timing of the
payments. See “— Environmental and Other
Matters.”
We occasionally provide guarantees that could require us to make
future payments in the event that the third party primary
obligor does not make its required payments. We have not
recorded a liability for any of these guarantees.
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
existing and future material domestic wholly-owned subsidiaries
fully and unconditionally guarantee our senior credit facility
and our senior notes on a joint and several basis. The
arrangement for the senior credit facility is also secured by
first-priority liens on substantially all our domestic assets
and pledges of up to 66 percent of the stock of certain
first-tier foreign subsidiaries. You should also read
Note 13 of the consolidated financial statements of Tenneco
Inc., 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. As of
December 31, 2010, we have $53 million in letters of
credit to support some of our subsidiaries’ insurance
arrangements, foreign employee benefit programs, environmental
remediation activities and cash management and capital
requirements.
Critical
Accounting Policies
We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United
States of America. Preparing our consolidated 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 consolidated 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 when title and risk of loss passes to the
customers under the terms of our arrangements with those
customers, which is usually at the time of shipment from our
plants or distribution centers. Generally, in connection with
the sale of exhaust systems to certain original equipment
manufacturers, we purchase catalytic converters and diesel
particulate
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filters or components thereof including precious metals
(“substrates”) on behalf of our customers which are
used in the assembled system. These substrates are included in
our inventory and “passed through” to the customer at
our cost, plus a small margin, since we take title to the
inventory and are responsible for both the delivery and quality
of the finished product. Revenues recognized for substrate sales
were $1,297 million, $966 million and
$1,492 million for 2010, 2009 and 2008, respectively. 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.
Certain taxes assessed by governmental authorities on revenue
producing transactions, such as value added taxes, are excluded
from revenue and recorded on a net basis. Shipping and handling
costs billed to customers are included in revenues and the
related costs are included in cost of sales in our Statements of
Income (Loss).
Warranty
Reserves
Where we have offered product warranty, we also provide for
warranty costs. 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
and upon specific warranty issues as they arise. The warranty
terms vary but range from one year up to limited lifetime
warranties on some of our premium aftermarket products. We
actively study trends of our warranty claims and take action to
improve product quality and minimize warranty claims. 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 consolidated financial statements.
Engineering,
Research and Development
We expense engineering, research, and development costs as they
are incurred. Engineering, research, and development expenses
were $117 million for 2010, $97 million for 2009 and
$127 million for 2008, net of reimbursements from our
customers. Of these amounts, $13 million in 2010,
$10 million in 2009 and $18 million in 2008 relate to
research and development, which includes the research, design,
and development of a new unproven product or process.
Additionally, $80 million, $61 million and
$80 million of engineering, research, and development
expense for 2010, 2009 and 2008, respectively, relates to
engineering costs we incurred for application of existing
products and processes to vehicle platforms. The remainder of
the expenses in each year relate to improvements and
enhancements to existing products and processes. Further, our
customers reimburse us for engineering, research, and
development costs on some platforms when we prepare prototypes
and incur costs before platform awards. Our engineering,
research, and development expense for 2010, 2009 and 2008 has
been reduced by $110 million, $104 million and
$120 million, respectively, for these reimbursements.
Pre-production
Design and Development and Tooling Assets
We expense pre-production design and development costs as
incurred unless we have a contractual guarantee for
reimbursement from the original equipment customer. Unbilled
pre-production design and development costs recorded in
prepayments and other and long-term receivables was
$15 million and $14 million on December 31, 2010
and 2009, respectively. In addition, plant, property and
equipment included $38 million and $49 million at
December 31, 2010 and 2009, respectively, for original
equipment tools and dies that we own, and prepayments and other
included $46 million and $50 million at
December 31, 2010 and 2009, respectively, for in-process
tools and dies that we are building for our original equipment
customers.
Income
Taxes
We evaluate our deferred income taxes quarterly to determine if
valuation allowances are required or should be adjusted.
U.S. GAAP requires that companies assess whether valuation
allowances should be established against their deferred tax
assets based on consideration of all available evidence, both
positive and negative, using a “more likely than not”
standard. This assessment considers, among other matters, the
nature,
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frequency and amount of recent losses, the duration of statutory
carryforward periods, and tax planning strategies. In making
such judgments, significant weight is given to evidence that can
be objectively verified.
Valuation allowances have been established for deferred tax
assets based on a “more likely than not” threshold.
The ability to realize deferred tax assets depends on our
ability to generate sufficient taxable income within the
carryforward periods provided for in the tax law for each tax
jurisdiction. We have considered the following possible sources
of taxable income when assessing the realization of our deferred
tax assets:
| • | Future reversals of existing taxable temporary differences; | |
| • | Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards; and | |
| • | Tax-planning strategies. |
In 2010, we reported income tax expense of $69 million. The
tax expense recorded differs from the expense that would be
recorded using a U.S. Federal statutory rate of
35 percent due to the impact of not benefiting tax losses
in the U.S. and certain foreign jurisdictions, and charges
primarily related to adjustments to prior year income taxes and
tax contingencies which more than offset a favorable mix of tax
rates in the jurisdictions we pay taxes. During 2010, we
recorded a $52 million reduction in our valuation allowance
related to the utilization of U.S. NOLs resulting from a
reorganization of our European operations. In evaluating the
requirements to record a valuation allowance, accounting
standards do not permit us to consider an economic recovery in
the U.S. or new business we have won. Consequently,
beginning in 2008, given our historical losses, we concluded
that our ability to fully utilize our NOLs was limited due to
projecting the continuation of the negative economic environment
and the impact of the negative operating environment on our tax
planning strategies. As a result of our tax planning strategies
which have not yet been implemented and which do not depend upon
generating future taxable income, we carry deferred tax assets
in the U.S. of $90 million relating to the expected
utilization of those NOLs. The federal NOLs expire beginning in
tax years ending in 2020 through 2029. The state NOLs expire in
various tax years through 2029.
If our operating performance improves on a sustained basis, our
conclusion regarding the need for a valuation allowance could
change, resulting in the reversal of some or all of the
valuation allowance in the future. The charge to establish the
U.S. valuation allowance also includes items related to the
losses allocable to certain state jurisdictions where it was
determined that tax attributes related to those jurisdictions
were potentially not realizable.
We are required to record a valuation allowance against deferred
tax assets generated by taxable losses in each period in the
U.S. as well as in other foreign jurisdictions. Our future
provision for income taxes will include no tax benefit with
respect to losses incurred and no tax expense with respect to
income generated in these jurisdictions until the respective
valuation allowance is eliminated. This will cause variability
in our effective tax rate.
Goodwill,
net
We evaluate goodwill for impairment in the fourth quarter of
each year, or more frequently if events indicate it is
warranted. The goodwill impairment test consists of a two-step
process. In step one, we compare the estimated fair value of our
reporting units with goodwill to the carrying value of the
unit’s assets and liabilities to determine if impairment
exists within the recorded balance of goodwill. We estimate the
fair value of each reporting unit using the income approach
which is based on the present value of estimated future cash
flows. The income approach is dependent on a number of factors,
including estimates of market trends, forecasted revenues and
expenses, capital expenditures, weighted average cost of capital
and other variables. A separate discount rate derived by a
combination of published sources, internal estimates and
weighted based on our debt and equity structure, was used to
calculate the discounted cash flows for each of our reporting
units. These estimates are based on assumptions that we believe
to be reasonable, but which are inherently uncertain and outside
of the control of management. If the carrying value of the
reporting unit is higher than its fair value, there is an
indication that impairment may exist which requires step two to
be performed to
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measure the amount of the impairment loss. The amount of
impairment is determined by comparing the implied fair value of
a reporting unit’s goodwill to its carrying value.
In the fourth quarter of 2009, the estimated fair value of each
of our reporting units significantly exceeded the carrying value
of its assets and liabilities. In the fourth quarter of 2010,
the estimated fair value of all of our reporting units, except
for our Australian reporting unit, significantly exceeded the
carrying value of its assets and liabilities. Our Australian
reporting unit had a goodwill balance of $11 million with
an estimated fair value in excess of its net carrying value of
one percent as of the testing date. Although our Australian
operations support the value of goodwill reported as tested in
the fourth quarter of 2010, it is possible that assumptions and
estimates could change in future periods and result in a future
impairment of our Australian reporting unit.
Pension
and Other Postretirement Benefits
We have various defined benefit pension plans that cover some of
our employees. We also have postretirement health care and life
insurance plans that cover some of our domestic employees. Our
pension and postretirement health care and life insurance
expenses and valuations are dependent on assumptions used by our
actuaries in calculating those 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 rates are based primarily on
actual plan experience while mortality rates are based upon the
general population experience which is not expected to differ
materially from our experience.
Our approach to establishing the discount rate assumption for
both our domestic and foreign plans is generally based on the
yield on high-quality corporate fixed-income investments. At the
end of each year, the discount rate is determined using the
results of bond yield curve models based on a portfolio of high
quality bonds matching the notional cash inflows with the
expected benefit payments for each significant benefit plan.
Based on this approach, for 2010 we lowered the weighted average
discount rate for all our pension plans to 5.5 percent in
2010 from 6.0 percent in 2009. The discount rate for
postretirement benefits was lowered to 5.6 percent in 2010
from 6.1 percent in 2009.
Our approach to determining expected return on plan asset
assumptions evaluates both historical returns as well as
estimates of future returns, and is adjusted for any expected
changes in the long-term outlook for the equity and fixed income
markets. As a result, our estimate of the weighted average
long-term rate of return on plan assets for all of our pension
plans was lowered from 7.6 percent in 2009 to
7.2 percent for 2010.
Except in the U.K., our pension plans generally do not require
employee contributions. Our policy is to fund our pension plans
in accordance with applicable U.S. and foreign government
regulations and to make additional payments as funds are
available to achieve full funding of the accumulated benefit
obligation. At December 31, 2010, all legal funding
requirements had been met. In 2010, we recognized a charge of
$6 million related to an actuarial loss for lump-sum
pension payments to two former employees. Other postretirement
benefit obligations, such as retiree medical, and certain
foreign pension plans are funded as the obligations become due.
Refer to Footnote 10 of our notes to consolidated financial
statements for more information regarding our pension and other
postretirement employee benefit costs and assumptions.
Recent
Accounting Pronouncements
Footnote 1 to the consolidated financial statements of Tenneco
Inc. located in Item 8 — Financial Statements and
Supplemental Data are incorporated herein by reference.
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Derivative
Financial Instruments
Foreign
Currency Exchange Rate Risk
We use derivative financial instruments, principally foreign
currency forward purchase and sale contracts with terms of less
than one year, to hedge our exposure to changes in foreign
currency exchange rates. Our primary exposure to changes in
foreign currency rates results from intercompany loans made
between affiliates to minimize the need for borrowings from
third parties. Additionally, we enter into foreign currency
forward purchase and sale contracts to mitigate our exposure to
changes in exchange rates on certain intercompany and
third-party trade receivables and payables. We manage
counter-party credit risk by entering into derivative financial
instruments with major financial institutions that can be
expected to fully perform under the terms of such agreements. We
do not enter into derivative financial instruments for
speculative purposes.
In managing our foreign currency exposures, we identify and
aggregate existing offsetting positions and then hedge residual
exposures through third-party derivative contracts. The fair
value of our foreign currency forward contracts was
$2 million at December 31, 2010 and is based on an
internally developed model which incorporates observable inputs
including quoted spot rates, forward exchange rates and
discounted future expected cash flows utilizing market interest
rates with similar quality and maturity characteristics. The
following table summarizes by major currency the notional
amounts for our foreign currency forward purchase and sale
contracts as of December 31, 2010. All contracts in the
following table mature no later than March 31, 2011.
| December 31, 2010 | ||||||||
|
Notional Amount
|
||||||||
| in Foreign Currency | ||||||||
| (Millions) | ||||||||
|
Australian dollars
|
—Purchase | 1 | ||||||
|
British pounds
|
—Purchase | 10 | ||||||
| —Sell | (8 | ) | ||||||
|
European euro
|
—Sell | (15 | ) | |||||
|
South African rand
|
—Purchase | 217 | ||||||
| —Sell | (41 | ) | ||||||
|
U.S. dollars
|
—Purchase | 2 | ||||||
| —Sell | (18 | ) | ||||||
|
Other
|
—Purchase | 652 | ||||||
| —Sell | (1 | ) | ||||||
Interest
Rate Risk
Our financial instruments that are sensitive to market risk for
changes in interest rates are primarily our debt securities. We
use our revolving credit facilities to finance our short-term
and long-term capital requirements. We pay a current market rate
of interest on these borrowings. Our long-term capital
requirements have been financed with long-term debt with
original maturity dates ranging from four to ten years. On
December 31, 2010, we had $1,011 million in long-term
debt obligations that have fixed interest rates. Of that amount,
$500 million is fixed through December 2020,
$250 million is fixed through November 2015,
$225 million is fixed through August 2018, $20 million
was fixed through November 2014 and the remainder is fixed from
2011 through 2025. On January 7, 2011, we redeemed the
remaining outstanding $20 million of the
8
5
/
8
percent senior subordinated notes at a price of
102.875 percent of principal amount plus accrued and unpaid
interest. We also have $152 million in long-term debt
obligations that are subject to variable interest rates. For
more detailed explanations on our debt structure and senior
credit facility refer to “Liquidity and Capital
Resources — Capitalization” earlier in this
Management’s Discussion and Analysis.
We estimate that the fair value of our long-term debt at
December 31, 2010 was about 103 percent of its book
value. A one percentage point increase or decrease in interest
rates would increase or decrease the annual
71
Table of Contents
interest expense we recognize in the income statement and the
cash we pay for interest expense by about $2 million.
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 costs related to an
existing condition caused by past operations that do not
contribute to current or future revenue generation. We record
liabilities when environmental assessments indicate that
required 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, as discussed
in Footnote 12 — Commitments and
Contingency — Litigation, of our notes to consolidated
financial statements. 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 consolidated financial statements.
As of December 31, 2010, we have the obligation to
remediate or contribute towards the remediation of certain
sites, including two existing Superfund sites. At
December 31, 2010, our aggregated estimated share of
environmental remediation costs for all these sites on a
discounted basis was approximately $16 million, of which
$5 million is recorded in other current liabilities and
$11 million is recorded in deferred credits and other
liabilities in our consolidated balance sheet. For those
locations in which the liability was discounted, the weighted
average discount rate used was 3.2 percent. The
undiscounted value of the estimated remediation costs was
$21 million. Our expected payments of environmental
remediation costs are estimated to be approximately
$5 million in 2011, $1 million in each year beginning
2012 through 2015 and $12 million thereafter. Based on
information known to us, we have established reserves that we
believe are adequate for these costs. Although we believe these
estimates of remediation costs are reasonable and are based on
the latest available information, the 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 towards the
remediation costs. In addition, certain environmental statutes
provide 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 these sites has been
considered, where appropriate, in our determination of our
estimated liability.
The $16 million noted above includes $5 million of
estimated environmental remediation costs that resulted from the
bankruptcy of Mark IV Industries in 2009. Prior to our 1996
acquisition of The Pullman Company, Pullman had sold certain
assets to Mark IV. As partial consideration for the purchase of
these assets, Mark IV agreed to assume Pullman’s and
its subsidiaries’ historical obligations to contribute to
the environmental remediation of certain sites. In April of
2009, Mark IV filed a petition for insolvency under
Chapter 11 of the United States Bankruptcy Code and
notified Pullman that it no longer intends to continue to
contribute toward the remediation of those sites. We are
continuing to conduct a thorough analysis and review of our
remediation obligations and it is possible that our estimate may
change as additional information becomes available to us.
We do not believe that any potential costs associated with our
current status as a potentially responsible party in the
Superfund sites, or as a liable party at the other locations
referenced herein, will be material to our consolidated results
of operations, financial position or cash flows.
We also from time to time are involved in legal proceedings,
claims or investigations that are incidental to the conduct of
our business. Some of these proceedings allege damages against
us relating to environmental liabilities (including toxic tort,
property damage and remediation), intellectual property matters
(including patent, trademark and copyright infringement, and
licensing disputes), personal injury claims (including
72
Table of Contents
injuries due to product failure, design or warning issues, and
other product liability related matters), taxes, employment
matters, and commercial or contractual disputes, sometimes
related to acquisitions or divestitures. For example, one of our
Argentine subsidiaries is currently defending against a criminal
complaint alleging the failure to comply with laws requiring the
proceeds of export transactions to be collected, reported
and/or
converted to local currency within specified time periods. As
another example, we are subject to an audit in 11 states of
our practices with respect to the payment of unclaimed property
to those states. We are in the early stages of this audit, which
could cover over 30 years and we now have practices in
place which we believe ensure that we pay unclaimed property as
required. We vigorously defend ourselves against all of these
claims. In future periods, we could be subject to cash costs or
charges to earnings if any of these matters are resolved on
unfavorable terms. However, although the ultimate outcome of any
legal matter cannot be predicted with certainty, based on
current 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, results of
operations or cash flows.
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. In the early 2000’s we were
named in nearly 20,000 complaints, most of which were filed in
Mississippi state court and the vast majority of which made no
allegations of exposure to asbestos from our product categories.
Most of these claims have been dismissed and our current docket
of active and inactive cases is less than 500 cases nationwide.
A small number of claims have been asserted by railroad workers
alleging exposure to asbestos products in railroad cars
manufactured by The Pullman Company, one of our subsidiaries.
The balance of the claims is related to alleged exposure to
asbestos in our automotive emission control products. Only a
small percentage of these claimants allege that they were
automobile mechanics 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 100 defendants from a variety of
industries. Additionally, the plaintiffs either do not specify
any, or specify the jurisdictional minimum, dollar amount for
damages. As major asbestos manufacturers continue to go out of
business or file for bankruptcy, we may experience an increased
number of these claims. We vigorously defend ourselves against
these claims as part of our ordinary course of business. In
future periods, we could be subject to charges to earnings if
any of these matters are resolved unfavorably to us. To date,
with respect to claims that have proceeded sufficiently through
the judicial process, we have regularly achieved favorable
resolutions. Accordingly, we presently believe that these
asbestos-related claims will not have a material adverse impact
on our future consolidated financial condition, results of
operations or cash flows.
Employee
Stock Ownership Plans
We have established Employee Stock Ownership Plans for the
benefit of U.S. employees. Under the plans, subject to
limitations in the Internal Revenue Code, participants may elect
to defer up to 75 percent of their salary through
contributions to the plan, which are invested in selected mutual
funds or used to buy our common stock. We match in cash
50 percent of each employee’s contribution up to eight
percent of the employee’s salary. In 2009, we temporarily
discontinued these matching contributions as a result of the
global economic downturn which began in 2008. We restored the
matching contributions to salaried and non-union hourly
U.S. employees beginning on January 1, 2010. In
connection with freezing the defined benefit pension plans for
nearly all U.S. based salaried and non-union hourly
employees effective December 31, 2006, and the related
replacement of those defined benefit plans with defined
contribution plans, we are making additional contributions to
the Employee Stock Ownership Plans. We recorded expense for
these contributions of $17 million, $10 million, and
$18 million in 2010, 2009 and 2008, respectively. Matching
contributions vest immediately. Defined benefit replacement
contributions fully vest on the employee’s third
anniversary of employment.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
The section entitled “Derivative Financial
Instruments” in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” is incorporated herein by reference.
73
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
INDEX TO
FINANCIAL STATEMENTS OF TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES
AND CONSOLIDATED SUBSIDIARIES
| Page | ||||
| 75 | ||||
| 76 | ||||
| 78 | ||||
| 79 | ||||
| 80 | ||||
| 81 | ||||
| 82 | ||||
| 85 | ||||
| 138 | ||||
74
Table of Contents
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Tenneco Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting
(as defined in
Rule 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934). Management’s
internal control system is designed to provide reasonable
assurance regarding the preparation and fair presentation of
published financial statements. All internal control systems, no
matter how well designed, have inherent limitations, including
the possibility of human error or circumvention or overriding of
controls. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation and may not
prevent or detect misstatements in financial reporting. Further,
due to changing conditions and adherence to established policies
and controls, internal control effectiveness may vary over time.
Management assessed the company’s effectiveness of internal
controls over financial reporting. In making this assessment, it
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated Framework.
Based on our assessment we have concluded that the
company’s internal control over financial reporting was
effective as of December 31, 2010.
Our internal control over financial reporting as of
December 31, 2010 has been audited by
PricewaterhouseCoopers LLP, our independent registered public
accounting firm, as stated in their report, which is included
herein.
February 25, 2011
75
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tenneco Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income (loss), cash
flows, changes in shareholders’ equity and comprehensive
income (loss) present fairly, in all material respects, the
financial position of Tenneco Inc. and its subsidiaries at
December 31, 2010 and the results of their operations and
their cash flows for the year ended December 31, 2010 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule for the year ended
December 31, 2010 in Item 8 presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2010, based on criteria
established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Management Report on Internal Control over
Financial Reporting. Our responsibility is to express opinions
on these financial statements and on the Company’s internal
control over financial reporting based on our integrated audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a
process designed 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. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers
LLP
Chicago, Illinois
February 25, 2011
76
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tenneco Inc.:
We have audited the accompanying consolidated balance sheet of
Tenneco Inc. and subsidiaries (the “Company”) as of
December 31, 2009, and the related consolidated statements
of income (loss), cash flows, changes in shareholders’
equity, and comprehensive income (loss) for each of the two
years in the period ended December 31, 2009. Our audits
also included the financial statement schedule listed in the
Index at Item 8 for each of the two years in the period
ended December 31, 2009. These financial statements and
financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company and subsidiaries as of December 31, 2009, and the
results of its operations and its cash flows for each of the two
years in the period ended December 31, 2009, in conformity
with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
/s/
Deloitte &
Touche LLP
Chicago, Illinois
February 26, 2010
77
Table of Contents
TENNECO
INC.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions Except Share and Per Share Amounts) | ||||||||||||
|
Revenues
|
||||||||||||
|
Net sales and operating revenues
|
$ | 5,937 | $ | 4,649 | $ | 5,916 | ||||||
|
Costs and expenses
|
||||||||||||
|
Cost of sales (exclusive of depreciation and amortization shown
below)
|
4,900 | 3,875 | 5,063 | |||||||||
|
Goodwill impairment charge
|
— | — | 114 | |||||||||
|
Engineering, research, and development
|
117 | 97 | 127 | |||||||||
|
Selling, general, and administrative
|
417 | 344 | 392 | |||||||||
|
Depreciation and amortization of other intangibles
|
216 | 221 | 222 | |||||||||
| 5,650 | 4,537 | 5,918 | ||||||||||
|
Other income (expense)
|
||||||||||||
|
Loss on sale of receivables
|
(3 | ) | (9 | ) | (10 | ) | ||||||
|
Other income (expense)
|
(3 | ) | (11 | ) | 9 | |||||||
| (6 | ) | (20 | ) | (1 | ) | |||||||
|
Earnings (loss) before interest expense, income taxes, and
noncontrolling interests
|
281 | 92 | (3 | ) | ||||||||
|
Interest expense (net of interest capitalized of
$4 million, $4 million and $6 million,
respectively)
|
149 | 133 | 113 | |||||||||
|
Income tax expense
|
69 | 13 | 289 | |||||||||
|
Net income (loss)
|
63 | (54 | ) | (405 | ) | |||||||
|
Less: Net income attributable to noncontrolling interests
|
24 | 19 | 10 | |||||||||
|
Net income (loss) attributable to Tenneco Inc.
|
$ | 39 | $ | (73 | ) | $ | (415 | ) | ||||
|
Earnings (loss) per share
|
||||||||||||
|
Weighted average shares of common stock outstanding —
|
||||||||||||
|
Basic
|
59,208,103 | 48,572,463 | 46,406,095 | |||||||||
|
Diluted
|
60,998,694 | 48,572,463 | 46,406,095 | |||||||||
|
Basic earnings (loss) per share of common stock
|
$ | 0.65 | $ | (1.50 | ) | $ | (8.95 | ) | ||||
|
Diluted earnings (loss) per share of common stock
|
$ | 0.63 | $ | (1.50 | ) | $ | (8.95 | ) | ||||
The accompanying notes to consolidated financial statements are
an integral
part of these statements of income (loss).
part of these statements of income (loss).
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Table of Contents
TENNECO
INC.
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Millions) | ||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 233 | $ | 167 | ||||
|
Receivables —
|
||||||||
|
Customer notes and accounts, net
|
796 | 572 | ||||||
|
Other
|
30 | 24 | ||||||
|
Inventories
|
547 | 428 | ||||||
|
Deferred income taxes
|
38 | 35 | ||||||
|
Prepayments and other
|
146 | 167 | ||||||
|
Total current assets
|
1,790 | 1,393 | ||||||
|
Other assets:
|
||||||||
|
Long-term receivables, net
|
9 | 8 | ||||||
|
Goodwill
|
89 | 89 | ||||||
|
Intangibles, net
|
32 | 30 | ||||||
|
Deferred income taxes
|
92 | 100 | ||||||
|
Other
|
105 | 111 | ||||||
| 327 | 338 | |||||||
|
Plant, property, and equipment, at cost
|
3,109 | 3,099 | ||||||
|
Less — Accumulated depreciation and amortization
|
(2,059 | ) | (1,989 | ) | ||||
| 1,050 | 1,110 | |||||||
| $ | 3,167 | $ | 2,841 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
|
Current liabilities:
|
||||||||
|
Short-term debt (including current maturities of long-term debt)
|
$ | 63 | $ | 75 | ||||
|
Trade payables
|
1,048 | 766 | ||||||
|
Accrued taxes
|
51 | 36 | ||||||
|
Accrued interest
|
13 | 22 | ||||||
|
Accrued liabilities
|
227 | 257 | ||||||
|
Other
|
66 | 45 | ||||||
|
Total current liabilities
|
1,468 | 1,201 | ||||||
|
Long-term debt
|
1,160 | 1,145 | ||||||
|
Deferred income taxes
|
56 | 66 | ||||||
|
Postretirement benefits
|
311 | 331 | ||||||
|
Deferred credits and other liabilities
|
125 | 80 | ||||||
|
Commitments and contingencies
|
||||||||
|
Total liabilities
|
3,120 | 2,823 | ||||||
|
Redeemable noncontrolling interests
|
12 | 7 | ||||||
|
Tenneco Inc. Shareholders’ equity:
|
||||||||
|
Common stock
|
1 | 1 | ||||||
|
Premium on common stock and other capital surplus
|
3,008 | 3,005 | ||||||
|
Accumulated other comprehensive loss
|
(237 | ) | (212 | ) | ||||
|
Retained earnings (accumulated deficit)
|
(2,536 | ) | (2,575 | ) | ||||
| 236 | 219 | |||||||
|
Less — Shares held as treasury stock, at cost
|
240 | 240 | ||||||
|
Total Tenneco Inc. shareholders’ equity
|
(4 | ) | (21 | ) | ||||
|
Noncontrolling interests
|
39 | 32 | ||||||
|
Total equity
|
35 | 11 | ||||||
|
Total liabilities, redeemable noncontrolling interests and equity
|
$ | 3,167 | $ | 2,841 | ||||
The accompanying notes to consolidated financial statements are
an integral
part of these balance sheets.
part of these balance sheets.
