<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
AUGUST 20, 1999
(Date of earliest event reported)
TENNECO INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
DELAWARE 1-12387 76-0515284
<S> <C> <C>
State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification Number)
</TABLE>
1275 KING STREET, GREENWICH, CONNECTICUT 06831
(Address of Principal Executive Offices) (Zip Code)
(203) 863-1000
(Registrant's Telephone Number, Including Area Code)
================================================================================
<PAGE> 2
CAUTIONARY STATEMENT AND "SAFE HARBOR" OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Current Report on Form 8-K contains forward-looking statements
regarding: (i) strategic alternatives, including the expected timing and
tax-free nature of the spin-off of the common stock of Tenneco Packaging Inc. to
Tenneco Inc. shareowners ("Spin-off") and the packaging and automotive companies
after the Spin-off; (ii) a restructuring plan; (iii) the planned sale of the
remaining interest in the containerboard joint venture; (iv) capital resources;
(v) the Year 2000 issue (relating to potential equipment and computer failures
by or at the change in the century); (vi) the outlook of the automotive and
specialty packaging businesses; and (vii) possible supplemental restructuring
and action plans and charges. See "Strategic Alternatives Analysis,"
"Restructuring and Other Charges," "Liquidity and Capital
Resources -- Capitalization," and "Year 2000" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in each of Sections
A, B and C; and see Section D -- "Third Quarter 1999 Outlook." These
forward-looking statements are based on the current expectations of Tenneco Inc.
and its consolidated subsidiaries ("Tenneco"). Because forward-looking
statements involve risks and uncertainties, plans, actions, and actual results
could differ materially. Among the factors that could cause plans, actions, and
results to differ materially from current expectations are: (i) the general
economic, political, and competitive conditions in markets and countries where
Tenneco operates, including currency fluctuations and other risks associated
with operating in foreign countries and changes in distribution channels; (ii)
governmental actions, including the ability to receive regulatory approvals and
the timing of such approvals; (iii) changes in capital availability or costs;
(iv) results of analysis regarding plans and strategic alternatives; (v) changes
in consumer demand and prices, including decreases in demand for Tenneco
products and its customers' products and the resulting negative impact on
revenues and margins from such products; (vi) the cost of compliance with
changes in regulations, including environmental regulations; (vii) workforce
factors such as strikes or labor interruptions; (viii) material substitutions or
increases in the costs of raw materials; (ix) Tenneco's ability to integrate
operations of acquired businesses quickly and in a cost-effective manner; (x)
new technologies; (xi) the ability of Tenneco and those with whom it conducts
business to timely resolve the Year 2000 issue, unanticipated costs of, problems
with or delays in resolving the Year 2000 issue, and the costs and impacts if
the Year 2000 issue is not timely resolved; (xii) changes by the Financial
Accounting Standards Board or other accounting regulatory bodies of
authoritative generally accepted accounting principles or policies; and (xiii)
the timing and occurrence (or non-occurrence) of transactions and events which
may be subject to circumstances beyond Tenneco's control.
i
<PAGE> 3
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
TABLE OF CONTENTS TO FORM 8-K
<TABLE>
<S> <C>
ITEM 5. Other Information................................... 1
Section A
Financial Statements for the three months ended March 31,
1999 and 1998.......................................... 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three
months ended March 31, 1999 and 1998................... 15
Section B
Financial Statements for the three months and six months
ended June 30, 1999 and 1998........................... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three
months and six months ended June 30, 1999 and 1998..... 37
Section C
Selected Financial Data................................... 52
Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three years
in the period ended December 31, 1998.................. 54
Financial Statements for the three years in the period
ended December 31, 1998................................ 70
Section D
Third Quarter 1999 Outlook................................ 108
</TABLE>
ii
<PAGE> 4
ITEM 5. OTHER INFORMATION
In August 1999, Tenneco received a letter ruling from the Internal Revenue
Service that the spin-off of the common stock of Tenneco Packaging to Tenneco
shareowners (the "Spin-off") will be tax-free for U.S. federal income tax
purposes to Tenneco and its shareowners and as a result has restated its
financial statements to reflect its specialty packaging segment as a
discontinued operation. As a result, income from continuing operations reflects
the income of Tenneco's remaining segment, Tenneco Automotive. Since Tenneco
would not have proceeded with the Spin-off absent the receipt of a determination
that the Spin-off would be tax-free, the establishment of a measurement date for
discontinued operations did not occur until that determination was received. The
following sections A, B and C present Tenneco's Selected Financial Data,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Financial Statements and Supplementary Data, which were
included, as applicable, in Tenneco's Annual Report on Form 10-K for the year
ended December 31, 1998 (subsequently restated in the Current Report on Form 8-K
dated July 14, 1999), and Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements which were
included in Tenneco's Quarterly Report on Form 10-Q for the three months ended
March 31, 1999 (subsequently restated in the Current Report on Form 8-K dated
July 14, 1999), and Tenneco's Quarterly Report on Form 10-Q for the three months
and six months ended June 30, 1999, as restated for the discontinued operations
of its specialty packaging segment. Section D presents certain information
regarding Tenneco's expectations for its continuing automotive and discontinued
specialty packaging business for the third quarter 1999.