79
Table of Contents
TENNECO
INC.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
Operating Activities
|
||||||||||||
|
Net income (loss)
|
$ | 63 | $ | (54 | ) | $ | (405 | ) | ||||
|
Adjustments to reconcile net income (loss) to cash provided by
operating activities —
|
||||||||||||
|
Depreciation and amortization of other intangibles
|
216 | 221 | 222 | |||||||||
|
Goodwill impairment charge
|
— | — | 114 | |||||||||
|
Deferred income taxes
|
4 | (24 | ) | 204 | ||||||||
|
Stock-based compensation
|
9 | 7 | 10 | |||||||||
|
Loss on sale of assets
|
3 | 9 | 10 | |||||||||
|
Changes in components of working capital —
|
||||||||||||
|
(Increase) decrease in receivables
|
(231 | ) | (8 | ) | 126 | |||||||
|
(Increase) decrease in inventories
|
(122 | ) | 101 | 19 | ||||||||
|
(Increase) decrease in prepayments and other current assets
|
20 | (55 | ) | 1 | ||||||||
|
Increase (decrease) in payables
|
238 | (2 | ) | (181 | ) | |||||||
|
Increase (decrease) in accrued taxes
|
12 | 10 | 4 | |||||||||
|
Increase (decrease) in accrued interest
|
(8 | ) | (1 | ) | — | |||||||
|
Increase (decrease) in other current liabilities
|
20 | 20 | — | |||||||||
|
Change in long-term assets
|
12 | 10 | 16 | |||||||||
|
Change in long-term liabilities
|
6 | 2 | 19 | |||||||||
|
Other
|
2 | 5 | 1 | |||||||||
|
Net cash provided by operating activities
|
244 | 241 | 160 | |||||||||
|
Investing Activities
|
||||||||||||
|
Proceeds from sale of assets
|
3 | 5 | 3 | |||||||||
|
Cash payments for plant, property, and equipment
|
(151 | ) | (120 | ) | (233 | ) | ||||||
|
Cash payments for software related intangible assets
|
(12 | ) | (6 | ) | (15 | ) | ||||||
|
Acquisition of businesses, net of cash acquired
|
— | 1 | (16 | ) | ||||||||
|
Other
|
3 | 1 | — | |||||||||
|
Net cash used by investing activities
|
(157 | ) | (119 | ) | (261 | ) | ||||||
|
Financing Activities
|
||||||||||||
|
Issuance of common shares
|
— | 188 | 2 | |||||||||
|
Issuance of long-term debt
|
880 | 6 | 1 | |||||||||
|
Debt issuance costs on long-term debt
|
(24 | ) | (8 | ) | (2 | ) | ||||||
|
Increase (decrease) in bank overdrafts
|
2 | (23 | ) | (1 | ) | |||||||
|
Retirement of long-term debt
|
(864 | ) | (22 | ) | (6 | ) | ||||||
|
Net increase (decrease) in revolver borrowings and short-term
debt excluding current maturities of long-term debt
|
(10 | ) | (218 | ) | 77 | |||||||
|
Distribution to noncontrolling interests partners
|
(14 | ) | (10 | ) | (13 | ) | ||||||
|
Net cash provided (used) by financing activities
|
(30 | ) | (87 | ) | 58 | |||||||
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
9 | 6 | (19 | ) | ||||||||
|
Increase (decrease) in cash and cash equivalents
|
66 | 41 | (62 | ) | ||||||||
|
Cash and cash equivalents, January 1
|
167 | 126 | 188 | |||||||||
|
Cash and cash equivalents, December 31 (Note)
|
$ | 233 | $ | 167 | $ | 126 | ||||||
|
Supplemental Cash Flow Information
|
||||||||||||
|
Cash paid during the year for interest
|
$ | 149 | $ | 131 | $ | 117 | ||||||
|
Cash paid during the year for income taxes (net of refunds)
|
53 | 38 | 62 | |||||||||
|
Non-cash Investing and Financing Activities
|
||||||||||||
|
Period ended balance of payables for plant, property, and
equipment
|
$ | 29 | $ | 26 | $ | 28 | ||||||
|
Assumption of debt from business acquisition
|
— | — | 10 | |||||||||
| 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 consolidated financial statements are
an integral
part of these statements of cash flows.
part of these statements of cash flows.
80
Table of Contents
TENNECO
INC.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
| (Millions Except Share Amounts) | ||||||||||||||||||||||||
|
Common Stock
|
||||||||||||||||||||||||
|
Balance January 1
|
60,789,739 | $ | 1 | 48,314,490 | $ | — | 47,892,532 | $ | — | |||||||||||||||
|
Issued
|
— | — | 12,000,000 | 1 | — | — | ||||||||||||||||||
|
Issued pursuant to benefit plans
|
142,643 | — | 283,195 | — | 238,982 | — | ||||||||||||||||||
|
Stock options exercised
|
609,378 | — | 192,054 | — | 182,976 | — | ||||||||||||||||||
|
Balance December 31
|
61,541,760 | 1 | 60,789,739 | 1 | 48,314,490 | — | ||||||||||||||||||
|
Premium on Common Stock and Other Capital Surplus
|
||||||||||||||||||||||||
|
Balance January 1
|
3,005 | 2,809 | 2,800 | |||||||||||||||||||||
|
Purchase of additional noncontrolling equity interest
|
(11 | ) | — | — | ||||||||||||||||||||
|
Premium on common stock issued
|
— | 188 | — | |||||||||||||||||||||
|
Premium on common stock issued pursuant to benefit plans
|
14 | 8 | 9 | |||||||||||||||||||||
|
Balance December 31
|
3,008 | 3,005 | 2,809 | |||||||||||||||||||||
|
Accumulated Other Comprehensive Loss
|
||||||||||||||||||||||||
|
Balance January 1
|
(212 | ) | (318 | ) | (73 | ) | ||||||||||||||||||
|
Other comprehensive income (loss)
|
(25 | ) | 106 | (245 | ) | |||||||||||||||||||
|
Balance December 31
|
(237 | ) | (212 | ) | (318 | ) | ||||||||||||||||||
|
Retained Earnings (Accumulated Deficit)
|
||||||||||||||||||||||||
|
Balance January 1
|
(2,575 | ) | (2,502 | ) | (2,087 | ) | ||||||||||||||||||
|
Net income (loss) attributable to Tenneco Inc.
|
39 | (73 | ) | (415 | ) | |||||||||||||||||||
|
Balance December 31
|
(2,536 | ) | (2,575 | ) | (2,502 | ) | ||||||||||||||||||
|
Less — Common Stock Held as Treasury Stock, at
Cost
|
||||||||||||||||||||||||
|
Balance January 1 and December 31
|
1,294,692 | 240 | 1,294,692 | 240 | 1,294,692 | 240 | ||||||||||||||||||
|
Total Tenneco Inc. shareholders’ equity
|
$ | (4 | ) | $ | (21 | ) | $ | (251 | ) | |||||||||||||||
|
Noncontrolling interests:
|
||||||||||||||||||||||||
|
Balance January 1
|
32 | 24 | 25 | |||||||||||||||||||||
|
Net income attributable to noncontrolling interests
|
16 | 13 | 6 | |||||||||||||||||||||
|
Sale of twenty percent equity interest to Tenneco Inc.
|
(4 | ) | — | — | ||||||||||||||||||||
|
Other comprehensive income (loss)
|
3 | — | — | |||||||||||||||||||||
|
Dividends declared
|
(8 | ) | (5 | ) | (7 | ) | ||||||||||||||||||
|
Balance December 31
|
$ | 39 | $ | 32 | $ | 24 | ||||||||||||||||||
|
Total equity
|
$ | 35 | $ | 11 | $ | (227 | ) | |||||||||||||||||
The accompanying notes to consolidated financial statements are
an integral
part of these statements of changes in shareholders’ equity.
part of these statements of changes in shareholders’ equity.
81
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TENNECO
INC.
| Year Ended December 31, 2010 | ||||||||||||||||||||||||
| Tenneco Inc. | Noncontrolling interests | Total | ||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
Accumulated
|
||||||||||||||||||||||
|
Other
|
Other
|
Other
|
||||||||||||||||||||||
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
|||||||||||||||||||
|
Income
|
Income
|
Income
|
Income
|
Income
|
Income
|
|||||||||||||||||||
| (Loss) | (Loss) | (Loss) | (Loss) | (Loss) | (Loss) | |||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||
|
Net Income
|
$ | 39 | $ | 24 | $ | 63 | ||||||||||||||||||
|
Accumulated Other Comprehensive Income (Loss)
|
||||||||||||||||||||||||
|
Cumulative Translation Adjustment
|
||||||||||||||||||||||||
|
Balance January 1
|
$ | 37 | $ | — | $ | 37 | ||||||||||||||||||
|
Translation of foreign currency statements
|
(29 | ) | (29 | ) | 5 | 5 | (24 | ) | (24 | ) | ||||||||||||||
|
Balance December 31
|
8 | 5 | 13 | |||||||||||||||||||||
|
Additional Liability for Pension and Postretirement
Benefits
|
||||||||||||||||||||||||
|
Balance January 1
|
(249 | ) | — | (249 | ) | |||||||||||||||||||
|
Additional Liability for Pension and Postretirement benefits,
net of tax
|
(1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||||||||||
|
Balance December 31
|
(250 | ) | (250 | ) | ||||||||||||||||||||
|
Balance December 31
|
$ | (242 | ) | $ | 5 | $ | (237 | ) | ||||||||||||||||
|
Other comprehensive income (loss)
|
(30 | ) | 5 | (25 | ) | |||||||||||||||||||
|
Comprehensive Income
|
$ | 9 | $ | 29 | $ | 38 | ||||||||||||||||||
The accompanying notes to consolidated financial statements are
an integral
part of these statements of comprehensive income (loss).
part of these statements of comprehensive income (loss).
82
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TENNECO
INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Year Ended December 31, 2009 | ||||||||||||||||||||||||
| Tenneco Inc. | Noncontrolling interests | Total | ||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
Accumulated
|
||||||||||||||||||||||
|
Other
|
Other
|
Other
|
||||||||||||||||||||||
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
|||||||||||||||||||
|
Income
|
Income
|
Income
|
Income
|
Income
|
Income
|
|||||||||||||||||||
| (Loss) | (Loss) | (Loss) | (Loss) | (Loss) | (Loss) | |||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||
|
Net Income (Loss)
|
$ | (73 | ) | $ | 19 | $ | (54 | ) | ||||||||||||||||
|
Accumulated Other Comprehensive Income (Loss)
|
||||||||||||||||||||||||
|
Cumulative Translation Adjustment
|
||||||||||||||||||||||||
|
Balance January 1
|
$ | (42 | ) | $ | — | $ | (42 | ) | ||||||||||||||||
|
Translation of foreign currency statements
|
79 | 79 | — | — | 79 | 79 | ||||||||||||||||||
|
Balance December 31
|
37 | — | 37 | |||||||||||||||||||||
|
Additional Liability for Pension and Postretirement
Benefits
|
||||||||||||||||||||||||
|
Balance January 1
|
(276 | ) | — | (276 | ) | |||||||||||||||||||
|
Additional liability for pension and postretirement benefits,
net of tax of $1 million
|
27 | 27 | 27 | 27 | ||||||||||||||||||||
|
Balance December 31
|
(249 | ) | (249 | ) | ||||||||||||||||||||
|
Balance December 31
|
$ | (212 | ) | $ | — | $ | (212 | ) | ||||||||||||||||
|
Other comprehensive income (loss)
|
106 | — | 106 | |||||||||||||||||||||
|
Comprehensive Income (Loss)
|
$ | 33 | $ | 19 | $ | 52 | ||||||||||||||||||
The accompanying notes to consolidated financial statements are
an integral
part of these statements of comprehensive income (loss).
83
Table of Contents
TENNECO
INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Year Ended December 31, 2008 | ||||||||||||||||||||||||
| Tenneco Inc. | Noncontrolling interests | Total | ||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
Accumulated
|
||||||||||||||||||||||
|
Other
|
Other
|
Other
|
||||||||||||||||||||||
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
Comprehensive
|
|||||||||||||||||||
|
Income
|
Income
|
Income
|
Income
|
Income
|
Income
|
|||||||||||||||||||
| (Loss) | (Loss) | (Loss) | (Loss) | (Loss) | (Loss) | |||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||
|
Net Income (Loss)
|
$ | (415 | ) | $ | 10 | $ | (405 | ) | ||||||||||||||||
|
Accumulated Other Comprehensive Income (Loss)
|
||||||||||||||||||||||||
|
Cumulative Translation Adjustment
|
||||||||||||||||||||||||
|
Balance January 1
|
$ | 85 | $ | — | $ | 85 | ||||||||||||||||||
|
Translation of foreign currency statements
|
(127 | ) | (127 | ) | — | — | (127 | ) | (127 | ) | ||||||||||||||
|
Balance December 31
|
(42 | ) | — | (42 | ) | |||||||||||||||||||
|
Additional Liability for Pension and Postretirement
Benefits
|
||||||||||||||||||||||||
|
Balance January 1
|
(158 | ) | — | (158 | ) | |||||||||||||||||||
|
Additional liability for pension and postretirement benefits,
net of tax of $9 million
|
(118 | ) | (118 | ) | (118 | ) | (118 | ) | ||||||||||||||||
|
Balance December 31
|
(276 | ) | (276 | ) | ||||||||||||||||||||
|
Balance December 31
|
$ | (318 | ) | $ | — | $ | (318 | ) | ||||||||||||||||
|
Other comprehensive income (loss)
|
(245 | ) | — | (245 | ) | |||||||||||||||||||
|
Comprehensive Income (Loss)
|
$ | (660 | ) | $ | 10 | $ | (650 | ) | ||||||||||||||||
The accompanying notes to consolidated financial statements are
an integral
part of these statements of comprehensive income (loss).
part of these statements of comprehensive income (loss).
84
Table of Contents
TENNECO
INC.
| 1. | Summary of Accounting Policies |
Consolidation
and Presentation
Our consolidated financial statements include all majority-owned
subsidiaries. We carry investments in 20 percent to
50 percent owned companies in which the Company does not
have a controlling interest, as equity method investments, at
cost plus equity in undistributed earnings since the date of
acquisition and cumulative translation adjustments. We have
eliminated intercompany transactions. We have evaluated all
subsequent events through the date our financial statements were
issued.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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 consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. These
estimates include, among others allowances for doubtful
receivables, promotional and product returns, pension and
post-retirement benefit plans, income taxes, and contingencies.
These items are covered in more detail elsewhere in Note 1,
Note 7, Note 10, and Note 12 of the consolidated
financial statements of Tenneco Inc. Actual results could differ
from those estimates.
Redeemable
Noncontrolling Interests
On January 1, 2009, we adopted new accounting guidance on
the presentation and disclosure of noncontrolling interests in
our consolidated financial statements, which required us to
reclassify retrospectively for all periods presented,
noncontrolling ownership interests (formerly called minority
interests) from the mezzanine section of the balance sheet
between liabilities and equity to the equity section of the
balance sheet, and to change our presentation of net income
(loss) in the consolidated statements of cash flows to include
the portion of net income (loss) attributable to noncontrolling
ownership interests. We have noncontrolling interests in four
joint ventures with redemption features that could require us to
purchase the noncontrolling interests at fair value in the event
of a change in control of Tenneco Inc. or certain of our
subsidiaries. Additionally, we hold a noncontrolling interest in
a joint venture which requires us to purchase the noncontrolling
interest at fair value in the event of default or under certain
other circumstances. We do not believe that it is probable that
the redemption features in any of these joint venture agreements
will be triggered. However, the redemption of these shares is
not solely within our control. Accordingly, the related
noncontrolling interests are presented as “Redeemable
noncontrolling interests” in the mezzanine section of our
consolidated balance sheets. We have also expanded our financial
statement presentation and disclosure of noncontrolling
ownership interests on our consolidated statements of income
(loss), consolidated statements of comprehensive income (loss)
and consolidated statements of changes in shareholders’
equity in accordance with these new disclosure requirements.
The following is a rollforward of activity in our redeemable
noncontrolling interests for the years ending December 31,
2010, 2009 and 2008, respectively:
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
Balance January 1
|
$ | 7 | $ | 7 | $ | 6 | ||||||
|
Net income attributable to redeemable noncontrolling interests
|
8 | 5 | 4 | |||||||||
|
Other comprehensive income (loss)
|
2 | — | — | |||||||||
|
Dividends declared
|
(5 | ) | (5 | ) | (3 | ) | ||||||
|
Balance December 31
|
$ | 12 | $ | 7 | $ | 7 | ||||||
85
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Inventories
At December 31, 2010 and 2009, inventory by major
classification was as follows:
| 2010 | 2009 | |||||||
| (Millions) | ||||||||
|
Finished goods
|
$ | 222 | $ | 175 | ||||
|
Work in process
|
164 | 116 | ||||||
|
Raw materials
|
118 | 95 | ||||||
|
Materials and supplies
|
43 | 42 | ||||||
| $ | 547 | $ | 428 | |||||
Our inventories are stated at the lower of cost or market value
using the
first-in,
first-out (“FIFO”) or average cost methods.
Goodwill
and Intangibles, net
We evaluate goodwill for impairment in the fourth quarter of
each year, or more frequently if events indicate it is
warranted. The goodwill impairment test consists of a two-step
process. In step one, we compare the estimated fair value of our
reporting units with goodwill to the carrying value of the
unit’s assets and liabilities to determine if impairment
exists within the recorded balance of goodwill. We estimate the
fair value of each reporting unit using the income approach
which is based on the present value of estimated future cash
flows. The income approach is dependent on a number of factors,
including estimates of market trends, forecasted revenues and
expenses, capital expenditures, weighted average cost of capital
and other variables. A separate discount rate derived by a
combination of published sources, internal estimates and
weighted based on our debt and equity structure, was used to
calculate the discounted cash flows for each of our reporting
units. These estimates are based on assumptions that we believe
to be reasonable, but which are inherently uncertain and outside
of the control of management. If the carrying value of the
reporting unit is higher than its fair value, there is an
indication that impairment may exist which requires step two to
be performed to measure the amount of the impairment loss. The
amount of impairment is determined by comparing the implied fair
value of a reporting unit’s goodwill to its carrying value.
In the fourth quarter of 2009, the estimated fair value of each
of our reporting units significantly exceeded the carrying value
of its assets and liabilities. In the fourth quarter of 2010,
the estimated fair value of all of our reporting units, except
for our Australian reporting unit, significantly exceeded the
carrying value of its assets and liabilities. Our Australian
reporting unit had a goodwill balance of $11 million with
an estimated fair value in excess of its net carrying value of
one percent as of the testing date. Although our Australian
operations support the value of goodwill reported as tested in
the fourth quarter of 2010, it is possible that assumptions and
estimates could change in future periods and result in a future
impairment of our Australian reporting unit.
86
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The changes in the net carrying amount of goodwill for the years
ended December 31, 2010 and 2009 were as follows:
| Year Ended December 31, 2010 | ||||||||||||||||
|
Europe,
|
||||||||||||||||
|
South
|
||||||||||||||||
|
North
|
America
|
Asia
|
||||||||||||||
| America | and India | Pacific | Total | |||||||||||||
| (Millions) | ||||||||||||||||
|
Balance as January 1
|
||||||||||||||||
|
Goodwill
|
$ | 330 | $ | 87 | $ | 10 | $ | 427 | ||||||||
|
Accumulated impairment losses
|
(306 | ) | (32 | ) | — | (338 | ) | |||||||||
| 24 | 55 | 10 | 89 | |||||||||||||
|
Translation adjustments
|
— | (1 | ) | 1 | — | |||||||||||
|
Balance at December 31
|
||||||||||||||||
|
Goodwill
|
330 | 85 | 12 | 427 | ||||||||||||
|
Accumulated impairment losses
|
(306 | ) | (31 | ) | (1 | ) | (338 | ) | ||||||||
| $ | 24 | $ | 54 | $ | 11 | $ | 89 | |||||||||
| Year Ended December 31, 2009 | ||||||||||||||||
|
Europe,
|
||||||||||||||||
|
South
|
||||||||||||||||
|
North
|
America
|
Asia
|
||||||||||||||
| America | and India | Pacific | Total | |||||||||||||
| (Millions) | ||||||||||||||||
|
Balance as January 1
|
||||||||||||||||
|
Goodwill
|
$ | 330 | $ | 95 | $ | 8 | $ | 433 | ||||||||
|
Accumulated impairment losses
|
(306 | ) | (32 | ) | — | (338 | ) | |||||||||
| 24 | 63 | 8 | 95 | |||||||||||||
|
Acquisition of business opening balance sheet adjustments
|
— | (10 | ) | — | (10 | ) | ||||||||||
|
Translation adjustments
|
— | 2 | 2 | 4 | ||||||||||||
|
Balance at December 31
|
||||||||||||||||
|
Goodwill
|
330 | 87 | 10 | 427 | ||||||||||||
|
Accumulated impairment losses
|
(306 | ) | (32 | ) | — | (338 | ) | |||||||||
| $ | 24 | $ | 55 | $ | 10 | $ | 89 | |||||||||
We have capitalized certain intangible assets, primarily
technology rights, trademarks and patents, based on their
estimated fair value at the date we acquired them. We amortize
our finite useful life intangible assets on a straight-line
basis over periods ranging from 5 to 50 years. Amortization
of intangibles amounted to $2 million in each of 2010 and
2009 and $3 million in 2008, and is included in the
statements of income
87
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
caption “Depreciation and amortization of
intangibles.” The carrying amount and accumulated
amortization of our finite useful life intangible assets were as
follows:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
|
Gross Carrying
|
Accumulated
|
Gross Carrying
|
Accumulated
|
|||||||||||||
| Value | Amortization | Value | Amortization | |||||||||||||
| (Millions) | (Millions) | |||||||||||||||
|
Customer contract
|
$ | 8 | $ | (2 | ) | $ | 8 | $ | (2 | ) | ||||||
|
Patents
|
5 | (4 | ) | 4 | (3 | ) | ||||||||||
|
Technology rights
|
21 | (5 | ) | 22 | (5 | ) | ||||||||||
|
Other
|
6 | (1 | ) | 2 | — | |||||||||||
|
Total
|
$ | 40 | $ | (12 | ) | $ | 36 | $ | (10 | ) | ||||||
Estimated amortization of intangible assets over the next five
years is expected to be $2 million in 2011 and 2012,
$4 million in 2013 and 2014 and $3 million in 2015. We
have capitalized indefinite life intangibles of $4 million
relating to purchased trademarks from our Marzocchi acquisition
in 2007.
Plant,
Property, and Equipment, at Cost
At December 31, 2010 and 2009, plant, property, and
equipment, at cost, by major category were as follows:
| 2010 | 2009 | |||||||
| (Millions) | ||||||||
|
Land, buildings, and improvements
|
$ | 524 | $ | 516 | ||||
|
Machinery and equipment
|
2,406 | 2,431 | ||||||
|
Other, including construction in progress
|
179 | 152 | ||||||
| $ | 3,109 | $ | 3,099 | |||||
We depreciate these properties excluding land on a straight-line
basis over the estimated useful lives of the assets. Useful
lives range from 10 to 50 years for buildings and
improvements and from three to 25 years for machinery and
equipment.
Notes and
Accounts Receivable and Allowance for Doubtful
Accounts
Receivables consist of amounts billed and currently due from
customers and unbilled pre-production design and development
costs. Short and long-term accounts receivable outstanding were
$823 million and $602 million at December 31,
2010 and 2009, respectively. The allowance for doubtful accounts
on short-term and long-term accounts receivable was
$20 million and $22 million at December 31, 2010
and 2009, respectively. Short and long-term notes receivable
outstanding were $2 million and $3 million at
December 31, 2010 and 2009, respectively. The allowance for
doubtful accounts on short-term and long-term notes receivable
was zero and $3 million at December 31, 2010 and 2009,
respectively.
Pre-production
Design and Development and Tooling Assets
We expense pre-production design and development costs as
incurred unless we have a contractual guarantee for
reimbursement from the original equipment customer. Unbilled
pre-production design and development costs recorded in
prepayments and other and long-term receivables was
$15 million and $14 million on December 31, 2010
and 2009, respectively. In addition, plant, property and
equipment included $38 million and $49 million at
December 31, 2010 and 2009, respectively, for original
equipment tools and
88
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
dies that we own, and prepayments and other included
$46 million and $50 million at December 31, 2010
and 2009, respectively, for in-process tools and dies that we
are building for our original equipment customers.
Internal
Use Software Assets
We capitalize certain costs related to the purchase and
development of software that we use in our business operations.
We amortize the costs attributable to these software systems
over their estimated useful lives, ranging from 3 to
12 years, based on various factors such as the effects of
obsolescence, technology, and other economic factors.
Capitalized software development costs, net of amortization,
were $53 million and $60 million at December 31,
2010 and 2009, respectively, and are recorded in other long-term
assets. Amortization of software development costs was
approximately $18 million, $22 million and
$24 million for the years ended December 31, 2010,
2009 and 2008, respectively, and is included in the statements
of income (loss) caption “Depreciation and amortization of
intangibles.” Additions to capitalized software development
costs, including payroll and payroll-related costs for those
employees directly associated with developing and obtaining the
internal use software, are classified as investing activities in
the statements of cash flows.
Income
Taxes
We evaluate our deferred income taxes quarterly to determine if
valuation allowances are required or should be adjusted.
U.S. GAAP requires that companies assess whether valuation
allowances should be established against their deferred tax
assets based on consideration of all available evidence, both
positive and negative, using a “more likely than not”
standard. This assessment considers, among other matters, the
nature, frequency and amount of recent losses, the duration of
statutory carryforward periods, and tax planning strategies. In
making such judgments, significant weight is given to evidence
that can be objectively verified.
Valuation allowances have been established for deferred tax
assets based on a “more likely than not” threshold.
The ability to realize deferred tax assets depends on our
ability to generate sufficient taxable income within the
carryforward periods provided for in the tax law for each tax
jurisdiction. We have considered the following possible sources
of taxable income when assessing the realization of our deferred
tax assets:
| • | Future reversals of existing taxable temporary differences; | |
| • | Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards; and | |
| • | Tax-planning strategies. |
In 2010, we reported income tax expense of $69 million. The
tax expense recorded differs from the expense that would be
recorded using a U.S. Federal statutory rate of
35 percent due to the impact of not benefiting tax losses
in the U.S. and certain foreign jurisdictions, and charges
primarily related to adjustments to prior year income taxes and
tax contingencies which more than offset a favorable mix of tax
rates in the jurisdictions we pay taxes. During 2010, we
recorded a $52 million reduction in our valuation allowance
related to the utilization of U.S. NOLs resulting from a
reorganization of our European operations. In evaluating the
requirements to record a valuation allowance, accounting
standards do not permit us to consider an economic recovery in
the U.S. or new business we have won. Consequently,
beginning in 2008, given our historical losses, we concluded
that our ability to fully utilize our NOLs was limited due to
projecting the continuation of the negative economic environment
and the impact of the negative operating environment on our tax
planning strategies. As a result of our tax planning strategies
which have not yet been implemented and which do not depend upon
generating future taxable income, we carry deferred tax assets
in the U.S. of $90 million relating to the expected
utilization of those NOLs. The federal NOLs expire beginning in
tax years ending in 2020 through 2029. The state NOLs expire in
various tax years through 2029.
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INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
If our operating performance improves on a sustained basis, our
conclusion regarding the need for a valuation allowance could
change, resulting in the reversal of some or all of the
valuation allowance in the future. The charge to establish the
U.S. valuation allowance also includes items related to the
losses allocable to certain state jurisdictions where it was
determined that tax attributes related to those jurisdictions
were potentially not realizable.
We are required to record a valuation allowance against deferred
tax assets generated by taxable losses in each period in the
U.S. as well as in other foreign jurisdictions. Our future
provision for income taxes will include no tax benefit with
respect to losses incurred and no tax expense with respect to
income generated in these jurisdictions until the respective
valuation allowance is eliminated. This will cause variability
in our effective tax rate.
Revenue
Recognition
We recognize revenue for sales to our original equipment and
aftermarket customers when title and risk of loss passes to the
customers under the terms of our arrangements with those
customers, which is usually at the time of shipment from our
plants or distribution centers. Generally, in connection with
the sale of exhaust systems to certain original equipment
manufacturers, we purchase catalytic converters and diesel
particulate filters or components thereof including precious
metals (“substrates”) on behalf of our customers which
are used in the assembled system. These substrates are included
in our inventory and “passed through” to the customer
at our cost, plus a small margin, since we take title to the
inventory and are responsible for both the delivery and quality
of the finished product. Revenues recognized for substrate sales
were $1,297 million, $966 million and
$1,492 million in 2010, 2009 and 2008, respectively. 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.
Certain taxes assessed by governmental authorities on revenue
producing transactions, such as value added taxes, are excluded
from revenue and recorded on a net basis. Shipping and handling
costs billed to customers are included in revenues and the
related costs are included in cost of sales in our Statements of
Income (Loss).
Warranty
Reserves
Where we have offered product warranty, we also provide for
warranty costs. 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
and upon specific warranty issues as they arise. The warranty
terms vary but range from one year up to limited lifetime
warranties on some of our premium aftermarket products. We
actively study trends of our warranty claims and take action to
improve product quality and minimize warranty claims. 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 consolidated financial statements.
Earnings
Per Share
We compute basic earnings per share by dividing income available
to common shareholders by the weighted-average number of common
shares outstanding. The computation of diluted earnings per
share is similar to the computation of basic earnings per share,
except that we adjust the weighted-average number of shares
outstanding to include estimates of additional shares that would
be issued if potentially dilutive common shares had been issued.
In addition, we adjust income available to common shareholders
to include any changes in income or loss that would result from
the assumed issuance of the dilutive common shares. Due to the
net losses for the years ended December 31, 2009 and 2008,
respectively, the calculation of diluted
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
earnings per share does not include the dilutive effect from
shares of restricted stock and stock options. See Note 2 to
the consolidated financial statements of Tenneco Inc.
Engineering,
Research and Development
We expense engineering, research, and development costs as they
are incurred. Engineering, research, and development expenses
were $117 million for 2010, $97 million for 2009 and
$127 million for 2008, net of reimbursements from our
customers. Our customers reimburse us for engineering, research,
and development costs on some platforms when we prepare
prototypes and incur costs before platform awards. Our
engineering, research, and development expense for 2010, 2009,
and 2008 has been reduced by $110 million,
$104 million and $120 million, respectively, for these
reimbursements.
Advertising
and Promotion Expenses
We expense advertising and promotion expenses as they are
incurred. Advertising and promotion expenses were
$59 million, $50 million, and $49 million for the
years ended December 31, 2010, 2009, and 2008, respectively.
Foreign
Currency Translation
We translate the consolidated financial statements of foreign
subsidiaries into U.S. dollars using the exchange rate at
each balance sheet date for assets and liabilities and a
weighted-average exchange rate for revenues and expenses in each
period. We record translation adjustments for those subsidiaries
whose local currency is their functional currency as a component
of accumulated other comprehensive loss in shareholders’
equity. We recognize transaction gains and losses arising from
fluctuations in currency exchange rates on transactions
denominated in currencies other than the functional currency in
earnings as incurred, except for those transactions which hedge
purchase commitments and for those intercompany balances which
are designated as long-term investments. Our results include
foreign currency transaction losses of less than $1 million
in 2010, $4 million in 2009, and $11 million in 2008,
respectively.
Risk
Management Activities
We use derivative financial instruments, principally foreign
currency forward purchase and sales contracts with terms of less
than one year, to hedge our exposure to changes in foreign
currency exchange rates. Our primary exposure to changes in
foreign currency rates results from intercompany loans made
between affiliates to minimize the need for borrowings from
third parties. Additionally, we enter into foreign currency
forward purchase and sale contracts to mitigate our exposure to
changes in exchange rates on certain intercompany and
third-party trade receivables and payables. We manage
counter-party credit risk by entering into derivative financial
instruments with major financial institutions that can be
expected to fully perform under the terms of such agreements. We
do not enter into derivative financial instruments for
speculative purposes. The fair value of our foreign currency
forward contracts is based on an internally developed model
which incorporates observable inputs including quoted spot
rates, forward exchange rates and discounted future expected
cash flows utilizing market interest rates with similar quality
and maturity characteristics. We record the change in fair value
of these foreign exchange forward contracts as part of currency
gains (losses) within cost of sales in the consolidated
statements of income (loss). The fair value of foreign exchange
forward contracts are recorded in prepayments and other current
assets or other current liabilities in the consolidated balance
sheet.
Recent
Accounting Pronouncements
In July 2010, the Financial Accounting Standard Board (FASB)
issued new accounting guidance on the disclosure of a
company’s credit quality of financing receivables and the
allowance for credit losses. Additional disclosure is required
for financing receivables on a disaggregated basis including a
rollforward
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INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
schedule of the allowance for credit losses on a portfolio
segment basis, the recorded investment in financing receivables
for each portfolio segment, the nonaccrual status of financing
receivables by class of financing receivables and the amount of
impaired financing receivables by class of financing
receivables. In addition, disclosures are required relating to
the credit quality indicators, past due information and
modifications made to an entity’s financing receivables.
These new disclosure requirements are effective for interim and
annual reporting periods ending on or after December 15,
2010. We have incorporated these new disclosure requirements in
Footnote 1 of our notes to consolidated financial statements.
In June 2009, the FASB issued new accounting guidance which
changes the accounting for transfers of financial assets, by
eliminating the concept of a qualifying special purpose entity
(QSPE), clarifying and amending the derecognition criteria for a
transfer to be accounted for as a sale, amending and clarifying
the unit of account eligible for sale accounting and requiring
that a transferor initially measure at fair value and recognize
all assets obtained and liabilities incurred as a result of a
transfer of a financial asset or group of financial assets
accounted for as a sale. Additionally, all existing QSPE’s
must be evaluated for consolidation by reporting entities in
accordance with the applicable consolidation guidance. The new
accounting guidance requires additional disclosures about a
transferor’s continuing involvement with transfers of
financial assets accounted for as a sale, the risks inherent in
the transferred financial assets that have been retained, and
the nature and financial effect of restrictions on the
transferor’s assets that continue to be reported in the
statement of financial position. The new accounting guidance was
effective for a reporting entity’s first annual reporting
period that begins after November 15, 2009, and for interim
and annual reporting periods thereafter. We have adopted this
new accounting guidance on January 1, 2010. Prior to the
adoption of this new accounting guidance, our securitized
accounts receivable programs qualified for sales accounting
treatment. The discount fees charged by the factor banks were
recorded as a loss on sale of receivables in our consolidated
statements of income (loss). Based on the new accounting rules,
effective January 1, 2010, we account for our
North American securitization programs as a secured
borrowing as we no longer meet the conditions required for sales
accounting treatment. Our European securitization programs
continue to qualify for sales accounting treatment under these
new accounting rules. We have disclosed the impact of this
accounting rule change on our consolidated financial statements
and added additional disclosures as required under this new
accounting guidance in Footnote 5 of our notes to consolidated
financial statements.
In June 2009, the FASB issued new accounting guidance which
changes the criterion relating to the consolidation of variable
interest entities (VIE) and amends the guidance governing the
determination of whether an enterprise is the primary
beneficiary of a VIE by requiring a qualitative rather than
quantitative analysis. The new accounting guidance also requires
continuous reassessments of whether an enterprise is the primary
beneficiary of a VIE and enhanced disclosures about an
entity’s involvement with a VIE. The new accounting
guidance is effective for a reporting entity’s first annual
reporting period that begins after November 15, 2009, and
for interim and annual reporting periods thereafter. The
adoption of this new accounting guidance on January 1,
2010, did not have any impact on our consolidated financial
statements.
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INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 2. | Earnings (Loss) Per Share |
Earnings (loss) per share of common stock outstanding were
computed as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions Except Share and Per Share Amounts) | ||||||||||||
|
Basic earnings (loss) per share —
|
||||||||||||
|
Net earnings (loss) attributable to Tenneco Inc.
|
$ | 39 | $ | (73 | ) | $ | (415 | ) | ||||
|
Weighted average shares of common stock outstanding
|
59,208,103 | 48,572,463 | 46,406,095 | |||||||||
|
Earnings (loss) per average share of common stock
|
$ | 0.65 | $ | (1.50 | ) | $ | (8.95 | ) | ||||
|
Diluted earnings (loss) per share —
|
||||||||||||
|
Net earnings (loss) attributable to Tenneco Inc.
|
$ | 39 | $ | (73 | ) | $ | (415 | ) | ||||
|
Weighted average shares of common stock outstanding
|
59,208,103 | 48,572,463 | 46,406,095 | |||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Restricted stock
|
441,561 | — | — | |||||||||
|
Stock options
|
1,349,030 | — | — | |||||||||
|
Weighted average shares of common stock outstanding including
dilutive securities
|
60,998,694 | 48,572,463 | 46,406,095 | |||||||||
|
Earnings (loss) per average share of common stock
|
$ | 0.63 | $ | (1.50 | ) | $ | (8.95 | ) | ||||
Options to purchase 612,832 shares of common stock were
outstanding as of December 31, 2010, but not included in
the computation of diluted earnings per share, because the
options were anti-dilutive. As a result of the net loss in 2009
and 2008, the calculation of diluted loss per share excludes the
dilutive effect of options and restricted stock.
| 3. | Acquisitions |
In January 2010, we purchased an additional 20 percent
equity interest in our Tenneco Tongtai (Dalian) Exhaust System
Co., Ltd. joint venture investment in China for $15 million
in cash. As a result of this purchase, our equity ownership
percentage of this joint venture investment increased to
80 percent from 60 percent.
| 4. | Restructuring and Other Charges |
Over the past several years, we have adopted plans to
restructure portions of our operations. These plans were
approved by our Board of Directors and were designed to reduce
operational and administrative overhead costs throughout the
business. Our Board of Directors approved a restructuring
project in 2001, known as Project Genesis, which was designed to
lower our fixed costs, relocate capacity, reduce our work force,
improve efficiency and utilization, and better optimize our
global footprint. We have subsequently engaged in various other
restructuring projects related to Project Genesis. We incurred
$40 million in restructuring and related costs during 2008,
of which $17 million was recorded in cost of sales and
$23 million was recorded in selling, general,
administrative and engineering expense. In 2009, we incurred
$21 million in restructuring and related costs, of which
$16 million was recorded in cost of sales, $1 million
was recorded in selling, general, administrative and engineering
expense and $4 million was recorded in depreciation and
amortization expense. In 2010, we incurred $19 million in
restructuring and related costs, of which $14 million was
recorded in cost of sales and $5 million was recorded in
depreciation and amortization expense.
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amounts related to activities that are part of our restructuring
plans are as follows:
|
December 31,
|
December 31,
|
|||||||||||||||||||
|
2009
|
2010
|
Impact of
|
2010
|
|||||||||||||||||
|
Restructuring
|
Cash
|
Exchange
|
Reserve
|
Restructuring
|
||||||||||||||||
| Reserve | Payments | Rates | Adjustments | Reserve | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Severance
|
$ | 15 | (7 | ) | — | (1 | ) | $ | 7 | |||||||||||
Under the terms of our amended and extended senior credit
agreement that took effect on June 3, 2010, we are allowed
to exclude $60 million of cash charges and expenses, before
taxes, related to cost reduction initiatives incurred after
June 3, 2010 from the calculation of the financial covenant
ratios required under our senior credit facility. As of
December 31, 2010, we have excluded $9 million in
cumulative allowable charges relating to restructuring
initiatives against the $60 million available under the
terms of the senior credit facility.
On September 22, 2009, we announced that we will be closing
our original equipment ride control plant in Cozad, Nebraska. We
estimate this closing will generate $8 million in
annualized cost savings once completed, incremental to the
$58 million of savings related to our October 2008
restructuring announcement. We originally planned to have
completed the closing of this facility by the end of 2010,
however, as a result of the faster than expected increase in
light vehicle production in North America and to better optimize
the transfer of some of the manufacturing activities, we plan to
continue certain production lines through the first half of
2011. We plan to hire at other facilities as we move the
production from Cozad to those facilities, resulting in a net
decrease of approximately 60 positions. During 2009 we recorded
$11 million of restructuring and related expenses related
to this initiative. For the twelve months ended
December 31, 2010 we recorded $10 million of
restructuring and related expenses related to this initiative.
At December 31, 2010, our restructuring reserve in Europe
was $1 million which relates to a number of restructuring
activities at certain European facilities.
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INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 5. | Long-Term Debt, Short-Term Debt, and Financing Arrangements |
Long-Term
Debt
A summary of our long-term debt obligations at December 31,
2010 and 2009, is set forth in the following table:
| 2010 | 2009 | |||||||
| (Millions) | ||||||||
|
Tenneco Inc. —
|
||||||||
|
Revolver borrowings due 2014, average effective interest rate
5.4% in 2010 and 5.6% in 2009
|
$ | — | $ | — | ||||
|
Senior Term Loans due 2012 and 2016, average effective interest
rate 5.1% in 2010 and 5.7% in 2009
|
149 | 133 | ||||||
|
7
3
/
4
% Senior
Notes due 2018
|
225 | — | ||||||
|
10
1
/
4
% Senior
Secured Notes due 2013, including unamortized premium
|
— | 249 | ||||||
|
6
7
/
8
% Senior
Notes due 2020
|
500 | — | ||||||
|
8
5
/
8
% Senior
Subordinated Notes due 2014(a)
|
20 | 500 | ||||||
|
8
1
/
8
% Senior
Notes due 2015
|
250 | 250 | ||||||
|
Debentures due 2012 through 2025, average effective interest
rate 8.4% in 2010 and 2009
|
1 | 1 | ||||||
|
Customer Notes due 2013, average effective interest rate 8.0% in
2010 and 2009
|
4 | 6 | ||||||
|
Other subsidiaries —
|
||||||||
|
Notes due 2011 through 2025, average effective interest rate
3.0% in 2010 and 4.0% in 2009
|
13 | 12 | ||||||
| 1,162 | 1,151 | |||||||
|
Less — maturities classified as current
|
2 | 6 | ||||||
|
Total long-term debt
|
$ | 1,160 | $ | 1,145 | ||||
| (a) | On January 7, 2010, we redeemed the remaining $20 million 8 5 / 8 percent senior subordinated notes by increasing our revolver borrowings which are classified as long-term debt. Accordingly, we have classified the $20 million as long-term debt. |
The aggregate maturities and sinking fund requirements
applicable to the long-term debt outstanding at
December 31, 2010, are $24 million, $5 million,
$4 million, $2 million and $252 million for 2011,
2012, 2013, 2014 and 2015, respectively. We have included in the
2011 payments, the redemption of all of the outstanding
8
5
/
8
percent senior subordinated notes that were not previously
tendered.
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Short-Term
Debt
Our short-term debt includes the current portion of long-term
obligations and borrowings by foreign subsidiaries. Information
regarding our short-term debt as of and for the years ended
December 31, 2010 and 2009 is as follows:
| 2010 | 2009 | |||||||
| (Millions) | ||||||||
|
Maturities classified as current
|
$ | 2 | $ | 6 | ||||
|
Notes payable
|
61 | 69 | ||||||
|
Total short-term debt
|
$ | 63 | $ | 75 | ||||
| 2010 | 2009 | |||||||
| Notes Payable(a) | Notes Payable(a) | |||||||
| (Dollars in Millions) | ||||||||
|
Outstanding borrowings at end of year
|
$ | 61 | $ | 69 | ||||
|
Weighted average interest rate on outstanding borrowings at end
of year(b)
|
7.8 | % | 6.9 | % | ||||
|
Approximate maximum month-end outstanding borrowings during year
|
$ | 201 | $ | 71 | ||||
|
Approximate average month-end outstanding borrowings during year
|
$ | 109 | $ | 60 | ||||
|
Weighted average interest rate on approximate average month-end
outstanding borrowings during year(b)
|
5.5 | % | 7.8 | % | ||||
| (a) | Includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements. | |
| (b) | This calculation does not include the commitment fees to be paid on the unused revolving credit facility balances which are recorded as interest expense for accounting purposes. |
Financing
Arrangements
| Committed Credit Facilities(a) as of December 31, 2010 | ||||||||||||||||||||
|
Letters of
|
||||||||||||||||||||
| Term | Commitments | Borrowings | Credit(b) | Available | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Tenneco Inc. revolving credit agreement
|
2014 | 622 | — | — | 622 | |||||||||||||||
|
Tenneco Inc.
tranche B-1
letter of credit/revolving loan agreement
|
2014 | 130 | — | 53 | 77 | |||||||||||||||
|
Tenneco Inc. Senior Term Loans
|
2016 | 149 | 149 | — | — | |||||||||||||||
|
Subsidiaries’ credit agreements
|
2011-2030 | 84 | 72 | — | 12 | |||||||||||||||
| $ | 985 | $ | 221 | $ | 53 | $ | 711 | |||||||||||||
| (a) | We generally are required to pay commitment fees on the unused portion of the total commitment. | |
| (b) | Letters of credit reduce the available borrowings under the tranche B-1 letter of credit/revolving loan agreement. |
Overview.
Our financing arrangements are
primarily provided by a committed senior secured financing
arrangement with a syndicate of banks and other financial
institutions. The arrangement is secured by
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
substantially all our domestic assets and pledges of up to
66 percent of the stock of certain first-tier foreign
subsidiaries, as well as guarantees by our material domestic
subsidiaries.
On June 3, 2010 we completed an amendment and extension of
our senior secured credit facility by extending the term of our
revolving credit facility and replacing our $128 million
term loan A with a larger and longer maturity term loan B
facility. As a result of the amendment and extension, as of
December 31, 2010, the senior credit facility provides us
with a total revolving credit facility size of $622 million
until March 16, 2012, when commitments of $66 million
will expire. After March 16, 2012, the extended revolving
credit facility will provide $556 million of revolving
credit and will mature on May 31, 2014. The extended
facility will mature earlier on December 15, 2013, if our
$130 million
tranche B-1
letter of credit/revolving loan facility is not refinanced by
that date. Prior to maturity, funds may be borrowed, repaid and
re-borrowed under the two revolving credit facilities without
premium or penalty. The leverage ratio (consolidated
indebtedness net of cash divided by consolidated EBITDA as
defined in the senior credit facility agreement) was decreased
from 5.00 to 4.50 for the second quarter of 2010; from 4.75 to
4.25 for the third quarter of 2010; and from 4.50 to 4.25 for
the fourth quarter of 2010 as a result of the June 3, 2010
amendment.
As of December 31, 2010, the senior credit facility also
provides a six-year, $150 million term loan B maturing in
June 2016, and a seven-year $130 million
tranche B-1
letter of credit/revolving loan facility maturing in March 2014.
We are required to make quarterly principal payments of $375
thousand on the term loan B, beginning on September 20,
2010 through March 31, 2016 with a final payment of
$141 million due June 3, 2016. The
tranche B-1
letter of credit/revolving loan facility requires repayment by
March 2014. We can enter into revolving loans and issue letters
of credit under the $130 million
tranche B-1
letter of credit/revolving loan facility. The
tranche B-1
letter of credit/revolving loan facility is reflected as debt on
our balance sheet only if we borrow money under this facility or
if we use the facility to make payments for letters of credit.
There is no additional cost to us for issuing letters of credit
under the
tranche B-1
letter of credit/revolving loan facility. However, outstanding
letters of credit reduce our availability to enter into
revolving loans under the facility. We pay the
tranche B-1
lenders interest equal to LIBOR plus a margin on all borrowings
under the facility. Funds deposited with the administrative
agent by the lenders and not borrowed by the Company earn
interest at an annual rate approximately equal to LIBOR less
25 basis points.
Beginning June 3, 2010 our term loan B and revolving credit
facility, bear interest at an annual rate equal to, at our
option, either (i) the London Interbank Offered Rate plus a
margin of 475 and 450 basis points, respectively, or
(ii) a rate consisting of the greater of (a) the
JPMorgan Chase prime rate plus a margin of 375 and
350 basis points, respectively, (b) the Federal Funds
rate plus 50 basis points plus a margin of 375 and
350 basis points, respectively, and (c) the Eurodollar
Rate plus 100 basis points plus a margin of 375 and
350 basis points, respectively. The margin we pay on these
borrowings will be reduced by 25 basis points following
each fiscal quarter for which our consolidated net leverage
ratio is less than 2.25 for extending lenders and for the term
loan B and will be further reduced by an additional
25 basis points following each fiscal quarter for which the
consolidated net leverage ratio is less than 2.0 for extending
lenders. The margin we pay on these borrowings for extending
lenders will increase by 50 basis points following each
fiscal quarter for which our consolidated net leverage ratio is
greater than or equal to 4.0 and will be further increased by an
additional 50 basis points following each fiscal quarter
for which the consolidated net leverage ratio is greater than or
equal to 5.0. Our consolidated net leverage ratio was 2.24 as of
December 31, 2010. Accordingly, in March of 2011 the margin
we pay on these borrowings will be reduced by 25 basis points
for extending lenders and will remain at such level for so long
as our consolidated net leverage ratio remains below 2.25 and
greater than or equal to 2.0.
The margin we pay on borrowings under our
tranche B-1
facility incurred interest at an annual rate equal to, at our
option, either (i) the London Interbank Offered Rate plus a
margin of 500 basis points, or (ii) a rate consisting
of the greater of (a) the JPMorgan Chase prime rate plus a
margin of 400 basis points, (b) the Federal Funds rate
plus 50 basis points plus a margin of 400 basis
points, and (c) the Eurodollar Rate plus
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
100 basis points plus a margin of 400 basis points.
The rate will increase by 50 basis points following each
fiscal quarter for which our consolidated net leverage ratio is
greater than or equal to 5.0.
At December 31, 2010, we had unused borrowing capacity of
$699 million under the $752 million amount available
under the two revolving credit facilities within our senior
secured credit facility with no outstanding borrowings and
$53 million in letters of credit outstanding. As of
December 31, 2010 our outstanding debt also includes
$20 million of
8
5
/
8
percent
subordinated notes due January 7, 2011, $250 million
of
8
1
/
8
percent
senior notes due November 15, 2015, $149 million term
loan B due June 3, 2016, $225 million of
7
3
/
4
percent
senior notes due August 15, 2018, $500 million of
6
7
/
8
percent
senior notes due December 15, 2020, and $78 million of
other debt.
On December 9, 2010, we commenced a cash tender offer of
our outstanding $500 million
8
5
/
8
percent
senior subordinated notes due in 2014 and a consent solicitation
to amend the indenture governing these notes. The consent
solicitation expired on December 22, 2010 and the cash
tender offer expired on January 6, 2011. On
December 23, 2010, we issued $500 million of
6
7
/
8
percent senior notes due December 15, 2020. The net
proceeds of this transaction, together with cash and available
liquidity, was used to finance the purchase of our
8
5
/
8
percent senior subordinated notes pursuant to the tender offer
at a price of 103.25 percent of the principal amount, plus
accrued and unpaid interest for holders who tendered prior to
the expiration of the consent solicitation, and
100.25 percent of the principal amount, plus accrued and
unpaid interest, for other participants. On January 7,
2011, we redeemed all remaining senior subordinated notes that
were not previously tendered, at a price of 102.875 percent
of the principal amount, plus accrued and unpaid interest. To
facilitate these transactions, we amended our senior credit
agreement to permit us to refinance our senior subordinated
notes with new senior unsecured notes. We did not incur any fee
in connection with this amendment. The new notes are general
senior obligations of Tenneco Inc. and are not secured by assets
of Tenneco Inc. or the guarantors. We recorded $20 million
of pre-tax charges in December 2010 and expect to record an
additional $1 million of pre-tax charges in the first
quarter of 2011 related to our repurchase and redemption of our
8
5
/
8
percent senior subordinated notes.
On August 3, 2010 we issued $225 million of
7
3
/
4
percent senior notes due August 15, 2018 in a private
offering. The net proceeds of this transaction, together with
cash and available liquidity, was used to finance the redemption
of our
10
1
/
4
percent senior secured notes due in 2013. We called the senior
secured notes for redemption on August 3, 2010, and
completed the redemption on September 2, 2010 at a price of
101.708 percent of the principal amount, plus accrued and
unpaid interest. We recorded $5 million of expense related
to our redemption of our
10
1
/
4
percent senior secured notes in the third quarter of 2010. The
new notes are general senior obligations of Tenneco Inc. and are
not secured by assets of Tenneco Inc. or the guarantors.
Senior Credit Facility — Interest Rates and
Fees.
Borrowings and letters of credit issued
under the senior credit facility bear interest at an annual rate
equal to, at our option, either (i) the London Interbank
Offered Rate plus a margin as set forth in the table below; or
(ii) a rate consisting of the greater of the
98
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
JPMorgan Chase prime rate, the Federal Funds rate plus
50 basis points or the Eurodollar Rate plus 100 basis
points, plus a margin as set forth in the table below:
|
12/24/2008
|
2/23/2009
|
3/2/2009
|
5/15/2009
|
8/14/2009
|
3/1/2010
|
|||||||||||||||||||||||
|
thru
|
thru
|
thru
|
thru
|
thru
|
thru
|
Beginning
|
||||||||||||||||||||||
| 2/22/2009 | 3/1/2009 | 5/14/2009 | 8/13/2009 | 2/28/2010 | 6/2/2010 | 6/3/2010 | ||||||||||||||||||||||
|
Applicable Margin over LIBOR for Revolving Loans
|
3.00 | % | 5.50 | % | 4.50 | % | 5.00 | % | 5.50 | % | 4.50 | % | 4.50 | % | ||||||||||||||
|
Applicable Margin over LIBOR for Term Loan B Loans
|
— | — | — | — | — | — | 4.75 | % | ||||||||||||||||||||
|
Applicable Margin over LIBOR for Term Loan A Loans
|
3.00 | % | 5.50 | % | 4.50 | % | 5.00 | % | 5.50 | % | 4.50 | % | — | |||||||||||||||
|
Applicable Margin over LIBOR for
Tranche B-1
Loans
|
3.00 | % | 5.50 | % | 5.00 | % | 5.00 | % | 5.50 | % | 5.00 | % | 5.00 | % | ||||||||||||||
|
Applicable Margin over Prime-based Loans
|
2.00 | % | 4.50 | % | 3.50 | % | 4.00 | % | 4.50 | % | 3.50 | % | — | |||||||||||||||
|
Applicable Margin over Prime for Revolving Loans
|
— | — | — | — | — | — | 3.50 | % | ||||||||||||||||||||
|
Applicable Margin over Prime for Term Loan B Loans
|
— | — | — | — | — | — | 3.75 | % | ||||||||||||||||||||
|
Applicable Margin over Prime for
Tranche B-1
Loans
|
— | — | — | — | — | — | 4.00 | % | ||||||||||||||||||||
|
Applicable Margin over Federal Funds for Revolving Loans
|
— | — | — | — | — | — | 3.50 | % | ||||||||||||||||||||
|
Applicable Margin over Federal Funds for Term Loan B Loans
|
— | — | — | — | — | — | 3.75 | % | ||||||||||||||||||||
|
Applicable Margin over Federal Funds for
Tranche B-1
Loans
|
2.50 | % | 5.00 | % | 4.00 | % | 4.50 | % | 5.00 | % | 4.00 | % | 4.00 | % | ||||||||||||||
|
Commitment Fee
|
0.50 | % | 0.75 | % | 0.50 | % | 0.50 | % | 0.75 | % | 0.50 | % | 0.75 | % | ||||||||||||||
Senior Credit Facility — Other Terms and
Conditions.