1
<PAGE> 5
SECTION A.
This section presents Tenneco's restated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations previously included in Tenneco's Quarterly Report on Form 10-Q for
the three months ended March 31, 1999 (subsequently restated in the Current
Report on Form 8-K dated July 14, 1999).
2
<PAGE> 6
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
----------- -----------
(MILLIONS EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
REVENUES
Net sales and operating revenues........................ $ 789 $ 800
Other income --
Gain (loss) on sale of businesses and assets,
net.............................................. (1) (6)
Other income, net.................................. 3 12
----------- -----------
791 806
----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation shown below)... 585 574
Engineering, research, and development.................. 11 11
Selling, general, and administrative.................... 105 103
Depreciation and amortization........................... 35 35
----------- -----------
736 723
----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY
INTEREST.................................................. 55 83
Interest expense (net of interest capitalized).......... 19 13
Income tax expense...................................... 14 19
Minority interest....................................... 6 8
----------- -----------
INCOME FROM CONTINUING OPERATIONS........................... 16 43
Income (loss) from discontinued operations, net of income
tax....................................................... (166) 32
----------- -----------
Income (loss) before extraordinary loss..................... (150) 75
Extraordinary loss, net of income tax....................... (7) --
----------- -----------
Income (loss) before cumulative effect of change in
accounting principle...................................... (157) 75
Cumulative effect of change in accounting principle, net of
income tax................................................ (134) --
----------- -----------
NET INCOME (LOSS)........................................... $ (291) $ 75
=========== ===========
EARNINGS (LOSS) PER SHARE
Average shares of common stock outstanding --
Basic................................................... 166,743,506 169,542,371
Diluted................................................. 167,180,597 170,065,712
Basic earnings (loss) per share of common stock --
Continuing operations................................... $ .10 $ .25
Discontinued operations................................. (1.00) .19
Extraordinary loss...................................... (.04) --
Cumulative effect of change in accounting principle..... (.80) --
----------- -----------
$ (1.74) $ .44
=========== ===========
Diluted earnings (loss) per share of common stock --
Continuing operations................................... $ .10 $ .25
Discontinued operations................................. (1.00) .19
Extraordinary loss...................................... (.04) --
Cumulative effect of change in accounting principle..... (.80) --
----------- -----------
$ (1.74) $ .44
=========== ===========
Cash dividends per share of common stock.................... $ .30 $ .30
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements of income (loss).