Our senior credit facility requires
that we maintain financial ratios equal to or better than the
following consolidated net leverage ratio (consolidated
indebtedness net of cash divided by consolidated EBITDA, as
defined in the senior credit facility agreement), and
consolidated interest coverage ratio (consolidated EBITDA
divided by consolidated interest expense, as defined under the
senior credit facility agreement) at the end of each period
indicated. Failure to maintain these ratios will result in a
default under our senior credit facility. The financial ratios
required under the amended and restated senior credit facility
and, the actual ratios we achieved for four quarters of 2010,
are as follows:
| Quarter Ended | ||||||||||||||||||||||||||||||||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
|||||||||||||||||||||||||||||
| 2010 | 2010 | 2010 | 2010 | |||||||||||||||||||||||||||||
| Req. | Act. | Req. | Act. | Req. | Act. | Req. | Act. | |||||||||||||||||||||||||
|
Leverage Ratio (maximum)
|
5.50 | 2.77 | 4.50 | 2.42 | 4.25 | 2.41 | 4.25 | 2.24 | ||||||||||||||||||||||||
|
Interest Coverage Ratio (minimum)
|
2.00 | 3.04 | 2.25 | 3.70 | 2.30 | 3.97 | 2.35 | 3.99 | ||||||||||||||||||||||||
99
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The financial ratios required under the senior credit facility
for 2011 and beyond are set forth below.
|
Interest
|
||||||||
|
Leverage
|
Coverage
|
|||||||
|
Period Ending
|
Ratio | Ratio | ||||||
|
March 31, 2011
|
4.00 | 2.55 | ||||||
|
June 30, 2011
|
3.75 | 2.55 | ||||||
|
September 30, 2011
|
3.50 | 2.55 | ||||||
|
December 31, 2011
|
3.50 | 2.55 | ||||||
|
Each quarter thereafter
|
3.50 | 2.75 | ||||||
The covenants in our senior credit facility agreement generally
prohibit us from repaying or refinancing our senior notes. So
long as no default existed, we would, however, under our senior
credit facility agreement, be permitted to repay or refinance
our senior notes: (i) with the net cash proceeds of
incremental facilities and permitted refinancing indebtedness
(as defined in the senior credit facility agreement);
(ii) with the net cash proceeds from the sale of shares of
our common stock; (iii) in exchange for permitted
refinancing indebtedness or in exchange for shares of our common
stock; (iv) with the net cash proceeds of any new senior or
subordinated unsecured indebtedness; (v) with the proceeds
of revolving credit loans (as defined in the senior credit
facility agreement); (vi) with the cash generated by the
operations of the company; and (vii) in an amount equal to
the sum of (A) the net cash proceeds of qualified stock
issued by the Company after March 16, 2007, plus
(B) the portion of annual excess cash flow (beginning with
excess cash flow for fiscal year 2010) not required to be
applied to payment of the credit facilities and which is not
used for other purposes, provided that the aggregate principal
amount of senior notes purchased and cancelled or redeemed
pursuant to clauses (v), (vi) and (vii), is capped as
follows based on the pro forma consolidated leverage ratio after
giving effect to such purchase, cancellation or redemption:
|
Proforma Consolidated
|
Aggregate Senior Note
|
|||
|
Leverage Ratio
|
Maximum Amount | |||
| (Millions) | ||||
|
Greater than or equal to 3.0x
|
$ | 20 | ||
|
Greater than or equal to 2.5x
|
$ | 100 | ||
|
Less than 2.5x
|
$ | 125 | ||
Although the senior credit facility agreement would permit us to
repay or refinance our senior notes under the conditions
described above, any repayment or refinancing of our outstanding
notes would be subject to market conditions and either the
voluntary participation of noteholders or our ability to redeem
the notes under the terms of the applicable note indenture. For
example, while the senior credit agreement would allow us to
repay our outstanding notes via a direct exchange of the notes
for either permitted refinancing indebtedness or for shares of
our common stock, we do not, under the terms of the agreements
governing our outstanding notes, have the right to refinance the
notes via any type of direct exchange.
The senior credit facility agreement also contains other
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
senior credit facility agreement); (iii) liquidations and
dissolutions; (iv) incurring additional indebtedness or
guarantees; (v) investments and acquisitions;
(vi) dividends and share repurchases; (vii) mergers
and consolidations; and (viii) refinancing of the senior
notes. 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 December 31, 2010, we were in compliance with
all the financial covenants and operational restrictions of the
facility. Our senior credit facility does not contain any terms
that could accelerate payment of the facility or affect pricing
under the facility as a result of a credit rating agency
downgrade.
100
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Senior and Subordinated Notes.
As of
December 31, 2010, our outstanding debt also includes
$20 million of
8
5
/
8
percent senior subordindated notes due January 7, 2011,
$250 million of
8
1
/
8
percent senior notes due November 15, 2015,
$225 million of
7
3
/
4
percent senior notes due August 15, 2018 and
$500 million of
6
7
/
8
percent senior notes due December 15, 2020. Under the
indentures governing the notes, we are permitted to redeem some
or all of the remaining senior notes at any time after
November 15, 2011 in the case of the senior notes due 2015,
August 14, 2014 in the case of the senior notes due 2018,
and December 15, 2015 in the case of senior notes due 2020.
On January 7, 2011, we redeemed all remaining senior
subordinated notes at a price of 102.875 percent of
principal amount plus accrued and unpaid interest. If we sell
certain of our assets or experience specified kinds of changes
in control, we must offer to repurchase the notes. Under the
indentures governing the notes, we are permitted to redeem up to
35 percent of the senior notes due 2018, with the proceeds
of certain equity offerings completed before August 13,
2013 and up to 35 percent of the senior notes due 2020,
with the proceeds of certain equity offerings completed before
December 15, 2013.
Our senior notes require that, as a condition precedent to
incurring certain types of indebtedness not otherwise permitted,
our consolidated fixed charge coverage ratio, as calculated on a
pro forma basis, be greater than 2.00. The indentures also
contain restrictions on our operations, including limitations
on: (i) incurring additional indebtedness or liens;
(ii) dividends; (iii) distributions and stock
repurchases; (iv) investments; (v) asset sales and
(vi) mergers and consolidations. Subject to limited
exceptions, all of our existing and future material domestic
wholly owned subsidiaries fully and unconditionally guarantee
these notes on a joint and several basis. There are no
significant restrictions on the ability of the subsidiaries that
have guaranteed these notes to make distributions to us. As of
December 31, 2010, we were in compliance with the covenants
and restrictions of these indentures.
Accounts Receivable Securitization.
We also
securitize some of our accounts receivable on a limited recourse
basis in North America and Europe. As servicer under these
accounts receivable securitization programs, we are responsible
for performing all accounts receivable administration functions
for these securitized financial assets including collections and
processing of customer invoice adjustments. In
North America, we have an accounts receivable
securitization program with three commercial banks. We
securitize original equipment and aftermarket receivables on a
daily basis under the bank program. We had no outstanding third
party investments in our securitized accounts receivable bank
program as of December 31, 2010 and $62 million at
December 31, 2009. In February 2010, the North American
program was amended and extended to February 18, 2011, at a
maximum facility size of $100 million. As part of this
renewal, the margin we pay to our banks decreased. In March
2010, the North American program was further amended to extend
the revolving terms of the program to March 25, 2011, add
an additional bank and increase the available financing under
the facility by $10 million to a new maximum of
$110 million. In addition, we added a second priority
facility to the North American program, which provides up to an
additional $40 million of financing against accounts
receivable generated in the U.S. or Canada that would
otherwise be ineligible under the existing securitization
facility. This new second priority facility also expires on
March 25, 2011, and is subordinated to the existing
securitization facility.
Each facility contains customary covenants for financings of
this type, including restrictions related to liens, payments,
mergers or consolidation and amendments to the agreements
underlying the receivables pool. Further, each facility may be
terminated upon the occurrence of customary events (with
customary grace periods, if applicable), including breaches of
covenants, failure to maintain certain financial ratios,
inaccuracies of representations and warranties, bankruptcy and
insolvency events, certain changes in the rate of default or
delinquency of the receivables, a change of control and the
entry or other enforcement of material judgments. In addition,
each facility contains cross-default provisions, where the
facility could be terminated in the event of non-payment of
other material indebtedness when due and any other event which
permits the acceleration of the maturity of material
indebtedness.
101
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
-
We also securitize receivables in our European operations with
regional banks in Europe. The amount of outstanding third party
investments in our securitized accounts receivable in Europe was
$91 million and $75 million at December 31, 2010
and December 31, 2009, respectively. The arrangements to
securitize receivables in Europe are provided under seven
separate facilities provided by various financial institutions
in each of the foreign jurisdictions. The commitments for these
arrangements are generally for one year, but some may be
cancelled with notice 90 days prior to renewal. In some
instances, the arrangement provides for cancellation by the
applicable financial institution at any time upon 15 days,
or less, notification.
If we were not able to securitize receivables under either the
North American or European securitization programs, our
borrowings under our revolving credit agreements might 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.
We adopted the amended accounting guidance under ASC Topic 860,
Accounting for Transfers of Financial Assets effective
January 1, 2010. Prior to the adoption of this new
guidance, we accounted for activities under our North American
and European accounts receivable securitization programs as
sales of financial assets to our banks. The new accounting
guidance changed the conditions that must be met for the
transfer of financial assets to be accounted for as a sale. The
new guidance adds additional conditions that must be satisfied
for transfers of financial assets to be accounted for as sales
when the transferor has not transferred the entire original
financial asset, including the requirement that no partial
interest holder have rights in the transferred asset that are
subordinate to the rights of other partial interest holders. In
our North American accounts receivable securitization
programs we transfer a partial interest in a pool of receivables
and the interest that we retain is subordinate to the
transferred interest. Accordingly, beginning January 1,
2010, we account for our North American securitization program
as a secured borrowing. In our European programs we transfer
accounts receivables in their entirety to the acquiring entities
and satisfy all of the conditions established under amended ASC
Topic 860 to report the transfer of financial assets in their
entirety as a sale. The fair value of assets received as
proceeds in exchange for the transfer of accounts receivable
under our European securitization programs approximates the fair
value of such receivables. We recognized $4 million in
interest expense in 2010 relating to our North American
securitization program which effective January 1, 2010, is
accounted for as a secured borrowing arrangement under the
amended accounting guidance for transfers of financial assets.
In addition, we recognized a loss of $3 million,
$9 million and $10 million for the years ended 2010,
2009 and 2008, respectively, on the sale of trade accounts
receivable in both the North American and European accounts
receivable securitization programs, representing the discount
from book values at which these receivables were sold to our
banks. The discount rate varies based on funding costs incurred
by our banks, which averaged approximately four percent during
2010.
The impact of the new accounting rules on our consolidated
financial statements includes an increase of $4 million in
interest expense and a corresponding decrease in loss on sale of
receivables on our income statement in 2010. In 2010, there was
no cash flow impact as a result of the new accounting rules.
Funding levels provided by our European securitization programs
continue to be reflected as a change in receivables and included
in net cash provided (used) by operating activities as under the
previous accounting rules. Had the new accounting rules been in
effect prior to 2010, reported receivables and short-term debt
would both have been $62 million higher as of
December 31, 2009. The loss on sale of receivables would
have been $5 million lower, offset by a corresponding
$5 million increase to interest expense for 2009. The loss
on sales of receivables would have been $4 million lower, offset
by a corresponding $4 million increase to interest expense for
2008. Additionally, our cash provided (used) by operations would
have decreased by $62 million with a corresponding increase
in cash provided by financing activities for the same amount for
2009.
102
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 6. | Financial Instruments |
The carrying and estimated fair values of our financial
instruments by class at December 31, 2010 and 2009 were as
follows:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
|
Carrying
|
Carrying
|
|||||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
| (Millions) | ||||||||||||||||
|
Long-term debt (including current maturities)
|
$ | 1,162 | $ | 1,201 | $ | 1,151 | $ | 1,168 | ||||||||
|
Instruments with off-balance sheet risk:
|
||||||||||||||||
|
Foreign exchange forward contracts
|
2 | 2 | 2 | 2 | ||||||||||||
Asset and Liability Instruments
— The fair
value of cash and cash equivalents, short and long-term
receivables, accounts payable, and short-term debt was
considered to be the same as or was not determined to be
materially different from their carrying amount.
Long-term Debt
— The fair value of our public
fixed rate senior and senior subordinated notes
($20 million remaining principal balance was redeemed on
January 7, 2011) is based on quoted market prices. The
fair value of our private borrowings under our senior credit
facility and other long-term debt instruments is based on the
market value of debt with similar maturities, interest rates and
risk characteristics.
Foreign Exchange Forward Contracts
— We use
derivative financial instruments, principally foreign currency
forward purchase and sales contracts with terms of less than one
year, to hedge our exposure to changes in foreign currency
exchange rates. Our primary exposure to changes in foreign
currency rates results from intercompany loans made between
affiliates to minimize the need for borrowings from third
parties. Additionally, we enter into foreign currency forward
purchase and sale contracts to mitigate our exposure to changes
in exchange rates on certain intercompany and third-party trade
receivables and payables. We manage counter-party credit risk by
entering into derivative financial instruments with major
financial institutions that can be expected to fully perform
under the terms of such agreements. We do not enter into
derivative financial instruments for speculative purposes. The
fair value of our foreign currency forward contracts is based on
an internally developed model which incorporates observable
inputs including quoted spot rates, forward exchange rates and
discounted future expected cash flows utilizing market interest
rates with similar quality and maturity characteristics. We
record the change in fair value of these foreign exchange
forward contracts as part of currency gains (losses) within cost
of sales in the consolidated statements of income (loss). The
fair value of foreign exchange forward contracts are recorded in
prepayments and other current assets or other current
liabilities in the consolidated balance sheet. The fair value of
our foreign exchange forward contracts, presented on a gross
basis by derivative contract at December 31, 2010 and 2009,
respectively, was as follows:
| Fair Value of Derivative Instruments | ||||||||||||||||||||||||
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
|
Asset
|
Liability
|
Asset
|
Liability
|
|||||||||||||||||||||
| Derivatives | Derivatives | Total | Derivatives | Derivatives | Total | |||||||||||||||||||
|
Foreign exchange forward contracts
|
$ | 2 | $ | — | $ | 2 | $ | 3 | $ | 1 | $ | 2 | ||||||||||||
103
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair value of our recurring financial assets and liabilities
at December 31, 2010 and 2009, respectively, are as follows:
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||
|
Financial Assets:
|
||||||||||||||||||||||||
|
Foreign exchange forward contracts
|
n/a | $2 | n/a | n/a | $2 | n/a | ||||||||||||||||||
|
Financial Liabilities:
|
||||||||||||||||||||||||
|
Foreign exchange forward contracts
|
n/a | $ | — | n/a | n/a | $ | — | n/a | ||||||||||||||||
The fair value hierarchy definition prioritizes the inputs used
in measuring fair value into the following levels:
| Level 1 — | Quoted prices in active markets for identical assets or liabilities. | |
| Level 2 — | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly. | |
| Level 3 — | Unobservable inputs based on our own assumptions. |
The following table summarizes by major currency the notional
amounts for foreign currency forward purchase and sale contracts
as of December 31, 2010 (all of which mature no later than
March 31, 2011):
|
Notional Amount
|
||||||
| In Foreign Currency | ||||||
| (Millions) | ||||||
|
Australian dollars
|
—Purchase | 1 | ||||
|
British pounds
|
—Purchase | 10 | ||||
| —Sell | (8 | ) | ||||
|
European euro
|
—Sell | (15 | ) | |||
|
South African rand
|
—Purchase | 217 | ||||
| —Sell | (41 | ) | ||||
|
U.S. dollars
|
—Purchase | 2 | ||||
| —Sell | (18 | ) | ||||
|
Other
|
—Purchase | 652 | ||||
| —Sell | (1 | ) | ||||
Financial Guarantees
— 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 existing and future material
domestic wholly-owned subsidiaries fully and unconditionally
guarantee our senior credit facility, our senior notes and our
senior subordinated notes ($20 million remaining principal
balance was redeemed on January 7, 2011) on a joint
and several basis. The arrangement for the senior credit
facility is also secured by first-priority liens on
substantially all our domestic assets and pledges of up to
66 percent of the stock of certain first-tier foreign
subsidiaries. No assets or capital stock of our direct or
indirect foreign subsidiaries secure these notes. For additional
information, refer to Note 13 of the consolidated financial
statements of Tenneco Inc., 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. As of
December 31, 2010, we have guaranteed $53 million in
letters of credit to support some of our subsidiaries’
insurance arrangements, foreign employee benefit programs,
environmental remediation activities and cash management and
capital requirements.
104
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Negotiable Financial Instruments
— One of our
European subsidiaries receives payment from one of its OE
customers whereby the accounts receivable are satisfied through
the delivery of negotiable financial instruments. We may collect
these financial instruments before their maturity date by either
selling them at a discount or using them to satisfy accounts
receivable that have previously been sold to a European bank.
Any of these financial instruments which are not sold are
classified as other current assets as they do not meet our
definition of cash equivalents. The amount of these financial
instruments that was collected before their maturity date and
sold at a discount totaled $6 million as of
December 31, 2010, and $5 million as of
December 31, 2009, respectively. No negotiable financial
instruments were held by our European subsidiary as of
December 31, 2010 or 2009, respectively.
In certain instances several of our Chinese subsidiaries receive
payment from OE customers and satisfy vendor payments through
the receipt and delivery of negotiable financial instruments.
Financial instruments used to satisfy vendor payables and not
redeemed totaled $8 million and $15 million at
December 31, 2010 and 2009, respectively, and were
classified as notes payable. Financial instruments received from
OE customers and not redeemed totaled $11 million and
$15 million at December 31, 2010 and 2009,
respectively. We classify financial instruments received from
our OE customers as other current assets if issued by a
financial institution of our customers or as customer notes and
accounts, net if issued by our customer. We classified
$11 million and $15 million in other current assets at
December 31, 2010 and 2009, respectively. Some of our
Chinese subsidiaries that issue their own negotiable financial
instruments to pay vendors are required to maintain a cash
balance if they exceed certain credit limits with the financial
institution that guarantees those financial instruments. A
restricted cash balance was not required at those Chinese
subsidiaries at December 31, 2010 and 2009, respectively.
The negotiable financial instruments received by one of our
European subsidiaries and some of our Chinese subsidiaries are
checks drawn by our OE customers and guaranteed by their banks
that are payable at a future date. The use of these instruments
for payment follows local commercial practice. Because
negotiable financial instruments are financial obligations of
our customers and are guaranteed by our customers’ banks,
we believe they represent a lower financial risk than the
outstanding accounts receivable that they satisfy which are not
guaranteed by a bank.
| 7. | Income Taxes |
The domestic and foreign components of our income before income
taxes and noncontrolling interests are as follows:
|
Year Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
U.S. income (loss) before income taxes
|
$ | (45 | ) | $ | (118 | ) | $ | (257 | ) | |||
|
Foreign income before income taxes
|
177 | 77 | 141 | |||||||||
|
Income (loss) before income taxes and noncontrolling interests
|
$ | 132 | $ | (41 | ) | $ | (116 | ) | ||||
105
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Following is a comparative analysis of the components of income
tax expense:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
Current —
|
||||||||||||
|
U.S.
|
$ | — | $ | (2 | ) | $ | 42 | |||||
|
State and local
|
1 | 4 | — | |||||||||
|
Foreign
|
64 | 35 | 12 | |||||||||
| 65 | 37 | 54 | ||||||||||
|
Deferred —
|
||||||||||||
|
U.S.
|
— | (18 | ) | 190 | ||||||||
|
State and local
|
— | (3 | ) | 45 | ||||||||
|
Foreign
|
4 | (3 | ) | — | ||||||||
| 4 | (24 | ) | 235 | |||||||||
|
Income tax expense
|
$ | 69 | $ | 13 | $ | 289 | ||||||
Following is a reconciliation of income taxes computed at the
statutory U.S. federal income tax rate (35 percent for
all years presented) to the income tax expense reflected in the
statements of income (loss):
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
Income tax expense (benefit) computed at the statutory U.S.
federal income tax rate
|
$ | 46 | $ | (14 | ) | $ | (41 | ) | ||||
|
Increases (reductions) in income tax expense resulting from:
|
||||||||||||
|
Foreign income taxed at different rates and foreign losses with
no tax benefit
|
(16 | ) | 14 | (6 | ) | |||||||
|
Taxes on repatriation of dividends
|
4 | 4 | 15 | |||||||||
|
State and local taxes on income, net of U.S. federal income tax
benefit
|
2 | 2 | 2 | |||||||||
|
Changes in valuation allowance for tax loss carryforwards and
credits
|
16 | 5 | 233 | |||||||||
|
Amortization of tax goodwill
|
— | — | (6 | ) | ||||||||
|
Foreign tax holidays
|
(5 | ) | (3 | ) | — | |||||||
|
Investment and R&D tax credits
|
(2 | ) | (5 | ) | (1 | ) | ||||||
|
Foreign earnings subject to U.S. federal income tax
|
5 | 3 | 3 | |||||||||
|
Adjustment of prior years taxes
|
4 | — | (2 | ) | ||||||||
|
Impact of foreign tax law changes
|
(1 | ) | 2 | 10 | ||||||||
|
Tax contingencies
|
12 | 6 | 40 | |||||||||
|
Goodwill impairment
|
— | — | 40 | |||||||||
|
Other
|
4 | (1 | ) | 2 | ||||||||
|
Income tax expense
|
$ | 69 | $ | 13 | $ | 289 | ||||||
106
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of our net deferred tax assets were as follows:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Millions) | ||||||||
|
Deferred tax assets —
|
||||||||
|
Tax loss carryforwards:
|
||||||||
|
U.S.
|
$ | 157 | $ | 218 | ||||
|
State
|
53 | 61 | ||||||
|
Foreign
|
56 | 55 | ||||||
|
Investment tax credit benefits
|
46 | 44 | ||||||
|
Postretirement benefits other than pensions
|
52 | 54 | ||||||
|
Pensions
|
55 | 69 | ||||||
|
Bad debts
|
3 | 3 | ||||||
|
Sales allowances
|
6 | 5 | ||||||
|
Payroll and other accruals
|
93 | 91 | ||||||
|
Valuation allowance
|
(318 | ) | (378 | ) | ||||
|
Total deferred tax assets
|
203 | 222 | ||||||
|
Deferred tax liabilities —
|
||||||||
|
Tax over book depreciation
|
82 | 89 | ||||||
|
Other
|
54 | 70 | ||||||
|
Total deferred tax liabilities
|
136 | 159 | ||||||
|
Net deferred tax assets
|
$ | 67 | $ | 63 | ||||
Following is a reconciliation of deferred taxes to the deferred
taxes shown in the balance sheet:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Millions) | ||||||||
|
Balance Sheet:
|
||||||||
|
Current portion — deferred tax asset
|
$ | 38 | $ | 35 | ||||
|
Non-current portion — deferred tax asset
|
92 | 100 | ||||||
|
Current portion — deferred tax liability shown in
other current liabilities
|
(7 | ) | (6 | ) | ||||
|
Non-current portion — deferred tax liability
|
(56 | ) | (66 | ) | ||||
|
Net deferred tax assets
|
$ | 67 | $ | 63 | ||||
We had potential tax assets of $318 million and
$378 million at December 31, 2010 and 2009,
respectively, that were not recognized on our balance sheet as a
result of the valuation allowance recorded. These unrecognized
tax assets resulted primarily from U.S. tax loss
carryforwards, foreign tax loss carryforwards, foreign
investment tax credits and U.S. state net operating losses
that are available to reduce future U.S., U.S. state and
foreign tax liabilities.
We evaluate our deferred income taxes quarterly to determine if
valuation allowances are required or should be adjusted.
U.S. GAAP requires that companies assess whether valuation
allowances should be established against their deferred tax
assets based on consideration of all available evidence, both
positive and negative, using a “more likely than not”
standard. This assessment considers, among other matters, the
nature,
107
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
frequency and amount of recent losses, the duration of statutory
carryforward periods, and tax planning strategies. In making
such judgments, significant weight is given to evidence that can
be objectively verified.
Valuation allowances have been established for deferred tax
assets based on a “more likely than not” threshold.
The ability to realize deferred tax assets depends on our
ability to generate sufficient taxable income within the
carryforward periods provided for in the tax law for each tax
jurisdiction. We have considered the following possible sources
of taxable income when assessing the realization of our deferred
tax assets:
| • | Future reversals of existing taxable temporary differences; | |
| • | Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards; and | |
| • | Tax-planning strategies. |
In 2010, we reported income tax expense of $69 million. The
tax expense recorded differs from the expense that would be
recorded using a U.S. Federal statutory rate of
35 percent due to the impact of not benefiting tax losses
in the U.S. and certain foreign jurisdictions, and charges
primarily related to adjustments to prior year income taxes and
tax contingencies which more than offset a favorable mix of tax
rates in the jurisdictions we pay taxes. During 2010, we
recorded a $52 million reduction in our valuation allowance
related to the utilization of U.S. NOLs resulting from a
reorganization of our European operations. In evaluating the
requirements to record a valuation allowance, accounting
standards do not permit us to consider an economic recovery in
the U.S. or new business we have won. Consequently,
beginning in 2008, given our historical losses, we concluded
that our ability to fully utilize our NOLs was limited due to
projecting the continuation of the negative economic environment
and the impact of the negative operating environment on our tax
planning strategies. As a result of our tax planning strategies
which have not yet been implemented and which do not depend upon
generating future taxable income, we carry deferred tax assets
in the U.S. of $90 million relating to the expected
utilization of those NOLs. The federal NOLs expire beginning in
tax years ending in 2020 through 2029. The state NOLs expire in
various tax years through 2029.
If our operating performance improves on a sustained basis, our
conclusion regarding the need for a valuation allowance could
change, resulting in the reversal of some or all of the
valuation allowance in the future. The charge to establish the
U.S. valuation allowance also includes items related to the
losses allocable to certain state jurisdictions where it was
determined that tax attributes related to those jurisdictions
were potentially not realizable.
We are required to record a valuation allowance against deferred
tax assets generated by taxable losses in each period in the
U.S. as well as in other foreign jurisdictions. Our future
provision for income taxes will include no tax benefit with
respect to losses incurred and no tax expense with respect to
income generated in these jurisdictions until the respective
valuation allowance is eliminated. This will cause variability
in our effective tax rate.
We do not provide for U.S. income taxes on unremitted
earnings of foreign subsidiaries, except for the earnings of
certain of our China operations, as our present intention is to
reinvest the unremitted earnings in our foreign operations.
Unremitted earnings of foreign subsidiaries were approximately
$683 million at December 31, 2010. We estimated that
the amount of U.S. and foreign income taxes that would be
accrued or paid upon remittance of the assets that represent
those unremitted earnings was $203 million.
We have tax sharing agreements with our former affiliates that
allocate tax liabilities for prior periods and establish
indemnity rights on certain tax issues.
U.S. GAAP provides that a tax benefit from an uncertain tax
position may be recognized when it is “more likely than
not” that the position will be sustained upon examination,
including resolutions of any related appeals or litigation
processes, based on the technical merits.
108
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A reconciliation of our uncertain tax positions is as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Uncertain tax positions —
|
||||||||||||
|
Balance January 1
|
$ | 96 | $ | 83 | $ | 44 | ||||||
|
Gross increases in tax positions in current period
|
23 | 17 | 16 | |||||||||
|
Gross increases in tax positions in prior period
|
4 | 16 | 56 | |||||||||
|
Gross decreases in tax positions in prior period
|
(6 | ) | — | (12 | ) | |||||||
|
Gross decreases — settlements
|
(2 | ) | (17 | ) | (8 | ) | ||||||
|
Gross decreases — statute of limitations expired
|
(4 | ) | (3 | ) | (13 | ) | ||||||
|
Balance December 31
|
$ | 111 | $ | 96 | $ | 83 | ||||||
Included in the balance of uncertain tax positions at
December 31, 2010, 2009 and 2008 were $36 million,
$28 million and $75 million, respectively, of tax
benefits, that, if recognized, would affect the effective tax
rate. We recognize accrued interest and penalties related to
unrecognized tax benefits as income tax expense. Related to the
uncertain tax positions noted above, we accrued penalties of
$2 million in 2009. No penalties were accrued in 2010 and
2008. Additionally, interest of less than one million was
accrued related to uncertain tax positions in 2010. No interest
was accrued in 2009 and $2 million of interest related to
uncertain tax positions was accrued in 2008. Our liability for
penalties was $3 million at both December 31, 2010 and
2009 respectively and $1 million at December 31, 2008,
and our liability for interest was $5 million,
$4 million and $7 million at December 31, 2010,
2009 and 2008, respectively.
Our uncertain tax position at December 31, 2010 and 2009
included foreign exposures relating to the disallowance of
deductions, global transfer pricing and various other issues. We
believe it is reasonably possible that a decrease of up to
$1 million in unrecognized tax benefits related to the
expiration of foreign statute of limitations and the conclusion
of foreign income tax examinations may occur within the coming
year.
We are subject to taxation in the U.S. and various state
and foreign jurisdictions. As of December 31, 2010, our tax
years open to examination in primary jurisdictions are as
follows:
|
Open To Tax
|
||||
| Year | ||||
|
United States — due to NOL
|
1998 | |||
|
Germany
|
2006 | |||
|
Belgium
|
2008 | |||
|
Canada
|
2005 | |||
|
United Kingdom
|
2009 | |||
|
Spain
|
2003 | |||
| 8. | Common Stock |
We have authorized 135 million shares ($0.01 par
value) of common stock, of which 61,541,760 shares and
60,789,739 shares were issued at December 31, 2010 and
2009, respectively. We held 1,294,692 shares of treasury
stock at both December 31, 2010 and 2009.
Equity Plans
— In December 1996, we adopted the
1996 Stock Ownership Plan, which permitted the granting of a
variety of awards, including common stock, restricted stock,
performance units, stock equivalent units, stock appreciation
rights (“SARs”) and stock options to our directors,
officers, employees and consultants. The 1996 plan, which
terminated as to new awards on December 31, 2001, was
renamed the
109
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
“Stock Ownership Plan.” In December 1999, we adopted
the Supplemental Stock Ownership Plan, which permitted the
granting of a variety of similar awards to our directors,
officers, employees and consultants. We were authorized to
deliver up to about 1.1 million treasury shares of common
stock under the Supplemental Stock Ownership Plan, which also
terminated as to new awards on December 31, 2001. In March
2002, we adopted the 2002 Long-Term Incentive Plan which
permitted the granting of a variety of similar awards to our
officers, directors, employees and consultants. Up to
4 million shares of our common stock were authorized for
delivery under the 2002 Long-Term Incentive Plan. In March 2006,
we adopted the 2006 Long-Term Incentive Plan which replaced the
2002 Long-Term Incentive Plan and permits the granting of a
variety of similar awards to directors, officers, employees and
consultants. On May 13, 2009, our stockholders approved an
amendment to the Tenneco Inc. 2006 Long-Term Incentive Plan to
increase the shares of common stock available thereunder by
2.3 million. Each share underlying an award generally
counts as one share against the total plan availability. Each
share underlying a full value award (e.g. restricted stock),
however, counts as 1.25 shares against the total plan
availability. As of December 31, 2010, up to
1,912,243 shares of our common stock remain authorized for
delivery under the 2006 Long-Term Incentive Plan. Our
nonqualified stock options have 7 to 20 year terms and vest
equally over a three-year service period from the date of the
grant.
We have granted restricted common stock to our directors and
certain key employees and restricted stock units, payable in
cash, to certain key employees. These awards generally require,
among other things, that the award holder remain in service to
our company during the restriction period, which is currently
3 years, with a portion of the award vesting equally each
year. We also have granted stock equivalent units and long-term
performance units to certain key employees that are payable in
cash. At December 31, 2010, the long-term performance units
outstanding included a three-year grant for
2008-2010
(“the 2008 Grant”) payable in the first quarter of
2011 and a three-year grant for
2010-2012
(“the 2010 Grant”) payable in the first quarter of
2013. Payment is based on the attainment of specified
performance goals. The 2008 Grant value is indexed to the stock
price. The 2010 Grant value is based on stock price, cumulative
EBITDA and free cashflow metrics. In addition, we have granted
SARs to certain key employees in our Asian and Indian operations
that are payable in cash after a three-year service period. The
grant value is indexed to the stock price.
In November 2009, we successfully completed the public offering
of 12 million shares of common stock at a price of $16.50
per share. We received $198 million in gross proceeds and
approximately $188 million in net proceeds, after expenses
from the sales of our common stock. We used the proceeds to
repay outstanding borrowings under our revolving credit facility
and for general corporate purposes.
Accounting Methods
— The impact of recognizing
compensation expense related to nonqualified stock options is
contained in the table below.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
Selling, general and administrative
|
$ | 3 | $ | 3 | $ | 4 | ||||||
|
Loss before interest expense, income taxes and noncontrolling
interests
|
(3 | ) | (3 | ) | (4 | ) | ||||||
|
Net loss
|
$ | (3 | ) | $ | (3 | ) | $ | (4 | ) | |||
|
Decrease in basic earnings per share
|
$ | (0.05 | ) | $ | (0.06 | ) | $ | (0.09 | ) | |||
|
Decrease in diluted earnings per share
|
$ | (0.05 | ) | $ | (0.06 | ) | $ | (0.09 | ) | |||
We immediately expense stock options and restricted stock
awarded to employees who are eligible to retire. When employees
become eligible to retire during the vesting period, we
recognize the remaining expense associated with their stock
options and restricted stock.
110
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2010, there was approximately
$4 million of unrecognized compensation costs related to
our stock option awards that we expect to recognize over a
weighted average period of 0.7 years.
Compensation expense for restricted stock, restricted stock
units, long-term performance units and SARs, was
$14 million for the year ended December 31, 2010 and
$5 million for each of the years ended December 31,
2009 and 2008 respectively, and was recorded in selling,
general, and administrative expense on the statement of income
(loss).
Cash received from stock option exercises for the year ended
December 31, 2010, 2009, and 2008 was $6 million,
$1 million, and $2 million, respectively. Stock option
exercises in 2010 and 2009 would have generated an excess tax
benefit of $4 million and $1 million in each period,
respectively. We did not record the excess tax benefit as we
have federal and state net operating losses which are not
currently being utilized.
Assumptions
— We calculated the fair values of
stock option awards using the Black-Scholes option pricing model
with the weighted average assumptions listed below. The fair
value of share-based awards is determined at the time the awards
are granted which is generally in January of each year, and
requires judgment in estimating employee and market behavior.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Stock Options Granted
|
||||||||||||
|
Weighted average grant date fair value, per share
|
$ | 11.76 | $ | 1.34 | $ | 8.03 | ||||||
|
Weighted average assumptions used:
|
||||||||||||
|
Expected volatility
|
75.4 | % | 82.6 | % | 37.7 | % | ||||||
|
Expected lives
|
4.6 | 4.5 | 4.1 | |||||||||
|
Risk-free interest rates
|
2.2 | % | 1.48 | % | 2.8 | % | ||||||
|
Dividends yields
|
0.0 | % | 0.00 | % | 0.0 | % | ||||||
Expected volatility is calculated based on current implied
volatility and historical realized volatility for the Company.
Expected lives of options are based upon the historical and
expected time to post-vesting forfeiture and exercise. We
believe this method is the best estimate of the future exercise
patterns currently available.
The risk-free interest rates are based upon the Constant
Maturity Rates provided by the U.S. Treasury. For our
valuations, we used the continuous rate with a term equal to the
expected life of the options.
111
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock Options
— The following table reflects
the status and activity for all options to purchase common stock
for the period indicated:
| Year Ended December 31, 2010 | ||||||||||||||||
|
Weighted Avg.
|
||||||||||||||||
|
Shares
|
Weighted Avg.
|
Remaining
|
Aggregate
|
|||||||||||||
|
Under
|
Exercise
|
Life in
|
Intrinsic
|
|||||||||||||
| Option | Prices | Years | Value | |||||||||||||
| (Millions) | ||||||||||||||||
|
Outstanding Stock Options
|
||||||||||||||||
|
Outstanding, January 1, 2010
|
3,425,457 | $ | 13.21 | 4.6 | $ | 20 | ||||||||||
|
Granted
|
346,774 | 19.48 | ||||||||||||||
|
Canceled
|
(15,000 | ) | 10.66 | |||||||||||||
|
Forfeited
|
(16,471 | ) | 19.72 | |||||||||||||
|
Exercised
|
(55,375 | ) | 6.06 | 1 | ||||||||||||
|
Outstanding, March 31, 2010
|
3,685,385 | $ | 13.89 | 4.7 | $ | 30 | ||||||||||
|
Granted
|
6,398 | 24.27 | ||||||||||||||
|
Canceled
|
— | — | ||||||||||||||
|
Forfeited
|
(1,350 | ) | 25.09 | |||||||||||||
|
Exercised
|
(32,546 | ) | 11.30 | — | ||||||||||||
|
Outstanding, June 30, 2010
|
3,657,887 | $ | 13.93 | 4.6 | $ | 37 | ||||||||||
|
Granted
|
4,540 | 22.58 | ||||||||||||||
|
Canceled
|
— | — | ||||||||||||||
|
Forfeited
|
(13,891 | ) | 6.58 | |||||||||||||
|
Exercised
|
(208,108 | ) | 6.56 | 4 | ||||||||||||
|
Outstanding, September 30, 2010
|
3,440,428 | $ | 14.38 | 4.3 | $ | 39 | ||||||||||
|
Granted
|
127 | 33.34 | ||||||||||||||
|
Canceled
|
— | — | ||||||||||||||
|
Forfeited
|
(2,965 | ) | 20.33 | |||||||||||||
|
Exercised
|
(308,349 | ) | 14.19 | 7 | ||||||||||||
|
Outstanding, December 31, 2010
|
3,129,241 | $ | 14.43 | 4.3 | $ | 68 | ||||||||||
|
Vested and Expected to Vest, December 31, 2010
|
3,051,525 | 14.50 | 4.3 | $ | 66 | |||||||||||
|
Exercisable, December 31, 2010
|
2,242,478 | $ | 15.23 | 4.1 | $ | 47 | ||||||||||
112
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Restricted Stock
— The following table reflects
the status for all nonvested restricted shares for the period
indicated:
|
Year Ended
|
||||||||
| December 31, 2010 | ||||||||
|
Weighted Avg.
|
||||||||
|
Grant Date
|
||||||||
| Shares | Fair Value | |||||||
|
Nonvested Restricted Shares
|
||||||||
|
Nonvested balance at January 1, 2010
|
644,052 | $ | 9.85 | |||||
|
Granted
|
240,555 | 19.48 | ||||||
|
Vested
|
(307,981 | ) | 13.82 | |||||
|
Forfeited
|
(3,064 | ) | 4.10 | |||||
|
Nonvested balance at March 31, 2010
|
573,562 | $ | 11.50 | |||||
|
Granted
|
4,099 | 24.27 | ||||||
|
Vested
|
(2,913 | ) | 13.54 | |||||
|
Forfeited
|
(160 | ) | 1.85 | |||||
|
Nonvested balance at June 30, 2010
|
574,588 | $ | 11.59 | |||||
|
Granted
|
2,909 | 22.58 | ||||||
|
Vested
|
(3,338 | ) | 18.46 | |||||
|
Forfeited
|
(436 | ) | 1.85 | |||||
|
Nonvested balance at September 30, 2010
|
573,723 | $ | 11.61 | |||||
|
Granted
|
81 | 33.34 | ||||||
|
Vested
|
(14,094 | ) | 13.39 | |||||
|
Forfeited
|
(1,512 | ) | 7.45 | |||||
|
Nonvested balance at December 31, 2010
|
558,198 | $ | 11.58 | |||||
The fair value of restricted stock grants is equal to the
average market price of our stock at the date of grant. As of
December 31, 2010, approximately $3 million of total
unrecognized compensation costs related to restricted stock
awards is expected to be recognized over a weighted-average
period of approximately 2.1 years.
Long-Term Performance Units, Restricted Stock Units and
SARs
— Long-term performance units, restricted
stock units, and SARs are paid in cash and recognized as a
liability based upon their fair value. As of December 31,
2010, $7 million of total unrecognized compensation costs
is expected to be recognized over a weighted-average period of
approximately 2.0 years.
| 9. | Preferred Stock |
We had 50 million shares of preferred stock ($0.01 par
value) authorized at December 31, 2010 and 2009,
respectively. No shares of preferred stock were outstanding at
those dates.
| 10. | Pension Plans, Postretirement and Other Employee Benefits |
Pension benefits are based on years of service and, for most
salaried employees, on average compensation. Our funding policy
is to contribute to the plans amounts necessary to satisfy the
funding requirement of applicable federal or foreign laws and
regulations. Of our $715 million benefit obligation at
December 31, 2010, approximately $650 million required
funding under applicable federal and foreign laws. At
December 31,
113
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2010, we had approximately $529 million in assets to fund
that obligation. The balance of our benefit obligation,
$65 million, did not require funding under applicable
federal or foreign laws and regulations. Pension plan assets
were invested in the following classes of securities:
| Percentage of Fair Market Value | ||||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
| 2010 | 2009 | |||||||||||||||
| US | Foreign | US | Foreign | |||||||||||||
|
Equity Securities
|
71 | % | 57 | % | 71 | % | 55 | % | ||||||||
|
Debt Securities
|
28 | % | 36 | % | 29 | % | 38 | % | ||||||||
|
Real Estate
|
— | 2 | % | — | 2 | % | ||||||||||
|
Other
|
1 | % | 5 | % | — | 5 | % | |||||||||
The assets of some of our pension plans are invested in trusts
that permit commingling of the assets of more than one employee
benefit plan for investment and administrative purposes. Each of
the plans participating in the trust has interests in the net
assets of the underlying investment pools of the trusts. The
investments for all our pension plans are recorded at estimated
fair value, in compliance with the recent accounting guidance on
fair value measurement.
114
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table presents our plan assets using the fair
value hierarchy as of December 31, 2010 and
December 31, 2009. The fair value hierarchy has three
levels based on the methods used to determine the fair value.
Level 1 assets refer to those asset values based on quoted
market prices in active markets for identical assets at the
measurement date. Level 2 assets refer to assets with
values determined using significant other observable inputs, and
Level 3 assets include values determined with
non-observable inputs.
| Fair Value Level as of December 31, 2010 | ||||||||||||||||||||||||
| US | Foreign | |||||||||||||||||||||||
|
Asset Category
|
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
U.S. large cap
|
$ | 33 | $ | 96 | $ | — | $ | 25 | $ | 7 | $ | — | ||||||||||||
|
U.S. mid cap
|
— | — | — | — | 1 | — | ||||||||||||||||||
|
U.S. Small Cap
|
— | 18 | — | — | 1 | — | ||||||||||||||||||
|
Non-U.S.
large cap
|
— | 18 | — | 36 | 65 | — | ||||||||||||||||||
|
Non-U.S.
mid
cap
|
— | — | — | — | 19 | — | ||||||||||||||||||
|
Non-U.S.
small cap
|
— | — | — | — | 8 | — | ||||||||||||||||||
|
Emerging markets
|
— | 6 | — | 1 | — | — | ||||||||||||||||||
|
Debt securities:
|
||||||||||||||||||||||||
|
U.S. treasuries/government bonds
|
20 | — | — | — | — | — | ||||||||||||||||||
|
U.S. corporate bonds
|
— | 20 | — | — | — | — | ||||||||||||||||||
|
U.S. mortgage backed securities
|
— | 24 | — | — | — | — | ||||||||||||||||||
|
U.S. asset backed securities
|
— | 1 | — | — | — | — | ||||||||||||||||||
|
U.S. other fixed income
|
— | 4 | — | — | — | — | ||||||||||||||||||
|
Non-U.S.
treasuries /government bonds
|
— | 1 | — | 59 | 5 | — | ||||||||||||||||||
|
Non-U.S.
corporate bonds
|
— | 1 | — | 15 | 21 | — | ||||||||||||||||||
|
Non-U.S.
other fixed income
|
— | — | — | — | — | 6 | ||||||||||||||||||
|
Real Estate:
|
||||||||||||||||||||||||
|
Non-U.S.
real estate
|
— | — | — | — | 5 | — | ||||||||||||||||||
|
Other:
|
||||||||||||||||||||||||
|
Insurance contracts
|
— | — | — | — | 7 | — | ||||||||||||||||||
|
Cash held in bank accounts
|
— | — | — | 6 | — | — | ||||||||||||||||||
|
Total
|
$ | 53 | $ | 189 | $ | — | $ | 142 | $ | 139 | $ | 6 | ||||||||||||
115
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TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Fair Value Level as of December 31, 2009 | ||||||||||||||||||||||||
| US | Foreign | |||||||||||||||||||||||
|
Asset Category
|
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
U.S. large cap
|
$ | 14 | $ | 89 | $ | — | $ | 4 | $ | 24 | $ | — | ||||||||||||
|
U.S. mid cap
|
— | 3 | — | — | — | — | ||||||||||||||||||
|
U.S. Small Cap
|
— | 16 | — | — | — | — | ||||||||||||||||||
|
Non-U.S.
large cap
|
— | 15 | — | 35 | 60 | — | ||||||||||||||||||
|
Non-U.S.
mid
cap
|
— | — | — | — | 17 | — | ||||||||||||||||||
|
Emerging markets
|
5 | — | — | — | 6 | — | ||||||||||||||||||
|
Debt securities:
|
||||||||||||||||||||||||
|
U.S. treasuries/government bonds
|
13 | 3 | — | — | — | — | ||||||||||||||||||
|
U.S. corporate bonds
|
— | 14 | — | — | — | — | ||||||||||||||||||
|
U.S. mortgage backed securities
|
— | 20 | — | — | — | — | ||||||||||||||||||
|
U.S. asset backed securities
|
— | 3 | — | — | — | — | ||||||||||||||||||
|
U.S. other fixed income
|
— | 4 | — | — | — | — | ||||||||||||||||||
|
Non-U.S.
treasuries /government bonds
|
— | — | — | 33 | 22 | — | ||||||||||||||||||
|
Non-U.S.
corporate bonds
|
— | — | — | 7 | 31 | — | ||||||||||||||||||
|
Non-U.S.
municipal obligations
|
— | — | — | — | 1 | — | ||||||||||||||||||
|
Non-U.S.
other fixed income
|
— | — | — | — | — | 6 | ||||||||||||||||||
|
Real Estate:
|
||||||||||||||||||||||||
|
Non-U.S.
real estate
|
— | — | — | — | 5 | — | ||||||||||||||||||
|
Other:
|
||||||||||||||||||||||||
|
Insurance contracts
|
— | — | — | — | 7 | — | ||||||||||||||||||
|
Cash held in bank accounts
|
— | — | — | 4 | — | — | ||||||||||||||||||
|
Total
|
$ | 32 | $ | 167 | $ | — | $ | 83 | $ | 173 | $ | 6 | ||||||||||||
Level 1 assets were valued using market prices based on
daily net asset value (NAV) or prices available daily through a
public stock exchange. Level 2 assets were valued primarily
using market prices, sometimes net of estimated realization
expenses, and based on broker/dealer markets or in commingled
funds where NAV is not available daily or publicly. For
insurance contracts, the estimated surrender value of the policy
was used to estimate fair market value. Level 3 assets in
the Netherlands were valued using an industry standard model
based on certain assumptions such as the U-return and estimated
technical reserve.
The table below summarizes the changes in the fair value of the
Level 3 assets:
|
December 31,
|
||||||||||||||||
| 2010 | December 31, 2009 | |||||||||||||||
| Level 3 Assets | Level 3 Assets | |||||||||||||||
| US | Foreign | US | Foreign | |||||||||||||
| (Millions) | (Millions) | |||||||||||||||
|
Balance at December 31 of the previous year
|
$ | — | $ | 6 | $ | — | $ | 4 | ||||||||
|
Actual return on plan assets:
|
||||||||||||||||
|
Relating to assets still held at the reporting date
|
— | — | — | 2 | ||||||||||||
|
Ending Balance at December 31
|
$ | — | $ | 6 | $ | — | $ | 6 | ||||||||
116
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table contains information about significant
concentrations of risk, including all individual assets that
make up more than 5% of the total assets and any direct
investments in Tenneco stock:
|
Percentage of
|
||||||||||||
|
Asset Category
|
Fair Value Level | Value | Total Assets | |||||||||
| (Millions) | ||||||||||||
|
2010:
|
||||||||||||
|
Tenneco Stock
|
1 | $ | 34 | 14.0 | % | |||||||
|
2009:
|
||||||||||||
|
Tenneco Stock
|
1 | $ | 14 | 7.3 | % | |||||||
Our investment policy for both our domestic and foreign plans is
to invest more heavily in equity securities than debt
securities. Targeted pension plan allocations are
70 percent in equity securities and 30 percent in debt
securities, with acceptable tolerance levels of plus or minus
five percent within each category for our domestic plans. Our
foreign plans are individually managed to different target
levels depending on the investing environment in each country.
Our approach to determining expected return on plan asset
assumptions evaluates both historical returns as well as
estimates of future returns, and adjusts for any expected
changes in the long-term outlook for the equity and fixed income
markets for both our domestic and foreign plans.
117
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the change in benefit obligation, the change in
plan assets, the development of net amount recognized, and the
amounts recognized in the balance sheets for the pension plans
and postretirement benefit plan follows:
| Pension | Postretirement | |||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||
| US | Foreign | US | Foreign | US | US | |||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||
|
Change in benefit obligation:
|
||||||||||||||||||||||||
|
Benefit obligation at December 31 of the previous year
|
$ | 341 | $ | 333 | $ | 334 | $ | 276 | $ | 142 | $ | 143 | ||||||||||||
|
Currency rate conversion
|
— | (3 | ) | — | 31 | — | — | |||||||||||||||||
|
Settlement
|
— | (2 | ) | — | (1 | ) | — | — | ||||||||||||||||
|
Service cost
|
1 | 4 | 1 | 3 | 1 | 1 | ||||||||||||||||||
|
Interest cost
|
20 | 19 | 20 | 18 | 8 | 8 | ||||||||||||||||||
|
Plan amendments
|
— | 1 | — | — | — | — | ||||||||||||||||||
|
Actuarial (gain)/loss
|
22 | 21 | 4 | 17 | (7 | ) | (2 | ) | ||||||||||||||||
|
Benefits paid
|
(30 | ) | (15 | ) | (18 | ) | (13 | ) | (9 | ) | (9 | ) | ||||||||||||
|
Participants’ contributions
|
— | 3 | — | 2 | — | — | ||||||||||||||||||
|
Benefit obligation at December 31
|
$ | 354 | $ | 361 | $ | 341 | $ | 333 | $ | 135 | $ | 141 | ||||||||||||
|
Change in plan assets:
|
||||||||||||||||||||||||
|
Fair value at December 31 of the previous year
|
$ | 199 | $ | 262 | $ | 165 | $ | 196 | $ | — | $ | — | ||||||||||||
|
Currency rate conversion
|
— | (1 | ) | — | 25 | — | — | |||||||||||||||||
|
Settlement
|
— | (2 | ) | — | (1 | ) | — | — | ||||||||||||||||
|
Actual return on plan assets
|
40 | 20 | 43 | 35 | — | — | ||||||||||||||||||
|
Employer contributions
|
33 | 20 | 9 | 18 | 9 | 9 | ||||||||||||||||||
|
Participants’ contributions
|
— | 3 | — | 2 | — | — | ||||||||||||||||||
|
Benefits paid
|
(30 | ) | (15 | ) | (18 | ) | (13 | ) | (9 | ) | (9 | ) | ||||||||||||
|
Fair value at December 31
|
$ | 242 | $ | 287 | $ | 199 | $ | 262 | $ | — | $ | — | ||||||||||||
|
Development of net amount recognized:
|
||||||||||||||||||||||||
|
Unfunded status at December 31
|
$ | (112 | ) | $ | (74 | ) | $ | (142 | ) | $ | (71 | ) | $ | (135 | ) | $ | (141 | ) | ||||||
|
Unrecognized cost:
|
||||||||||||||||||||||||
|
Actuarial loss
|
165 | 120 | 171 | 104 | 63 | 74 | ||||||||||||||||||
|
Prior service cost/ (credit)
|
2 | 11 | 2 | 11 | (35 | ) | (41 | ) | ||||||||||||||||
|
Net amount recognized at December 31
|
$ | 55 | $ | 57 | $ | 31 | $ | 44 | $ | (107 | ) | $ | (108 | ) | ||||||||||
|
Amounts recognized in the balance sheets as of December 31
|
||||||||||||||||||||||||
|
Noncurrent assets
|
$ | — | $ | 1 | $ | — | $ | 2 | $ | — | $ | — | ||||||||||||
|
Current liabilities
|
(3 | ) | (3 | ) | (17 | ) | (2 | ) | (10 | ) | (10 | ) | ||||||||||||
|
Noncurrent liabilities
|
(109 | ) | (72 | ) | (125 | ) | (71 | ) | (125 | ) | (131 | ) | ||||||||||||
|
Net amount recognized
|
$ | (112 | ) | $ | (74 | ) | $ | (142 | ) | $ | (71 | ) | $ | (135 | ) | $ | (141 | ) | ||||||
118
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Assets of one plan may not be utilized to pay benefits of other
plans. Additionally, the prepaid (accrued) pension cost has been
recorded based upon certain actuarial estimates as described
below. Those estimates are subject to revision in future periods
given new facts or circumstances.
Net periodic pension costs (income) for the years 2010, 2009,
and 2008, consist of the following components:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| US | Foreign | US | Foreign | US | Foreign | |||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||
|
Service cost — benefits earned during the year
|
$ | 1 | $ | 5 | $ | 1 | $ | 4 | $ | 1 | $ | 5 | ||||||||||||
|
Interest cost
|
20 | 19 | 20 | 18 | 20 | 20 | ||||||||||||||||||
|
Expected return on plan assets
|
(21 | ) | (19 | ) | (22 | ) | (19 | ) | (23 | ) | (21 | ) | ||||||||||||
|
Curtailment loss
|
— | — | 1 | — | — | — | ||||||||||||||||||
|
Settlement loss
|
6 | — | 2 | — | — | 1 | ||||||||||||||||||
|
Net amortization:
|
||||||||||||||||||||||||
|
Actuarial loss
|
3 | 3 | 2 | 2 | 3 | 4 | ||||||||||||||||||
|
Prior service cost
|
— | 2 | 1 | 2 | 1 | 1 | ||||||||||||||||||
|
Net pension costs
|
$ | 9 | $ | 10 | $ | 5 | $ | 7 | $ | 2 | $ | 10 | ||||||||||||
Amounts recognized in accumulated other comprehensive loss for
pension benefits consist of the following components:
| 2010 | 2009 | |||||||||||||||
| US | Foreign | US | Foreign | |||||||||||||
| (Millions) | ||||||||||||||||
|
Net actuarial loss
|
$ | 165 | $ | 120 | $ | 171 | $ | 104 | ||||||||
|
Prior service cost
|
2 | 11 | 2 | 11 | ||||||||||||
| $ | 167 | $ | 131 | $ | 173 | $ | 115 | |||||||||
In 2011, we expect to recognize the following amounts, which are
currently reflected in accumulated other comprehensive income,
as components of net periodic benefit cost:
| 2011 | ||||||||
| US | Foreign | |||||||
| (Millions) | ||||||||
|
Net actuarial loss
|
$ | 4 | $ | 5 | ||||
|
Prior service cost
|
— | 2 | ||||||
| $ | 4 | $ | 7 | |||||
119
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for all pension plans with
accumulated benefit obligations in excess of plan assets at
December 31, 2010 and 2009 were as follows:
|
December 31,
|
December 31,
|
|||||||||||||||
| 2010 | 2009 | |||||||||||||||
| US | Foreign | US | Foreign | |||||||||||||
| (Millions) | ||||||||||||||||
|
Projected Benefit Obligation
|
$ | 354 | $ | 332 | $ | 341 | $ | 302 | ||||||||
|
Accumulated Benefit Obligation
|
352 | 328 | 339 | 297 | ||||||||||||
|
Fair Value of Plan Assets
|
242 | 257 | 199 | 229 | ||||||||||||
The following estimated benefit payments are payable from the
pension plans to participants:
|
Year
|
US | Foreign | ||||||
| (Millions) | ||||||||
|
2011
|
18 | 17 | ||||||
|
2012
|
18 | 15 | ||||||
|
2013
|
18 | 16 | ||||||
|
2014
|
20 | 17 | ||||||
|
2015
|
21 | 17 | ||||||
|
2016-2019
|
123 | 100 | ||||||
The following assumptions were used in the accounting for the
pension plans for the years of 2010, 2009, and 2008:
| 2010 | 2009 | |||||||||||||||
| US | Foreign | US | Foreign | |||||||||||||
|
Weighted-average assumptions used to determine benefit
obligations
|
||||||||||||||||
|
Discount rate
|
5.6 | % | 5.4 | % | 6.1 | % | 6.0 | % | ||||||||
|
Rate of compensation increase
|
N/A | 3.5 | % | N/A | 3.5 | % | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| US | Foreign | US | Foreign | US | Foreign | |||||||||||||||||||
|
Weighted-average assumptions used to determine net periodic
benefit cost
|
||||||||||||||||||||||||
|
Discount rate
|
6.1 | % | 6.0 | % | 6.2 | % | 6.3 | % | 6.2 | % | 5.6 | % | ||||||||||||
|
Expected long-term return on plan assets
|
8.3 | % | 6.9 | % | 8.8 | % | 7.3 | % | 8.8 | % | 7.7 | % | ||||||||||||
|
Rate of compensation increase
|
N/A | 3.5 | % | N/A | 3.1 | % | N/A | 4.4 | % | |||||||||||||||
We made contributions of $53 million to our pension plans
during 2010. Based on current actuarial estimates, we believe we
will be required to make contributions of $44 million to
those plans during 2011. Pension contributions beyond 2011 will
be required, but those amounts will vary based upon many
factors, including the performance of our pension fund
investments during 2011.
The pension results for the year ended December 31, 2008
include amounts relating to our acquisition of Gruppo Marzocchi
on September 1, 2008. In addition, during the year 2008,
the Company adjusted the beginning balance of both the foreign
pension benefit obligation and related plan assets by
$17 million to include a cash balance plan relating to a
foreign subsidiary.
120
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We have life insurance plans which provided benefit to a
majority of our U.S. employees. We also have postretirement
plans for our U.S. employees hired before January 1,
2001. The plans cover salaried employees retiring on or after
attaining age 55 who have at least 10 years of service
with us after attaining age 45. For hourly employees, the
postretirement benefit plans generally cover employees who
retire according to one of our hourly employee retirement plans.
All of these benefits may be subject to deductibles, co-payment
provisions and other limitations, and we have reserved the right
to change these benefits. For those employees hired after
January 1, 2001, we do not provide any postretirement
benefits. Our postretirement healthcare and life insurance plans
are not funded. The measurement date used to determine
postretirement benefit obligations is December 31.
Net periodic postretirement benefit cost for the years 2010,
2009, and 2008, consists of the following components:
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
Service cost — benefits earned during the year
|
$ | 1 | $ | 1 | $ | 2 | ||||||
|
Interest on accumulated postretirement benefit obligation
|
8 | 8 | 8 | |||||||||
|
Net amortization:
|
||||||||||||
|
Actuarial loss
|
4 | 5 | 5 | |||||||||
|
Prior service credit
|
(6 | ) | (6 | ) | (5 | ) | ||||||
|
Net periodic postretirement benefit cost
|
$ | 7 | $ | 8 | $ | 10 | ||||||
In 2011, we expect to recognize the following amounts, which are
currently reflected in accumulated other comprehensive income,
as components of net periodic benefit cost:
| 2011 | ||||
|
Net actuarial loss
|
$ | 4 | ||
|
Prior service credit
|
(6 | ) | ||
| $ | (2 | ) | ||
The following estimated postretirement benefit payments are
payable from the plan to participants:
|
Postretirement
|
||||
|
Year
|
Benefits | |||
| (Millions) | ||||
|
2011
|
10 | |||
|
2012
|
10 | |||
|
2013
|
10 | |||
|
2014
|
10 | |||
|
2015
|
10 | |||
|
2016-2019
|
49 | |||
121
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following estimated subsidies under the Medicare
Prescription Drug, Improvement, and Modernization Act are
expected to be received:
|
Postretirement
|
||||
|
Year
|
Benefits | |||
| (Millions) | ||||
|
2011
|
1 | |||
|
2012
|
1 | |||
|
2013
|
1 | |||
|
2014
|
1 | |||
|
2015
|
1 | |||
|
2016-2019
|
3 | |||
The weighted average assumed health care cost trend rate used in
determining the 2010 accumulated postretirement benefit
obligation was 7.5 percent, declining to 5 percent by
2014. The healthcare cost trend rate was 8.3 percent for
2009 and 9 percent 2008, declining to 5 percent over
succeeding periods.
The following assumptions were used in the accounting for
postretirement cost for the years of 2010, 2009 and 2008:
| 2010 | 2009 | |||||||
|
Weighted-average assumptions used to determine benefit
obligations
|
||||||||
|
Discount rate
|
5.6 | % | 6.1 | % | ||||
|
Rate of compensation increase
|
N/A | N/A | ||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Weighted-average assumptions used to determine net periodic
benefit cost
|
||||||||||||
|
Discount rate
|
6.1 | % | 6.2 | % | 6.2 | % | ||||||
|
Rate of compensation increase
|
N/A | 4.0 | % | 4.0 | % | |||||||
The effect of a one-percentage-point increase or decrease in the
2010 assumed health care cost trend rates on total service cost
and interest and the postretirement benefit obligation are as
follows:
|
One-Percentage
|
One-Percentage
|
|||||||
| Point Increase | Point Decrease | |||||||
| (Millions) | ||||||||
|
Effect on total of service cost and interest cost
|
$ | 1 | $ | — | ||||
|
Effect on postretirement benefit obligation
|
10 | (9 | ) | |||||
Based on current actuarial estimates, we believe we will be
required to make postretirement contributions of approximately
$10 million during 2011.
We have established Employee Stock Ownership Plans for the
benefit of our domestic employees. Under the plans, subject to
limitations in the Internal Revenue Code, participants may elect
to defer up to 75 percent of their salary through
contributions to the plan, which are invested in selected mutual
funds or used to buy our common stock. We match in cash
50 percent of each employee’s contribution up to eight
percent of the employee’s salary. In 2009, we temporarily
discontinued these matching contributions as a result of the
global economic downturn that began in 2008. We restored the
matching contributions to salaried and non-union hourly
U.S. employees beginning on January 1, 2010. In
connection with freezing the defined benefit pension plans for
nearly all U.S. based salaried and non-union hourly
employees effective December 31, 2006, and the related
replacement of those defined benefit plans with defined
contribution plans, we are making additional contributions to
the Employee Stock Ownership Plans. We recorded expense for
these contributions of $17 million, $10 million, and
$18 million in 2010, 2009 and 2008, respectively. Matching
contributions vest
122
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
immediately. Defined benefit replacement contributions fully
vest on the employee’s third anniversary of employment.
| 11. | Segment and Geographic Area Information |
We are a global manufacturer with three geographic reportable
segments: (1) North America, (2) Europe, South America
and India (“Europe”), and (3) Asia Pacific. Each
segment manufactures and distributes ride control and emission
control products primarily for the automotive industry. We have
not aggregated individual operating segments within these
reportable segments. We evaluate segment performance based
primarily on income before interest expense, income taxes, and
noncontrolling interests. Products are transferred between
segments and geographic areas on a basis intended to reflect as
nearly as possible the “market value” of the products.
123
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Segment results for 2010, 2009, and 2008 are as follows:
| Segment | ||||||||||||||||||||
|
North
|
Asia
|
Reclass &
|
||||||||||||||||||
| America | Europe | Pacific | Elims | Consolidated | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
At December 31, 2010, and for the Year Then Ended
|
||||||||||||||||||||
|
Revenues from external customers
|
$ | 2,821 | $ | 2,446 | $ | 670 | $ | — | $ | 5,937 | ||||||||||
|
Intersegment revenues
|
11 | 148 | 28 | (187 | ) | — | ||||||||||||||
|
Interest income
|
— | 3 | 1 | — | 4 | |||||||||||||||
|
Depreciation and amortization of intangibles
|
109 | 86 | 21 | — | 216 | |||||||||||||||
|
Income before interest expense, income taxes, and noncontrolling
interests
|
155 | 76 | 50 | — | 281 | |||||||||||||||
|
Total assets
|
1,281 | 1,337 | 525 | 24 | 3,167 | |||||||||||||||
|
Equity in net assets of unconsolidated affiliates
|
— | 9 | — | — | 9 | |||||||||||||||
|
Expenditures for plant, property and equipment
|
59 | 66 | 29 | — | 154 | |||||||||||||||
|
Noncash items other than depreciation and amortization
|
4 | 6 | — | — | 10 | |||||||||||||||
|
At December 31, 2009, and for the Year Then Ended
|
||||||||||||||||||||
|
Revenues from external customers
|
$ | 2,092 | $ | 2,047 | $ | 510 | $ | — | $ | 4,649 | ||||||||||
|
Intersegment revenues
|
7 | 162 | 15 | (184 | ) | — | ||||||||||||||
|
Interest income
|
— | 3 | 1 | — | 4 | |||||||||||||||
|
Depreciation and amortization of intangibles
|
113 | 89 | 19 | — | 221 | |||||||||||||||
|
Income before interest expense, income taxes, and noncontrolling
interests
|
42 | 20 | 30 | — | 92 | |||||||||||||||
|
Total assets
|
1,102 | 1,338 | 391 | 10 | 2,841 | |||||||||||||||
|
Equity in net assets of unconsolidated affiliates
|
— | 12 | — | — | 12 | |||||||||||||||
|
Expenditures for plant, property and equipment
|
45 | 58 | 15 | — | 118 | |||||||||||||||
|
Noncash items other than depreciation and amortization
|
8 | (1 | ) | 1 | — | 8 | ||||||||||||||
|
At December 31, 2008, and for the Year Then Ended
|
||||||||||||||||||||
|
Revenues from external customers
|
$ | 2,630 | $ | 2,758 | $ | 528 | $ | — | $ | 5,916 | ||||||||||
|
Intersegment revenues
|
11 | 225 | 15 | (251 | ) | — | ||||||||||||||
|
Interest income
|
— | 10 | 1 | — | 11 | |||||||||||||||
|
Depreciation and amortization of intangibles
|
108 | 97 | 17 | — | 222 | |||||||||||||||
|
Income before interest expense, income taxes, and noncontrolling
interests
|
(107 | ) | 85 | 19 | — | (3 | ) | |||||||||||||
|
Total assets
|
1,120 | 1,352 | 322 | 34 | 2,828 | |||||||||||||||
|
Equity in net assets of unconsolidated affiliates
|
— | 14 | — | — | 14 | |||||||||||||||
|
Expenditures for plant, property and equipment
|
108 | 89 | 24 | — | 221 | |||||||||||||||
|
Noncash items other than depreciation and amortization
|
(122 | ) | (11 | ) | — | — | (133 | ) | ||||||||||||
124
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table shows information relating to our external
customer revenues for each product or each group of similar
products:
|
Net Sales
|
||||||||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
Emission Control Systems & Products
|
||||||||||||
|
Aftermarket
|
$ | 318 | $ | 315 | $ | 358 | ||||||
|
Original Equipment
|
||||||||||||
|
OE Value-add
|
2,223 | 1,638 | 2,128 | |||||||||
|
OE Substrate
|
1,284 | 966 | 1,492 | |||||||||
| 3,507 | 2,604 | 3,620 | ||||||||||
| 3,825 | 2,919 | 3,978 | ||||||||||
|
Ride Control Systems & Products
|
||||||||||||
|
Aftermarket
|
851 | 721 | 761 | |||||||||
|
Original Equipment
|
1,261 | 1,009 | 1,177 | |||||||||
| 2,112 | 1,730 | 1,938 | ||||||||||
|
Total Revenues
|
$ | 5,937 | $ | 4,649 | $ | 5,916 | ||||||
The following customers accounted for 10 percent or more of
our net sales in any of the last three years.
|
Customer
|
2010 | 2009 | 2008 | |||||||||
|
General Motors
|
19 | % | 16 | % | 20 | % | ||||||
|
Ford
|
13 | % | 14 | % | 11 | % | ||||||
| Geographic Area | ||||||||||||||||||||||||||||
|
United
|
Other
|
Reclass &
|
||||||||||||||||||||||||||
| States | Germany | Canada | China | Foreign(a) | Elims | Consolidated | ||||||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||||||
|
At December 31, 2010, and for the Year Then Ended
|
||||||||||||||||||||||||||||
|
Revenues from external customers(b)
|
$ | 2,275 | $ | 616 | $ | 327 | $ | 473 | $ | 2,246 | $ | — | $ | 5,937 | ||||||||||||||
|
Long-lived assets(c)
|
352 | 109 | 64 | 76 | 564 | — | 1,165 | |||||||||||||||||||||
|
Total assets
|
1,147 | 322 | 149 | 321 | 1,308 | (80 | ) | 3,167 | ||||||||||||||||||||
|
At December 31, 2009, and for the Year Then Ended
|
||||||||||||||||||||||||||||
|
Revenues from external customers(b)
|
$ | 1,531 | $ | 559 | $ | 416 | $ | 361 | $ | 1,782 | $ | — | $ | 4,649 | ||||||||||||||
|
Long-lived assets(c)
|
373 | 116 | 75 | 61 | 604 | — | 1,229 | |||||||||||||||||||||
|
Total assets
|
984 | 409 | 125 | 249 | 1,153 | (79 | ) | 2,841 | ||||||||||||||||||||
|
At December 31, 2008, and for the Year Then Ended
|
||||||||||||||||||||||||||||
|
Revenues from external customers(b)
|
$ | 1,954 | $ | 898 | $ | 483 | $ | 309 | $ | 2,272 | $ | — | $ | 5,916 | ||||||||||||||
|
Long-lived assets(c)
|
421 | 130 | 74 | 57 | 599 | — | 1,281 | |||||||||||||||||||||
|
Total assets
|
1,066 | 429 | 112 | 186 | 1,149 | (114 | ) | 2,828 | ||||||||||||||||||||
| Note: | (a) Revenues from external customers and long-lived assets for individual foreign countries other than Germany, Canada, and China are not material. |
| (b) | Revenues are attributed to countries based on location of the shipper. | |
| (c) | Long-lived assets include all long-term assets except goodwill, intangibles and deferred tax assets. |
125
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 12. | Commitments and Contingencies |
Capital
Commitments
We estimate that expenditures aggregating approximately
$48 million will be required after December 31, 2010
to complete facilities and projects authorized at such date, and
we have made substantial commitments in connection with these
facilities and projects.
Lease
Commitments
We have long-term leases for certain facilities, equipment and
other assets. The minimum lease payments under non-cancelable
leases with lease terms in excess of one year are:
|
Subsequent
|
||||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | Years | |||||||||||||||||||
| (Millions) | ||||||||||||||||||||||||
|
Operating Leases
|
$ | 26 | $ | 19 | $ | 13 | $ | 8 | $ | 5 | $ | 17 | ||||||||||||
|
Capital Leases
|
1 | — | — | — | — | — | ||||||||||||||||||
Total rental expense for the year 2010, 2009 and 2008 was
$45 million, $43 million and $46 million,
respectively.
Litigation
We also from time to time are involved in legal proceedings,
claims or investigations that are incidental to the conduct of
our business. Some of these proceedings allege damages against
us relating to environmental liabilities (including toxic tort,
property damage and remediation), intellectual property matters
(including patent, trademark and copyright infringement, and
licensing disputes), personal injury claims (including injuries
due to product failure, design or warning issues, and other
product liability related matters), taxes, employment matters,
and commercial or contractual disputes, sometimes related to
acquisitions or divestitures. For example, one of our Argentine
subsidiaries is currently defending against a criminal complaint
alleging the failure to comply with laws requiring the proceeds
of export transactions to be collected, reported
and/or
converted to local currency within specified time periods. As
another example, we are subject to an audit in 11 states of
our practices with respect to the payment of unclaimed property
to those states. We are in the early stages of this audit, which
could cover over 30 years and we now have practices in
place which we believe ensure that we pay unclaimed property as
required. We vigorously defend ourselves against all of these
claims. In future periods, we could be subject to cash costs or
charges to earnings if any of these matters are resolved on
unfavorable terms. However, although the ultimate outcome of any
legal matter cannot be predicted with certainty, based on
current 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, results of
operations or cash flows.
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. In the early 2000’s we were
named in nearly 20,000 complaints, most of which were filed in
Mississippi state court and the vast majority of which made no
allegations of exposure to asbestos from our product categories.
Most of these claims have been dismissed and our current docket
of active and inactive cases is less than 500 cases nationwide.
A small number of claims have been asserted by railroad workers
alleging exposure to asbestos products in railroad cars
manufactured by The Pullman Company, one of our subsidiaries.
The balance of the claims is related to alleged exposure to
asbestos in our automotive emission control products. Only a
small percentage of these claimants allege that they were
automobile mechanics 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
126
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 100 defendants from a variety of industries.
Additionally, the plaintiffs either do not specify any, or
specify the jurisdictional minimum, dollar amount for damages.
As major asbestos manufacturers continue to go out of business
or file for bankruptcy, we may experience an increased number of
these claims. We vigorously defend ourselves against these
claims as part of our ordinary course of business. In future
periods, we could be subject to charges to earnings if any of
these matters are resolved unfavorably to us. To date, with
respect to claims that have proceeded sufficiently through the
judicial process, we have regularly achieved favorable
resolutions. Accordingly, we presently believe that these
asbestos-related claims will not have a material adverse impact
on our future consolidated financial condition, results of
operations or cash flows.
Product
Warranties
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 our 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
current and long-term liabilities on the balance sheet.
Below is a table that shows the activity in the warranty accrual
accounts:
|
Year Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions) | ||||||||||||
|
Beginning Balance
|
$ | 32 | $ | 27 | $ | 25 | ||||||
|
Accruals related to product warranties
|
19 | 18 | 17 | |||||||||
|
Reductions for payments made
|
(18 | ) | (13 | ) | (15 | ) | ||||||
|
Ending Balance
|
$ | 33 | $ | 32 | $ | 27 | ||||||
Environmental
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 costs related to an
existing condition caused by past operations that do not
contribute to current or future revenue generation. We record
liabilities when environmental assessments indicate that
required 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 consolidated
financial statements.
127
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2010, we have the obligation to
remediate or contribute towards the remediation of certain
sites, including two existing Superfund sites. At
December 31, 2010, our aggregated estimated share of
environmental remediation costs for all these sites on a
discounted basis was approximately $16 million, of which
$5 million is recorded in other current liabilities and
$11 million is recorded in deferred credits and other
liabilities in our consolidated balance sheet. For those
locations in which the liability was discounted, the weighted
average discount rate used was 3.2 percent. The
undiscounted value of the estimated remediation costs was
$21 million. Our expected payments of environmental
remediation costs are estimated to be approximately
$5 million in 2011, $1 million in each year beginning
2012 through 2015 and $12 million thereafter. Based on
information known to us, we have established reserves that we
believe are adequate for these costs. Although we believe these
estimates of remediation costs are reasonable and are based on
the latest available information, the 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 towards the
remediation costs. In addition, certain environmental statutes
provide 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 these sites has been
considered, where appropriate, in our determination of our
estimated liability.
The $16 million noted above includes $5 million of
estimated environmental remediation costs that resulted from the
bankruptcy of Mark IV Industries in 2009. Prior to our 1996
acquisition of The Pullman Company, Pullman had sold certain
assets to Mark IV. As partial consideration for the purchase of
these assets, Mark IV agreed to assume Pullman’s and
its subsidiaries’ historical obligations to contribute to
the environmental remediation of certain sites. In April of
2009, Mark IV filed a petition for insolvency under
Chapter 11 of the United States Bankruptcy Code and
notified Pullman that it no longer intends to continue to
contribute toward the remediation of those sites. We are
continuing to conduct a thorough analysis and review of our
remediation obligations and it is possible that our estimate may
change as additional information becomes available to us.
We do not believe that any potential costs associated with our
current status as a potentially responsible party in the
Superfund sites, or as a liable party at the other locations
referenced herein, will be material to our consolidated results
of operations, financial position or cash flows.
| 13. | Supplemental Guarantor Condensed Consolidating Financial Statements |
Basis of
Presentation
Subject to limited exceptions, all of our existing and future
material domestic 100% owned subsidiaries (which are referred to
as the Guarantor Subsidiaries) fully and unconditionally
guarantee our senior notes due in 2015, 2018, and 2020 on a
joint and several basis. The Guarantor Subsidiaries are combined
in the presentation below.
These 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 information 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.
128
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
STATEMENT
OF INCOME (LOSS)
| For the Year Ended December 31, 2010 | ||||||||||||||||||||
|
Tenneco Inc.
|
||||||||||||||||||||
|
Guarantor
|
Nonguarantor
|
(Parent
|
Reclass
|
|||||||||||||||||
| Subsidiaries | Subsidiaries | Company) | & Elims | Consolidated | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Net sales and operating revenues —
|
||||||||||||||||||||
|
External
|
$ | 2,571 | $ | 3,366 | $ | — | $ | — | $ | 5,937 | ||||||||||
|
Affiliated companies
|
130 | 472 | — | (602 | ) | — | ||||||||||||||
| 2,701 | 3,838 | — | (602 | ) | 5,937 | |||||||||||||||
|
Costs and expenses
|
||||||||||||||||||||
|
Cost of sales (exclusive of depreciation and amortization shown
below)
|
2,331 | 3,171 | — | (602 | ) | 4,900 | ||||||||||||||
|
Engineering, research, and development
|
48 | 69 | — | — | 117 | |||||||||||||||
|
Selling, general, and administrative
|
153 | 261 | 3 | — | 417 | |||||||||||||||
|
Depreciation and amortization of other intangibles
|
86 | 130 | — | — | 216 | |||||||||||||||
| 2,618 | 3,631 | 3 | (602 | ) | 5,650 | |||||||||||||||
|
Other income (expense)
|
||||||||||||||||||||
|
Loss on sale of receivables
|
— | (3 | ) | — | — | (3 | ) | |||||||||||||
|
Other income (expense)
|
12 | 1 | — | (16 | ) | (3 | ) | |||||||||||||
| 12 | (2 | ) | — | (16 | ) | (6 | ) | |||||||||||||
|
Earnings before interest expense, income taxes,
noncontrolling interests and equity in net income from
affiliated companies
|
95 | 205 | (3 | ) | (16 | ) | 281 | |||||||||||||
|
Interest expense —
|
||||||||||||||||||||
|
External (net of interest capitalized)
|
(2 | ) | 7 | 144 | — | 149 | ||||||||||||||
|
Affiliated companies (net of interest income)
|
186 | (54 | ) | (132 | ) | — | — | |||||||||||||
|
Income tax expense (benefit)
|
7 | 62 | — | — | 69 | |||||||||||||||
|
Equity in net income (loss) from affiliated companies
|
154 | — | 54 | (208 | ) | — | ||||||||||||||
|
Net income (loss)
|
58 | 190 | 39 | (224 | ) | 63 | ||||||||||||||
|
Less: Net income attributable to noncontrolling interests
|
— | 24 | — | — | 24 | |||||||||||||||
|
Net income (loss) attributable to Tenneco Inc.
|
$ | 58 | $ | 166 | $ | 39 | $ | (224 | ) | $ | 39 | |||||||||
129
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
STATEMENT
OF INCOME (LOSS)
| For the Year Ended December 31, 2009 | ||||||||||||||||||||
|
Tenneco Inc.
|
||||||||||||||||||||
|
Guarantor
|
Nonguarantor
|
(Parent
|
Reclass
|
|||||||||||||||||
| Subsidiaries | Subsidiaries | Company) | & Elims | Consolidated | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Net sales and operating revenues —
|
||||||||||||||||||||
|
External
|
$ | 1,915 | $ | 2,734 | $ | — | $ | — | $ | 4,649 | ||||||||||
|
Affiliated companies
|
92 | 399 | — | (491 | ) | — | ||||||||||||||
| 2,007 | 3,133 | — | (491 | ) | 4,649 | |||||||||||||||
|
Costs and expenses
|
||||||||||||||||||||
|
Cost of sales (exclusive of depreciation and amortization shown
below)
|
1,836 | 2,530 | — | (491 | ) | 3,875 | ||||||||||||||
|
Engineering, research, and development
|
36 | 61 | — | — | 97 | |||||||||||||||
|
Selling, general, and administrative
|
105 | 236 | 3 | — | 344 | |||||||||||||||
|
Depreciation and amortization of other intangibles
|
91 | 130 | — | — | 221 | |||||||||||||||
| 2,068 | 2,957 | 3 | (491 | ) | 4,537 | |||||||||||||||
|
Other income (expense)
|
||||||||||||||||||||
|
Loss on sale of receivables
|
— | (9 | ) | — | — | (9 | ) | |||||||||||||
|
Other income (expense)
|
(2 | ) | 4 | — | (13 | ) | (11 | ) | ||||||||||||
| (2 | ) | (5 | ) | — | (13 | ) | (20 | ) | ||||||||||||
|
Earnings (loss) before interest expense, income taxes,
noncontrolling interests and equity in net income from
affiliated companies
|
(63 | ) | 171 | (3 | ) | (13 | ) | 92 | ||||||||||||
|
Interest expense —
|
||||||||||||||||||||
|
External (net of interest capitalized)
|
(1 | ) | 4 | 130 | — | 133 | ||||||||||||||
|
Affiliated companies (net of interest income)
|
140 | (15 | ) | (125 | ) | — | — | |||||||||||||
|
Income tax expense (benefit)
|
(1 | ) | 33 | (19 | ) | — | 13 | |||||||||||||
|
Equity in net income (loss) from affiliated companies
|
124 | — | (84 | ) | (40 | ) | — | |||||||||||||
|
Net income (loss)
|
(77 | ) | 149 | (73 | ) | (53 | ) | (54 | ) | |||||||||||
|
Less: Net income attributable to noncontrolling interests
|
— | 19 | — | — | 19 | |||||||||||||||
|
Net income (loss) attributable to Tenneco Inc.
|
$ | (77 | ) | $ | 130 | $ | (73 | ) | $ | (53 | ) | $ | (73 | ) | ||||||
130
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
STATEMENT
OF INCOME (LOSS)
| For the Year Ended December 31, 2008 | ||||||||||||||||||||
|
Tenneco Inc.
|
||||||||||||||||||||
|
Guarantor
|
Nonguarantor
|
(Parent
|
Reclass
|
|||||||||||||||||
| Subsidiaries | Subsidiaries | Company) | & Elims | Consolidated | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Net sales and operating revenues —
|
||||||||||||||||||||
|
External
|
$ | 2,392 | $ | 3,524 | $ | — | $ | — | $ | 5,916 | ||||||||||
|
Affiliated companies
|
66 | 476 | — | (542 | ) | — | ||||||||||||||
| 2,458 | 4,000 | — | (542 | ) | 5,916 | |||||||||||||||
|
Costs and expenses
|
||||||||||||||||||||
|
Cost of sales (exclusive of depreciation and amortization shown
below)
|
2,058 | 3,547 | — | (542 | ) | 5,063 | ||||||||||||||
|
Goodwill impairment charge
|
114 | — | — | — | 114 | |||||||||||||||
|
Engineering, research, and development
|
52 | 75 | — | — | 127 | |||||||||||||||
|
Selling, general, and administrative
|
124 | 264 | 4 | — | 392 | |||||||||||||||
|
Depreciation and amortization of other intangibles
|
86 | 136 | — | — | 222 | |||||||||||||||
| 2,434 | 4,022 | 4 | (542 | ) | 5,918 | |||||||||||||||
|
Other income (expense)
|
||||||||||||||||||||
|
Loss on sale of receivables
|
— | (10 | ) | — | — | (10 | ) | |||||||||||||
|
Other income (expense)
|
63 | (1 | ) | (1 | ) | (52 | ) | 9 | ||||||||||||
| 63 | (11 | ) | (1 | ) | (52 | ) | (1 | ) | ||||||||||||
|
Earnings (loss) before interest expense, income taxes,
noncontrolling interests, and equity in net income from
affiliated companies
|
87 | (33 | ) | (5 | ) | (52 | ) | (3 | ) | |||||||||||
|
Interest expense —
|
||||||||||||||||||||
|
External (net of interest capitalized)
|
(3 | ) | 3 | 113 | — | 113 | ||||||||||||||
|
Affiliated companies (net of interest income)
|
124 | (10 | ) | (114 | ) | — | — | |||||||||||||
|
Income tax expense (benefit)
|
20 | 89 | 185 | (5 | ) | 289 | ||||||||||||||
|
Equity in net income (loss) from affiliated companies
|
(138 | ) | — | (226 | ) | 364 | — | |||||||||||||
|
Net income (loss)
|
(192 | ) | (115 | ) | (415 | ) | 317 | (405 | ) | |||||||||||
|
Less: Net income attributable to noncontrolling interests
|
— | 10 | — | — | 10 | |||||||||||||||
|
Net income (loss) attributable to Tenneco Inc.
|
$ | (192 | ) | $ | (125 | ) | $ | (415 | ) | $ | 317 | $ | (415 | ) | ||||||
131
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
BALANCE
SHEET
| December 31, 2010 | ||||||||||||||||||||
|
Tenneco Inc.
|
||||||||||||||||||||
|
Guarantor
|
Nonguarantor
|
(Parent
|
Reclass
|
|||||||||||||||||
| Subsidiaries | Subsidiaries | Company) | & Elims | Consolidated | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | — | $ | 233 | $ | — | $ | — | $ | 233 | ||||||||||
|
Receivables, net
|
402 | 1,106 | 24 | (706 | ) | 826 | ||||||||||||||
|
Inventories
|
221 | 326 | — | — | 547 | |||||||||||||||
|
Deferred income taxes
|
103 | — | — | (65 | ) | 38 | ||||||||||||||
|
Prepayments and other
|
35 | 111 | — | — | 146 | |||||||||||||||
|
Total current assets
|
761 | 1,776 | 24 | (771 | ) | 1,790 | ||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Investment in affiliated companies
|
391 | — | 707 | (1,098 | ) | — | ||||||||||||||
|
Notes and advances receivable from affiliates
|
4,119 | 788 | 5,853 | (10,760 | ) | — | ||||||||||||||
|
Long-term receivables, net
|
1 | 8 | — | — | 9 | |||||||||||||||
|
Goodwill
|
22 | 67 | — | — | 89 | |||||||||||||||
|
Intangibles, net
|
14 | 18 | — | — | 32 | |||||||||||||||
|
Deferred income taxes
|
37 | 21 | 34 | — | 92 | |||||||||||||||
|
Other
|
26 | 46 | 33 | — | 105 | |||||||||||||||
| 4,610 | 948 | 6,627 | (11,858 | ) | 327 | |||||||||||||||
|
Plant, property, and equipment, at cost
|
997 | 2,112 | — | — | 3,109 | |||||||||||||||
|
Less — Accumulated depreciation and amortization
|
(713 | ) | (1,346 | ) | — | — | (2,059 | ) | ||||||||||||
| 284 | 766 | — | — | 1,050 | ||||||||||||||||
|
Total assets
|
$ | 5,655 | $ | 3,490 | $ | 6,651 | $ | (12,629 | ) | $ | 3,167 | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Short-term debt (including current maturities of long-term debt)
|
||||||||||||||||||||
|
Short-term debt — non-affiliated
|
$ | — | $ | 62 | $ | 1 | $ | — | $ | 63 | ||||||||||
|
Short-term debt — affiliated
|
214 | 371 | 10 | (595 | ) | — | ||||||||||||||
|
Trade payables
|
367 | 773 | — | (92 | ) | 1,048 | ||||||||||||||
|
Accrued taxes
|
20 | 31 | — | — | 51 | |||||||||||||||
|
Other
|
130 | 213 | 47 | (84 | ) | 306 | ||||||||||||||
|
Total current liabilities
|
731 | 1,450 | 58 | (771 | ) | 1,468 | ||||||||||||||
|
Long-term debt — non-affiliated
|
— | 11 | 1,149 | — | 1,160 | |||||||||||||||
|
Long-term debt — affiliated
|
4,583 | 768 | 5,409 | (10,760 | ) | — | ||||||||||||||
|
Deferred income taxes
|
— | 56 | — | — | 56 | |||||||||||||||
|
Postretirement benefits and other liabilities
|
347 | 85 | — | 4 | 436 | |||||||||||||||
|
Commitments and contingencies
|
||||||||||||||||||||
|
Total liabilities
|
5,661 | 2,370 | 6,616 | (11,527 | ) | 3,120 | ||||||||||||||
|
Redeemable noncontrolling interests
|
— | 12 | — | — | 12 | |||||||||||||||
|
Tenneco Inc. Shareholders’ equity
|
(6 | ) | 1,069 | 35 | (1,102 | ) | (4 | ) | ||||||||||||
|
Noncontrolling interests
|
— | 39 | — | — | 39 | |||||||||||||||
|
Total equity
|
(6 | ) | 1,108 | 35 | (1,102 | ) | 35 | |||||||||||||
|
Total liabilities, redeemable noncontrolling interests and equity
|
$ | 5,655 | $ | 3,490 | $ | 6,651 | $ | (12,629 | ) | $ | 3,167 | |||||||||
132
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
BALANCE
SHEET
| December 31, 2009 | ||||||||||||||||||||
|
Tenneco Inc.
|
||||||||||||||||||||
|
Guarantor
|
Nonguarantor
|
(Parent
|
Reclass
|
|||||||||||||||||
| Subsidiaries | Subsidiaries | Company) | & Elims | Consolidated | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 20 | $ | 147 | $ | — | $ | — | $ | 167 | ||||||||||
|
Receivables, net
|
289 | 936 | 39 | (668 | ) | 596 | ||||||||||||||
|
Inventories
|
161 | 267 | — | — | 428 | |||||||||||||||
|
Deferred income taxes
|
— | 69 | — | (34 | ) | 35 | ||||||||||||||
|
Prepayments and other
|
43 | 124 | — | — | 167 | |||||||||||||||
|
Total current assets
|
513 | 1,543 | 39 | (702 | ) | 1,393 | ||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Investment in affiliated companies
|
591 | — | 632 | (1,223 | ) | — | ||||||||||||||
|
Notes and advances receivable from affiliates
|
3,872 | 308 | 5,818 | (9,998 | ) | — | ||||||||||||||
|
Long-term receivables, net
|
3 | 5 | — | — | 8 | |||||||||||||||
|
Goodwill
|
22 | 67 | — | — | 89 | |||||||||||||||
|
Intangibles, net
|
16 | 14 | — | — | 30 | |||||||||||||||
|
Deferred income taxes
|
75 | 25 | 15 | (15 | ) | 100 | ||||||||||||||
|
Other
|
28 | 58 | 25 | — | 111 | |||||||||||||||
| 4,607 | 477 | 6,490 | (11,236 | ) | 338 | |||||||||||||||
|
Plant, property, and equipment, at cost
|
1,005 | 2,094 | — | — | 3,099 | |||||||||||||||
|
Less — Accumulated depreciation and amortization
|
(696 | ) | (1,293 | ) | — | — | (1,989 | ) | ||||||||||||
| 309 | 801 | — | — | 1,110 | ||||||||||||||||
|
Total assets
|
$ | 5,429 | $ | 2,821 | $ | 6,529 | $ | (11,938 | ) | $ | 2,841 | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Short-term debt (including current maturities of long-term debt)
|
||||||||||||||||||||
|
Short-term debt — non-affiliated
|
$ | — | $ | 74 | $ | 1 | $ | — | $ | 75 | ||||||||||
|
Short-term debt — affiliated
|
302 | 229 | 10 | (541 | ) | — | ||||||||||||||
|
Trade payables
|
270 | 609 | — | (113 | ) | 766 | ||||||||||||||
|
Accrued taxes
|
6 | 30 | — | — | 36 | |||||||||||||||
|
Other
|
167 | 166 | 39 | (48 | ) | 324 | ||||||||||||||
|
Total current liabilities
|
745 | 1,108 | 50 | (702 | ) | 1,201 | ||||||||||||||
|
Long-term debt — non-affiliated
|
— | 8 | 1,137 | — | 1,145 | |||||||||||||||
|
Long-term debt — affiliated
|
4,374 | 261 | 5,363 | (9,998 | ) | — | ||||||||||||||
|
Deferred income taxes
|
15 | 66 | — | (15 | ) | 66 | ||||||||||||||
|
Postretirement benefits and other liabilities
|
326 | 81 | — | 4 | 411 | |||||||||||||||
|
Commitments and contingencies
|
||||||||||||||||||||
|
Total liabilities
|
5,460 | 1,524 | 6,550 | (10,711 | ) | 2,823 | ||||||||||||||
|
Redeemable noncontrolling interests
|
— | 7 | — | — | 7 | |||||||||||||||
|
Tenneco Inc. Shareholders’ equity
|
(31 | ) | 1,258 | (21 | ) | (1,227 | ) | (21 | ) | |||||||||||
|
Noncontrolling interests
|
— | 32 | — | — | 32 | |||||||||||||||
|
Total equity
|
(31 | ) | 1,290 | (21 | ) | (1,227 | ) | 11 | ||||||||||||
|
Total liabilities, redeemable noncontrolling interests and equity
|
$ | 5,429 | $ | 2,821 | $ | 6,529 | $ | (11,938 | ) | $ | 2,841 | |||||||||
133
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
STATEMENT
OF CASH FLOWS
| Year Ended December 31, 2010 | ||||||||||||||||||||
|
Tenneco Inc.
|
||||||||||||||||||||
|
Guarantor
|
Nonguarantor
|
(Parent
|
Reclass
|
|||||||||||||||||
| Subsidiaries | Subsidiaries | Company) | & Elims | Consolidated | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Operating Activities
|
||||||||||||||||||||
|
Net cash provided (used) by operating activities
|
$ | 97 | $ | 380 | $ | (233 | ) | $ | — | $ | 244 | |||||||||
|
Investing Activities
|
||||||||||||||||||||
|
Proceeds from sale of assets
|
1 | 2 | — | — | 3 | |||||||||||||||
|
Cash payments for plant, property, and equipment
|
(50 | ) | (101 | ) | — | — | (151 | ) | ||||||||||||
|
Cash payments for software related intangible assets
|
(7 | ) | (5 | ) | — | — | (12 | ) | ||||||||||||
|
Investments and other
|
— | 3 | — | — | 3 | |||||||||||||||
|
Net cash used by investing activities
|
(56 | ) | (101 | ) | — | — | (157 | ) | ||||||||||||
|
Financing Activities
|
||||||||||||||||||||
|
Issuance of long-term debt
|
— | 5 | 875 | — | 880 | |||||||||||||||
|
Retirement of long-term debt
|
— | (4 | ) | (860 | ) | — | (864 | ) | ||||||||||||
|
Debt issuance cost on long-term debt
|
— | — | (24 | ) | — | (24 | ) | |||||||||||||
|
Increase (decrease) in bank overdrafts
|
— | 2 | — | — | 2 | |||||||||||||||
|
Net increase (decrease) in revolver borrowings and short-term
debt excluding current maturities of long-term debt
|
— | (10 | ) | — | — | (10 | ) | |||||||||||||
|
Intercompany dividends and net increase (decrease) in
intercompany obligations
|
(61 | ) | (181 | ) | 242 | — | — | |||||||||||||
|
Distribution to noncontrolling interests partners
|
— | (14 | ) | — | — | (14 | ) | |||||||||||||
|
Net cash provided (used) by financing activities
|
(61 | ) | (202 | ) | 233 | — | (30 | ) | ||||||||||||
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
— | 9 | — | — | 9 | |||||||||||||||
|
Increase (decrease) in cash and cash equivalents
|
(20 | ) | 86 | — | — | 66 | ||||||||||||||
|
Cash and cash equivalents, January 1
|
20 | 147 | — | — | 167 | |||||||||||||||
|
Cash and cash equivalents, December 31 (Note)
|
$ | — | $ | 233 | $ | — | $ | — | $ | 233 | ||||||||||
| Note: | Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. |
134
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
STATEMENT
OF CASH FLOWS
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
Tenneco Inc.
|
||||||||||||||||||||
|
Guarantor
|
Nonguarantor
|
(Parent
|
Reclass
|
|||||||||||||||||
| Subsidiaries | Subsidiaries | Company) | & Elims | Consolidated | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Operating Activities
|
||||||||||||||||||||
|
Net cash provided (used) by operating activities
|
$ | 347 | $ | 160 | $ | (266 | ) | $ | — | $ | 241 | |||||||||
|
Investing Activities
|
||||||||||||||||||||
|
Proceeds from sale of assets
|
— | 5 | — | — | 5 | |||||||||||||||
|
Cash payments for plant, property, and equipment
|
(42 | ) | (78 | ) | — | — | (120 | ) | ||||||||||||
|
Acquisition of business (net of cash acquired)
|
— | 1 | — | — | 1 | |||||||||||||||
|
Cash payments for software related intangible assets
|
(2 | ) | (4 | ) | — | — | (6 | ) | ||||||||||||
|
Investments and other
|
— | 1 | — | — | 1 | |||||||||||||||
|
Net cash used by investing activities
|
(44 | ) | (75 | ) | — | — | (119 | ) | ||||||||||||
|
Financing Activities
|
||||||||||||||||||||
|
Issuance of common shares
|
— | — | 188 | — | 188 | |||||||||||||||
|
Issuance of long-term debt
|
— | — | 6 | — | 6 | |||||||||||||||
|
Retirement of long-term debt
|
— | (5 | ) | (17 | ) | — | (22 | ) | ||||||||||||
|
Debt issuance cost on long-term debt
|
— | — | (8 | ) | — | (8 | ) | |||||||||||||
|
Increase (decrease) in bank overdrafts
|
— | (23 | ) | — | — | (23 | ) | |||||||||||||
|
Net increase (decrease) in revolver borrowings and short-term
debt excluding current maturities of long-term debt
|
— | 21 | (239 | ) | — | (218 | ) | |||||||||||||
|
Intercompany dividends and net increase (decrease) in
intercompany obligations
|
(299 | ) | (37 | ) | 336 | — | — | |||||||||||||
|
Distribution to noncontrolling interests partners
|
— | (10 | ) | — | — | (10 | ) | |||||||||||||
|
Net cash provided (used) by financing activities
|
(299 | ) | (54 | ) | 266 | — | (87 | ) | ||||||||||||
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
— | 6 | — | — | 6 | |||||||||||||||
|
Increase (decrease) in cash and cash equivalents
|
4 | 37 | — | — | 41 | |||||||||||||||
|
Cash and cash equivalents, January 1
|
16 | 110 | — | — | 126 | |||||||||||||||
|
Cash and cash equivalents, December 31 (Note)
|
$ | 20 | $ | 147 | $ | — | $ | — | $ | 167 | ||||||||||
| Note: | Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. |
135
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
STATEMENT
OF CASH FLOWS
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
Tenneco Inc.
|
||||||||||||||||||||
|
Guarantor
|
Nonguarantor
|
(Parent
|
Reclass
|
|||||||||||||||||
| Subsidiaries | Subsidiaries | Company) | & Elims | Consolidated | ||||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Operating Activities
|
||||||||||||||||||||
|
Net cash provided (used) by operating activities
|
$ | 167 | $ | 130 | $ | (137 | ) | $ | — | $ | 160 | |||||||||
|
Investing Activities
|
||||||||||||||||||||
|
Proceeds from sale of assets
|
— | 3 | — | — | 3 | |||||||||||||||
|
Cash payments for plant, property, and equipment
|
(90 | ) | (143 | ) | — | — | (233 | ) | ||||||||||||
|
Acquisition of business (net of cash acquired)
|
(19 | ) | 3 | — | — | (16 | ) | |||||||||||||
|
Cash payments for software related intangible assets
|
(9 | ) | (6 | ) | — | — | (15 | ) | ||||||||||||
|
Net cash used by investing activities
|
(118 | ) | (143 | ) | — | — | (261 | ) | ||||||||||||
|
Financing Activities
|
||||||||||||||||||||
|
Issuance of common shares
|
— | — | 2 | — | 2 | |||||||||||||||
|
Issuance of long-term debt
|
— | 1 | — | — | 1 | |||||||||||||||
|
Retirement of long-term debt
|
— | (4 | ) | (2 | ) | — | (6 | ) | ||||||||||||
|
Debit issuance cost on long-term debt
|
— | — | (2 | ) | — | (2 | ) | |||||||||||||
|
Increase (decrease) in bank overdrafts
|
— | (1 | ) | — | — | (1 | ) | |||||||||||||
|
Net increase (decrease) in revolver borrowings and short-term
debt excluding current maturities of long-term debt
|
— | 7 | 70 | — | 77 | |||||||||||||||
|
Intercompany dividends and net increase (decrease) in
intercompany obligations
|
(39 | ) | (30 | ) | 69 | — | — | |||||||||||||
|
Distribution to noncontrolling interests partners
|
— | (13 | ) | — | — | (13 | ) | |||||||||||||
|
Net cash provided (used) by financing activities
|
(39 | ) | (40 | ) | 137 | — | 58 | |||||||||||||
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
— | (19 | ) | — | — | (19 | ) | |||||||||||||
|
Increase (decrease) in cash and cash equivalents
|
10 | (72 | ) | — | — | (62 | ) | |||||||||||||
|
Cash and cash equivalents, January 1
|
6 | 182 | — | — | 188 | |||||||||||||||
|
Cash and cash equivalents, December 31 (Note)
|
$ | 16 | $ | 110 | $ | — | $ | — | $ | 126 | ||||||||||
| Note: | Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. |
136
Table of Contents
TENNECO
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 14. | Quarterly Financial Data (Unaudited) |
|
Earnings Before
|
||||||||||||||||
|
Net Sales
|
Cost of Sales
|
Interest Expense,
|
Net Income (Loss)
|
|||||||||||||
|
and
|
(Excluding
|
Income Taxes
|
Attributable
|
|||||||||||||
|
Operating
|
Depreciation and
|
and Noncontrolling
|
to Tenneco
|
|||||||||||||
|
Quarter
|
Revenues | Amortization) | Interests | Inc. | ||||||||||||
| (Millions) | ||||||||||||||||
|
2010
|
||||||||||||||||
|
1st
|
$ | 1,316 | $ | 1,073 | $ | 59 | $ | 7 | ||||||||
|
2nd
|
1,502 | 1,222 | 93 | 40 | ||||||||||||
|
3rd
|
1,542 | 1,280 | 67 | 10 | ||||||||||||
|
4th
|
1,577 | 1,325 | 62 | (18 | ) | |||||||||||
| $ | 5,937 | $ | 4,900 | $ | 281 | $ | 39 | |||||||||
|
2009
|
||||||||||||||||
|
1st
|
$ | 967 | $ | 827 | $ | (13 | ) | $ | (49 | ) | ||||||
|
2nd
|
1,106 | 913 | 17 | (33 | ) | |||||||||||
|
3rd
|
1,254 | 1,043 | 35 | (8 | ) | |||||||||||
|
4th
|
1,322 | 1,092 | 53 | 17 | ||||||||||||
| $ | 4,649 | $ | 3,875 | $ | 92 | $ | (73 | ) | ||||||||
|
Basic
|
Diluted
|
|||||||
|
Earnings (Loss)
|
Earnings (Loss)
|
|||||||
|
per Share of
|
per Share of
|
|||||||
|
Quarter
|
Common Stock | Common Stock | ||||||
|
2010
|
||||||||
|
1st
|
$ | 0.11 | $ | 0.11 | ||||
|
2nd
|
0.68 | 0.66 | ||||||
|
3rd
|
0.17 | 0.17 | ||||||
|
4th
|
(0.31 | ) | (0.31 | ) | ||||
|
Full Year
|
0.65 | 0.63 | ||||||
|
2009
|
||||||||
|
1st
|
$ | (1.05 | ) | $ | (1.05 | ) | ||
|
2nd
|
(0.72 | ) | (0.72 | ) | ||||
|
3rd
|
(0.17 | ) | (0.17 | ) | ||||
|
4th
|
0.33 | 0.32 | ||||||
|
Full Year
|
(1.50 | ) | (1.50 | ) | ||||
| Note: | The sum of the quarters may not equal the total of the respective year’s earnings per share on either a basic or diluted basis due to changes in the weighted average shares outstanding throughout the year. |
(The
preceding notes are an integral part of the foregoing
consolidated financial statements.)
137
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SCHEDULE II
TENNECO
INC. AND CONSOLIDATED SUBSIDIARIES
|
Column A
|
Column B | Column C | Column D | Column E | ||||||||||||||||
| Additions | ||||||||||||||||||||
|
Balance
|
Charged
|
Charged
|
||||||||||||||||||
|
at
|
to
|
to
|
Balance
|
|||||||||||||||||
|
Beginning
|
Costs and
|
Other
|
at End
|
|||||||||||||||||
|
Description
|
of Year | Expenses | Accounts | Deductions | of Year | |||||||||||||||
| (Millions) | ||||||||||||||||||||
|
Allowance for Doubtful Accounts and Notes Receivable Deducted
from Assets to Which it Applies:
|
||||||||||||||||||||
|
Year Ended December 31, 2010
|
$ | 25 | $ | 2 | $ | — | $ | 7 | $ | 20 | ||||||||||
|
Year Ended December 31, 2009
|
$ | 24 | $ | 5 | $ | — | $ | 4 | $ | 25 | ||||||||||
|
Year Ended December 31, 2008
|
$ | 25 | $ | 3 | $ | 2 | $ | 6 | $ | 24 | ||||||||||
138
Table of Contents
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Evaluation
of Disclosure 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 year 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 and such information is
accumulated and communicated to management as appropriate to
allow timely decisions regarding required disclosures.
See Item 8, “Financial Statements and Supplementary
Data” for management’s report on internal control over
financial reporting and the report of our independent registered
public accounting firm thereon.
Changes
in Internal Control over Financial Reporting
There have been no changes in our internal control over
financial reporting during the quarter ended December 31,
2010, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
None
139
Table of Contents
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The sections entitled “Election of Directors” and
“Corporate Governance” in our definitive Proxy
Statement for the Annual Meeting of Stockholders to be held
May 18, 2011 are incorporated herein by reference. In
addition, Item 4.1 of this Annual Report on
Form 10-K,
which appears at the end of Part I, is incorporated herein
by reference.
A copy of our Code of Ethical Conduct for Financial Managers,
which applies to our Chief Executive Officer, Chief Financial
Officer, Controller and other key financial managers, is filed
as Exhibit 14 to this
Form 10-K.
We have posted a copy of the Code of Ethical Conduct for
Financial Managers on our Internet website at
www.tenneco.com
. We will make a copy of this code
available to any person, without charge, upon written request to
Tenneco Inc., 500 North Field Drive, Lake Forest, Illinois
60045, Attn: General Counsel. We intend to satisfy the
disclosure requirement under Item 5.05 of
Form 8-K
and applicable NYSE rules regarding amendments to or waivers of
our Code of Ethical Conduct by posting this information on our
Internet website at
www.tenneco.com
.
| ITEM 11. | EXECUTIVE COMPENSATION. |
The section entitled “Executive Compensation” in our
definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2011 is incorporated
herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The section entitled “Ownership of Common Stock” in
our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2011 is incorporated
herein by reference.
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table shows, as of December 31, 2010,
information regarding outstanding awards available under our
compensation plans (including individual compensation
arrangements) under which our equity securities may be delivered:
|
(a)
|
(c)
|
|||||||||||
|
Number of
|
(b)
|
Number of
|
||||||||||
|
securities to be
|
Weighted-
|
securities
|
||||||||||
|
issued upon
|
average exercise
|
available for
|
||||||||||
|
exercise of
|
price of
|
future
|
||||||||||
|
outstanding
|
outstanding
|
issuance
|
||||||||||
|
options,
|
options,
|
(excluding
|
||||||||||
|
warrants and
|
warrants and
|
shares in
|
||||||||||
| Plan category | rights(1) | rights | column (a))(1) | |||||||||
|
Equity compensation plans approved by security holders:
|
||||||||||||
|
Stock Ownership Plan(2)
|
293,266 | $ | 7.37 | — | ||||||||
|
2002 Long-Term Incentive Plan (as amended)(3)
|
892,587 | $ | 12.32 | — | ||||||||
|
2006 Long-Term Incentive Plan(4)
|
1,943,388 | $ | 16.47 | 1,912,243 | ||||||||
| (1) | Reflects the number of shares of the Company’s common stock. Does not include 418,832 shares that may be issued in settlement of common stock equivalent units that were (i) credited to outside directors as payment for their retainer and other fees or (ii) credited to any of our executive officers who have elected to defer a portion of their compensation. In general, these units are settled in cash. At the option of the Company, however, the units may be settled in shares of the Company’s common stock. | |
| (2) | This plan terminated as to new awards on December 31, 2001 (except awards pursuant to commitments outstanding at that date). | |
| (3) | This plan terminated as to new awards upon adoption of our 2006 Long-term Incentive Plan (except awards pursuant to commitments outstanding on that date). |
140
Table of Contents
| (4) | Does not include 558,198 shares subject to outstanding restricted stock (vest over time) as of December 31, 2010 that were issued at a weighted average exercise price of $11.58. Under this plan, as of December 31, 2010, a maximum of 1,529,794 shares remained available for delivery under full value awards (i.e., bonus stock, stock equivalent units, performance units, restricted stock and restricted stock units). |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The subsections entitled “The Board of Directors and its
Committees — General” and “Transactions with
Related Persons” under the section entitled “Corporate
Governance” in our definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 18, 2011
are incorporated herein by reference.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The sections entitled “Ratify Appointment of Independent
Public Accountants — Audit, Audit-Related, Tax and All
Other Fees” and “Ratify Appointment of Independent
Public Accountants — Pre-Approval Policy” in our
definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2011 are incorporated
herein by reference.
141
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED IN ITEM 8
See “Index to Financial Statements of Tenneco Inc. and
Consolidated Subsidiaries” set forth in Item 8,
“Financial Statements and Supplementary Data” for a
list of financial statements filed as part of this Report.
INDEX TO
SCHEDULE INCLUDED IN ITEM 8
| Page | ||||
|
Schedule of Tenneco Inc. and Consolidated
Subsidiaries — Schedule II — Valuation
and qualifying accounts — three years ended
December 31, 2010
|
138 | |||
SCHEDULES
OMITTED AS NOT REQUIRED OR INAPPLICABLE
Schedule I — Condensed financial information of
registrant
Schedule III — Real estate and accumulated
depreciation
Schedule IV — Mortgage loans on real estate
Schedule V — Supplemental information concerning
property — casualty insurance operations
142
Table of Contents
EXHIBITS
The following exhibits are filed with this Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010, or
incorporated herein by reference (exhibits designated by an
asterisk are filed with the report; all other exhibits are
incorporated by reference):
INDEX TO
EXHIBITS
|
Exhibit
|
||||||
|
Number
|
Description
|
|||||
| 2 | — | None. | ||||
| 3 | .1(a) | — | Restated Certificate of Incorporation of the registrant dated December 11, 1996 (incorporated herein by reference to 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 to 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 to 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 to 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 to 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 to 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 to 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 to 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 to 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 | .1(j) | — | Certificate of Ownership and Merger merging Tenneco Inc. with and into the registrant, dated October 27, 2005 (incorporated herein by reference to Exhibit 99.1 of the registrant’s Current Report on Form 8-K dated October 28, 2005, File No. 1-12387). | |||
| 3 | .2 | — | By-laws of the registrant, as amended March 4, 2008 (incorporated herein by reference to Exhibit 99.1 of the registrant’s Current Report on Form 8-K event date March 4, 2008, File No. 1-12387). | |||
| 3 | .3 | — | Certificate of Incorporation of Tenneco Global Holdings Inc. (“Global”), as amended (incorporated herein by reference to Exhibit 3.3 of 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 of the registrant’s Registration Statement on Form S-4, Reg. No. 333-93757). | |||
| 3 | .5 | — | Certificate of Incorporation of TMC Texas Inc. (“TMC”) (incorporated herein by reference to Exhibit 3.5 of 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 of the registrant’s Registration Statement on Form S-4, Reg. No. 333-93757). | |||
143
Table of Contents
|
Exhibit
|
||||||
|
Number
|
Description
|
|||||
| 3 | .7 | — | Amended and Restated Certificate of Incorporation of Tenneco International Holding Corp. dated as of April 29, 2010 (incorporated herein by reference to Exhibit 3.1 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, File No. 1-12387). | |||
| 3 | .8 | — | Amended and Restated By-laws of TIHC (incorporated herein by reference to Exhibit 3.8 of 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 of 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 of 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 of 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 of 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 of 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 of the registrant’s Registration Statement on Form S-4, Reg. No. 333-93757). | |||
| 4 | .1(a) | — | Indenture, dated as of November 1, 1996, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 of the registrant’s Registration Statement on Form S-4, Registration No. 333-14003). | |||
| 4 | .1(b) | — | 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 to 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 | .1(c) | — | 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 to 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 | .1(d) | — | 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 to 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 | .2 | — | Specimen stock certificate for Tenneco Inc. common stock (incorporated herein by reference to Exhibit 4.3 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-12387). | |||
| 4 | .3(a) | — | Second Amended and Restated Credit Agreement, dated as of March 16, 2007, among Tenneco Inc., JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto (incorporated herein by reference to Exhibit 99.1 of the registrant’s Current Report on Form 8-K dated March 16, 2007). | |||
| 4 | .3(b) | — | Guarantee and Collateral Agreement, dated as of March 16, 2007 (amending and restating the Guarantee and Collateral Agreement dated as of November 4, 1999, as previously amended and amended and restated), among Tenneco Inc., various of its subsidiaries and JPMorgan Chase Bank, N.A., as administrative agent (incorporated herein by reference to Exhibit 99.2 of the registrant’s Current Report on Form 8-K dated March 16, 2007). | |||
| 4 | .3(c) | — | Waiver, dated July 23, 2007, to Second Amended and Restated Credit Agreement, dated as March 16, 2007, by and among the registrant, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto (incorporated herein by reference to Exhibit 4.5(c) of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 1-12387). | |||
144
Table of Contents
|
Exhibit
|
||||||
|
Number
|
Description
|
|||||
| 4 | .3(d) | — | Second Amendment, dated November 26, 2007, to Second Amended and Restated Credit Agreement, dated as March 16, 2007, by and among the registrant, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto (incorporated herein by reference to Exhibit 4.5(d) of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 1-12387). | |||
| 4 | .3(e) | — | Third Amendment, dated as of December 23, 2008, to Second Amended and Restated Credit Agreement, dated as of March 16, 2007, by and among the registrant, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated December 23, 2008). | |||
| 4 | .3(f) | — | Fourth Amendment, dated as of February 23, 2009, to Second Amended and Restated Credit Agreement, dated as of March 16, 2007, by and among the registrant, JP Morgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto (incorporated herein by reference to Exhibit 4.1 of the registrant’s Current Report on Form 8-K dated February 23, 2009). | |||
| 4 | .3(g) | — | Fifth Amendment to the Second Amended and Restated Credit Agreement, dated June 3, 2010, by and among the registrant, various subsidiaries of the registrant and JP Morgan Chase Bank, N.A., as administrative agent (incorporated herein by reference to Exhibit 99.1 of the registrant’s Current Report on Form 8-K filed June 9, 2010, File No. 1-12387). | |||
| 4 | .3(h) | — | Sixth Amendment to the Second Amended and Restated Credit Agreement, dated November 15, 2010, by and among the registrant, various subsidiaries of the registrant and JP Morgan Chase Bank, N.A., as administrative agent (incorporated herein by reference to Exhibit 4.1 of the registrant’s Current Report on Form 8-K filed November 30, 2010, File No. 1-12387). | |||
| 4 | .4(a) | — | Indenture, dated as of November 19, 2007, by and among the registrant, the subsidiary guarantors party thereto and Wells Fargo Bank, N.A., as trustee (incorporated herein by reference to Exhibit 4.9(a) of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 1-12387). | |||
| 4 | .4(b) | — | Agreement of Resignation, Appointment and Acceptance between Tenneco Inc., Wells Fargo Bank, National Association and Bank of New York Mellon Trust Company, N. A. (incorporated herein by reference to Exhibit 10.1 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 1-12387). | |||
| 4 | .5(a) | — | Indenture, dated August 3, 2010, among the registrant, various subsidiaries of the registrant and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 of the registrant’s Current Report on Form 8-K filed August 3, 2010, File No. 1-12387). | |||
| 4 | .5(b) | — | Registration Rights Agreement, dated August 3, 2010, among the registrant, various subsidiaries of the registrant and the initial purchasers named therein (incorporated herein by reference to Exhibit 4.2 of the registrant’s Current Report on Form 8-K filed August 3, 2010, File No. 1-12387). | |||
| 4 | .6(a) | Indenture, dated December 23, 2010, among the registrant, various subsidiaries of the registrant and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 of the registrant’s Current Report on Form 8-K filed December 23, 2010, File No. 1-12387). | ||||
| 4 | .6(b) | Registration Rights Agreement, dated December 23, 2010, among the registrant, various subsidiaries of the registrant and the initial purchasers named therein (incorporated herein by reference to Exhibit 4.2 of the registrant’s Current Report on Form 8-K filed December 23, 2010, File No. 1-12387). | ||||
| 9 | — | None. | ||||
| 10 | .1 | Distribution Agreement, dated November 1, 1996, by and among El Paso Tennessee Pipeline Co., the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference to 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., the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference to 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. , the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference to Exhibit 10.3 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). | |||
145
Table of Contents
|
Exhibit
|
||||||
|
Number
|
Description
|
|||||
| 10 | .4 | — | Benefits Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co., the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference to 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., the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference to 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., Newport News Shipbuilding Inc., the registrant, and El Paso Natural Gas Company (incorporated herein by reference to Exhibit 10.6 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). | |||
| 10 | .7 | — | First Amendment to Tax Sharing Agreement, dated as of December 11, 1996, among El Paso Tennessee Pipeline Co., the registrant, El Paso Natural Gas Company and Newport News Shipbuilding Inc. (incorporated herein by reference to 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 | — | Change of Control Severance Benefits Plan for Key Executives (incorporated herein by reference to 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 | .9 | — | Stock Ownership Plan (incorporated herein by reference to Exhibit 10.10 of the registrant’s Registration Statement on Form S-4, Reg. No. 333-93757). | |||
| +10 | .10 | — | Key Executive Pension Plan (incorporated herein by reference to Exhibit 10.11 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). | |||
| +10 | .11 | — | Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.12 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). | |||
| +10 | .12 | — | Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.13 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). | |||
| 10 | .13 | — | Human Resources Agreement by and between the registrant and Tenneco Packaging Inc. dated November 4, 1999 (incorporated herein by reference to Exhibit 99.1 of the registrant’s Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). | |||
| 10 | .14 | — | Tax Sharing Agreement by and between the registrant and Tenneco Packaging Inc. dated November 3, 1999 (incorporated herein by reference to Exhibit 99.2 of the registrant’s Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). | |||
| 10 | .15 | — | Amended and Restated Transition Services Agreement by and between the registrant and Tenneco Packaging Inc. dated as of November 4, 1999 (incorporated herein by reference to 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 | .16 | — | 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 to Exhibit 10.24 of the registrant’s Registration Statement on Form S-4, Reg. No. 333-93757). | |||
| +10 | .17 | — | Amendment No. 1 to Change in Control Severance Benefits Plan for Key Executives (incorporated herein by reference to Exhibit 10.23 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). | |||
| +10 | .18 | — | 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 to Exhibit 10.29 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-12387). | |||
| +10 | .19 | — | Letter Agreement dated July 27, 2000 between the registrant and Timothy E. Jackson (incorporated herein by reference to Exhibit 10.27 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). | |||
146
Table of Contents
|
Exhibit
|
||||||
|
Number
|
Description
|
|||||
| +10 | .20 | — | Letter Agreement dated as of June 1, 2001 between the registrant and Hari Nair (incorporated herein by reference to Exhibit 10.28 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2001, File No. 1-12387). | |||
| +10 | .21 | — | 2002 Long-Term Incentive Plan (As Amended and Restated Effective March 11, 2003) (incorporated herein by reference to Exhibit 10.26 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). | |||
| +10 | .22 | — | Amendment No. 1 to Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.27 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387). | |||
| +10 | .23 | — | Supplemental Stock Ownership Plan (incorporated herein by reference to Exhibit 10.28 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387). | |||
| +10 | .24 | — | Form of Stock Option Agreement for employees under the 2002 Long-Term Incentive Plan, as amended (providing for a ten year option term) (incorporated herein by reference to Exhibit 99.2 of the registrant’s Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). | |||
| +10 | .25 | — | Form of Stock Option Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended (providing for a ten year option term) (incorporated herein by reference to Exhibit 99.3 of the registrant’s Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). | |||
| +10 | .26 | — | Form of Stock Option Agreement for employees under the 2002 Long-Term Incentive Plan, as amended (providing for a seven year option term) (incorporated herein by reference to Exhibit 99.2 of the registrant’s Current Report on Form 8-K dated January 17, 2005, File No. 1-12387). | |||
| +10 | .27 | — | Form of Stock Option Agreement for non-employee directors under the 2002 Long-Term Incentive Plan, as amended (providing for a seven year option term) (incorporated herein by reference to Exhibit 99.3 of the registrant’s Current Report on Form 8-K dated January 17, 2005, File No. 1-12387). | |||
| +10 | .28 | — | Amendment No. 1 to the Key Executive Pension Plan (incorporated herein by reference to Exhibit 10.39 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-12387). | |||
| +10 | .29 | — | Amendment No. 1 to the Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.40 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). | |||
| +10 | .30 | — | Second Amendment to the Key Executive Pension Plan (incorporated herein by reference to Exhibit 10.41 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). | |||
| +10 | .31 | — | Amendment No. 2 to the Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.42 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). | |||
| +10 | .32 | — | Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.43 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). | |||
| +10 | .33 | — | Supplemental Pension Plan for Management (incorporated herein by reference to Exhibit 10.45 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). | |||
| +10 | .34 | — | Intentionally omitted. | |||
| +10 | .35 | — | Amended and Restated Value Added (“TAVA”) Incentive Compensation Plan, effective January 1, 2006 (incorporated herein by reference to Exhibit 10.47 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 1-12387). | |||
| +10 | .36 | — | Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 99.1 of the registrant’s Current Report on Form 8-K, dated May 9, 2006). | |||
| +10 | .37 | — | Form of Restricted Stock Award Agreement for non-employee directors under the Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 99.2 of the registrant’s Current Report on Form 8-K, dated May 9, 2006). | |||
| +10 | .38 | — | Form of Stock Option Agreement for employees under the Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 99.3 of the registrant’s Current Report on Form 8-K, dated May 9, 2006). | |||
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|
Exhibit
|
||||||
|
Number
|
Description
|
|||||
| +10 | .39 | — | Form of Restricted Stock Award Agreement for employees under the Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 99.4 of the registrant’s Current Report on Form 8-K, dated May 9, 2006). | |||
| +10 | .40 | — | Form of First Amendment to the Tenneco Inc. Supplemental Pension Plan for Management (incorporated herein by reference to Exhibit 10.56 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-12387). | |||
| +10 | .41 | — | Form of First Amendment to the Tenneco Inc. Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.57 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-12387). | |||
| +10 | .42 | — | Letter Agreement dated January 5, 2007 between the registrant and Hari N. Nair (incorporated herein by reference to Exhibit 10.60 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-12387). | |||
| +10 | .43 | — | Letter Agreement between Tenneco Inc. and Gregg Sherrill (incorporated herein by reference to Exhibit 99.2 of the registrant’s Current Report on Form 8-K dated as of January 5, 2007, File No. 1-12387). | |||
| +10 | .44 | — | Letter Agreement between Tenneco Inc. and Gregg Sherrill, dated as of January 15, 2007 (incorporated herein by reference to Exhibit 99.1 of the registrant’s Current Report on Form 8-K dated as of January 15, 2007, File No. 1-12387). | |||
| +10 | .45 | — | Form of Restricted Stock Agreement between Tenneco Inc. and Gregg M. Sherrill (incorporated herein by reference to Exhibit 10.63 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-12387). | |||
| +10 | .46 | — | Form of Long-Term Performance Unit Award Under the 2006 Long-Term Incentive Plan (stub period award for 2007) (incorporated herein by reference to Exhibit 10.64 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, File No. 1-12387). | |||
| +10 | .47 | — | Form of Long-Term Performance Unit Award Under the 2006 Long-Term Incentive Plan (three-year award for 2007-2009 period) (incorporated herein by reference to Exhibit 10.65 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, File No. 1-12387). | |||
| +10 | .48 | — | Tenneco Inc. Change in Control Severance Benefit Plan for Key Executives, as Amended and Restated effective December 12, 2007 (incorporated herein by reference to Exhibit 10.61 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .49 | — | Form of Long-Term Performance Unit Award Under the 2006 Long-Term Incentive Plan (stub period award for 2008) (incorporated herein by reference to Exhibit 10.67 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 1-12387). | |||
| +10 | .50 | — | Form of Long-Term Performance Unit Award Under the 2006 Long-Term Incentive Plan (three-year award for periods commencing with 2008) (incorporated herein by reference to Exhibit 10.68 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 1-12387). | |||
| +10 | .51 | — | Letter Agreement dated January 5, 2007 between the registrant and Timothy E. Jackson (incorporated herein by reference to Exhibit 10.69 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 1-12387). | |||
| +10 | .52 | — | Excess Benefit Plan, including Supplements for Gregg M. Sherrill and Kenneth R. Trammell (incorporated herein by reference to Exhibit 10.65 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .53 | — | Amendment No. 2 to Change in Control Severance Benefit Plan for Key Executives (incorporated herein by reference to Exhibit 10.66 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .54 | — | Incentive Deferral Plan, as Amended and Restated Effective as of January 1, 2008 (incorporated herein by reference to Exhibit 10.67 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .55 | — | Code Section 409A Amendment to 2002 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.68 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
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Exhibit
|
||||||
|
Number
|
Description
|
|||||
| +10 | .56 | — | Code Section 409A Amendment to 2006 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.69 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .57 | — | Code Section 409A to Excess Benefit Plan (incorporated herein by reference to Exhibit 10.70 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .58 | — | Code Section 409A Amendment to Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.71 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .59 | — | Code Section 409A Amendment to Supplemental Pension Plan for Management (incorporated herein by reference to Exhibit 10.72 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .60 | — | Code Section 409A Amendment to Amended and Restated Value Added (“TAVA”) Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.73 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .61 | — | Code Section 409A Amendment to Letter Agreement between the registrant and Gregg M. Sherrill (incorporated herein by reference to Exhibit 10.74 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .62 | — | Code Section 409A Amendment to Letter Agreement between the registrant and Hari N. Nair (incorporated herein by reference to Exhibit 10.75 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| +10 | .63 | — | Code Section 409A Amendment to Letter Agreement between the registrant and Timothy E. Jackson (incorporated herein by reference to Exhibit 10.76 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| 10 | .64 | — | Second Amended and Restated Receivables Purchase Agreement, dated as of May 4, 2005, among the registrant, as Servicer, Tenneco Automotive RSA Company, as Seller, Jupiter Securitization Corporation and Liberty Street Funding Corp., as Conduits The Bank of Nova Scotia, JP Morgan Chase Bank, N.A. and the Committed Purchasers from time to time party thereto, and Amendments 1 through 10 thereto (incorporated herein by reference to Exhibit 10.77 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). | |||
| 10 | .65 | — | Amendment No. 11, dated as of April 29, 2009, to Second Amended and Restated Receivable Purchase Agreement (incorporated herein by reference to Exhibit 10.1 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, File No. 1-12387). | |||
| +10 | .66 | — | Tenneco Inc. 2006 Long-Term Incentive Plan (as amended and restated effective March 11, 2009) (incorporated herein by reference to Appendix A of the registrant’s proxy statement on Schedule 14A, filed with the Securities and Exchange Commission on March 31, 2009, File No. 1-12387). | |||
| 10 | .67 | — | Amendment No. 12, dated as of June 25, 2009, to Second Amended and Restated Receivable Purchase Agreement (incorporated herein by reference to Exhibit 10.1 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 1-12387). | |||
| 10 | .68 | — | Amendment No. 13, dated as of July 31, 2009, to Second Amended and Restated Receivable Purchase Agreement (incorporated herein by reference to Exhibit 10.2 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 1-12387). | |||
| 10 | .69 | — | Underwriting Agreement, dated November 18, 2009, between Tenneco Inc. and the underwriters named therein (incorporated herein by reference to Exhibit 1.1 of the registrant’s Current Report on Form 8-K filed November 19, 2009, File No. 1-12387). | |||
| +10 | .70 | — | Amendment No. 2, effective January 15, 2010, to Amended and Restated Tenneco Value Added Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.70 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 1-12387). | |||
| +10 | .71 | — | Amendment dated December 18, 2009, to Tenneco Inc. Incentive Deferral Plan (incorporated herein by reference to Exhibit 10.71 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 1-12387). | |||
| +10 | .72 | — | Form of Amendment to Long-Term Performance Unit Award under the 2006 Long-Term Incentive Plan (three year award for 2007-2009 period) (incorporated herein by reference to Exhibit 10.72 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 1-12387). | |||
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Exhibit
|
||||||
|
Number
|
Description
|
|||||
| +10 | .73 | — | Form of Amendment to Long-Term Performance Unit Award under the 2006 Long-Term Incentive Plan (three year award for 2008-2010 period) (incorporated herein by reference to Exhibit 10.73 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 1-12387). | |||
| 10 | .74 | — | Amendment No. 14, dated February 19, 2010, to Second Amended and Restated Receivables Purchase Agreement (incorporated herein by reference to Exhibit 10.74 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 1-12387). | |||
| 10 | .75 | — | Third Amended and Restated Receivables Purchase Agreement, dated as of March 26, 2010, among Tenneco Automotive RSA Company, as Seller, Tenneco Automotive Operating Company Inc., as Servicer, Falcon Asset Securitization Company LLC and Liberty Street Funding LLC, as Conduits, the Committed Purchasers from time to time party thereto, JPMorgan Chase Bank, N.A., The Bank of Nova Scotia and Wells Fargo Bank, N.A., as Co-Agents and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated herein by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated as of March 26, 2010, File No. 1-12387). | |||
| 10 | .76 | — | Intercreditor Agreement, dated as of March 26, 2010, among Tenneco Automotive RSA Company, Tenneco Automotive Operating Company Inc., JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. (incorporated herein by reference to Exhibit 10.2 of the registrant’s Current Report on Form 8-K dated as of March 26, 2010, File No. 1-12387). | |||
| 10 | .77 | — | Omnibus Amendment No. 4, dated as of March 26, 2010, to Receivables Sale Agreements, as amended (incorporated herein by reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K dated as of March 26, 2010, File No. 1-12387). | |||
| 10 | .78 | — | SLOT Receivables Purchase Agreement, dated as of March 26, 2010, among Tenneco Automotive RSA Company, as Seller, Tenneco Automotive Operating Company Inc., as Servicer, and Wells Fargo Bank, N.A., individually and as SLOT Agent (incorporated herein by reference to Exhibit 10.4 of the registrant’s Current Report on Form 8-K dated as of March 26, 2010, File No. 1-12387). | |||
| 10 | .79 | — | Fourth Amended and Restated Performance Undertaking, dated as of March 26, 2010, by the registrant in favor of Tenneco Automotive RSA Company (incorporated herein by reference to Exhibit 10.5 of the registrant’s Current Report on Form 8-K dated as of March 26, 2010, File No. 1-12387). | |||
| +10 | .80 | — | Form of Tenneco Inc. Three Year Long-Term Performance Unit Award Agreement (incorporated herein by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated as of March 15, 2010, File No. 1-12387). | |||
| +10 | .81 | — | Form of Tenneco Inc. 2006 Long-Term Incentive Plan Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.1 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, File No. 1-12387). | |||
| +10 | .82 | — | Second Amendment to Tenneco Inc. Incentive Deferral Plan effective as of January 1, 2011 (incorporated herein by reference to Exhibit 10.1 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, File No. 1-12387). | |||
| 11 | — | None. | ||||
| *12 | — | Computation of Ratio of Earnings to Fixed Charges. | ||||
| 13 | — | None. | ||||
| 14 | — | Tenneco Inc. Code of Ethical Conduct for Financial Managers (incorporated herein by reference from Exhibit 99.3 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387). | ||||
| 16 | .1 | — | Letter from Deloitte & Touche LLP to the Securities and Exchange Commission dated August 6, 2009 (incorporated herein by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated August 6, 2009, File No. 1-12387). | |||
| 16 | .2 | — | Letter from Deloitte & Touche LLP to the Securities and Exchange Commission dated March 3, 2010 (incorporated herein by reference to Exhibit 16.1 of the registrant’s Current Report on Form 8-K dated March 3, 2010, File No. 1-12387). | |||
| 18 | — | None. | ||||
| *21 | — | List of Subsidiaries of Tenneco Inc. | ||||
| 22 | — | None. | ||||
| *23 | .1 | — | Consent of PricewaterhouseCoopers LLP. | |||
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Exhibit
|
||||||
|
Number
|
Description
|
|||||
| *23 | .2 | — | Consent of Deloitte & Touche LLP. | |||
| *24 | — | Powers of Attorney. | ||||
| *31 | .1 | — | Certification of Gregg M. Sherrill 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 Gregg M. Sherrill and Kenneth R. Trammell under Section 906 of the Sarbanes-Oxley Act of 2002. | |||
| 33 | — | None. | ||||
| 34 | — | None. | ||||
| 35 | — | None. | ||||
| 99 | — | None. | ||||
| 100 | — | None. | ||||
| 101 | — | None. | ||||
| * | Filed herewith. | |
| + | Indicates a management contract or compensatory plan or arrangement. |
151
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TENNECO INC.
| By |
/s/
Gregg
M. Sherrill
|
Gregg M. Sherrill
Chairman and Chief Executive Officer
Date: February 25, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934 this report has been signed by the following persons in the
capacities indicated on February 25, 2011.
|
Signature
|
Title
|
|||
|
/s/
Gregg
M. Sherrill
|
Chairman, President and Chief Executive Officer and Director (principal executive officer) | |||
|
/s/
Kenneth
R. Trammell
|
Executive Vice President and Chief Financial Officer (principal financial officer) | |||
|
*
|
Vice President and Controller (principal accounting officer) | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*By:
/s/
Kenneth R. Trammell
Attorney in fact |
||||
152
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. (removed and Reserved)printItem 4. 1. Executive Officers Of The RegistrantprintPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters, and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintItem 10. Directors, Executive Officers and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accountant Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Schedulesprint