3
<PAGE> 7
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------
1999 1998
---- -----
(MILLIONS)
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations........................... $ 16 $ 43
Adjustments to reconcile income from continuing operations
to cash provided (used) by operating activities --
Depreciation and amortization.......................... 35 35
Deferred income taxes.................................. 9 30
(Gain) loss on sale of businesses and assets, net...... 1 6
Changes in components of working capital --
(Increase) decrease in receivables................ (86) (143)
(Increase) decrease in inventories................ (30) (9)
(Increase) decrease in prepayments and other
current assets................................... -- (6)
Increase (decrease) in payables................... 49 7
Increase (decrease) in taxes accrued.............. (19) (37)
Increase (decrease) in interest accrued........... 31 30
Increase (decrease) in other current
liabilities...................................... (33) (24)
Other.................................................. (25) (21)
---- -----
Cash provided (used) by continuing operations............... (52) (89)
Cash provided (used) by discontinued operations............. 1 55
---- -----
Net cash provided (used) by operating activities............ (51) (34)
---- -----
INVESTING ACTIVITIES
Net proceeds related to the sale of discontinued
operations................................................ 3 --
Net proceeds from sale of assets............................ 5 1
Expenditures for plant, property, and equipment............. (33) (40)
Acquisition of businesses................................... (3) --
Expenditures for plant, property, and equipment and business
acquisitions -- discontinued operations................... (53) (62)
Investments and other....................................... 4 (2)
---- -----
Net cash provided (used) by investing activities............ (77) (103)
---- -----
FINANCING ACTIVITIES
Issuance of common and treasury shares...................... 12 13
Purchase of common stock.................................... (4) (11)
Issuance of long-term debt.................................. -- 3
Retirement of long-term debt................................ (29) (3)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt.............................. 204 177
Dividends (common).......................................... (51) (51)
---- -----
Net cash provided (used) by financing activities............ 132 128
---- -----
Effect of foreign exchange rate changes on cash and
temporary cash investments................................ (2) --
---- -----
Increase (decrease) in cash and temporary cash
investments............................................... 2 (9)
Cash and temporary cash investments, January 1.............. 29 29
---- -----
Cash and temporary cash investments, March 31 (Note)........ $ 31 $ 20
==== =====
Cash paid during the period for interest.................... $ 37 $ 31
Cash paid during the period for income taxes (net of
refunds).................................................. $ 17 $ 17
</TABLE>
- -------------------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
The accompanying notes to financial statements are an integral part of these
statements of cash flows.
4
<PAGE> 8
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
--------- ------------ ---------
1999 1998 1998
--------- ------------ ---------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments..................... $ 31 $ 29 $ 20
Receivables --
Customer notes and accounts, net................... 539 430 498
Income taxes....................................... 1 3 34
Other.............................................. 10 10 5
Inventories --
Finished goods..................................... 241 221 201
Work in process.................................... 78 79 73
Raw materials...................................... 68 73 67
Materials and supplies............................. 38 41 42
Deferred income taxes................................... 28 39 28
Prepayments and other................................... 79 139 190
------ ------ ------
1,113 1,064 1,158
------ ------ ------
Other assets:
Long-term notes receivable, net......................... 25 23 24
Goodwill and intangibles, net........................... 483 499 511
Deferred income taxes................................... 46 39 53
Pension assets.......................................... 103 101 95
Other................................................... 91 201 153
------ ------ ------
748 863 836
------ ------ ------
Plant, property, and equipment, at cost..................... 1,892 1,944 1,791
Less -- Reserves for depreciation and amortization...... 846 851 756
------ ------ ------
1,046 1,093 1,035
------ ------ ------
Net assets of discontinued operations....................... 1,428 1,739 1,768
------ ------ ------
$4,335 $4,759 $4,797
====== ====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt (including current maturities on
long-term debt)....................................... $ 368 $ 304 $ 131
Trade payables.......................................... 344 337 327
Taxes accrued........................................... 8 31 33
Accrued liabilities..................................... 197 161 169
Other................................................... 32 76 103
------ ------ ------
949 909 763
------ ------ ------
Long-term debt.............................................. 677 671 727
------ ------ ------
Deferred income taxes....................................... 32 98 201
------ ------ ------
Postretirement benefits..................................... 140 139 114
------ ------ ------
Deferred credits and other liabilities...................... 34 31 56
------ ------ ------
Commitments and contingencies
Minority interest........................................... 407 407 408
------ ------ ------
Shareowners' equity:
Common stock............................................ 2 2 2
Premium on common stock and other capital surplus....... 2,713 2,710 2,690
Accumulated other comprehensive income (loss)........... (168) (91) (145)
Retained earnings (accumulated deficit)................. (200) 142 113
------ ------ ------
2,347 2,763 2,660
Less -- Shares held as treasury stock, at cost.......... 251 259 132
------ ------ ------
2,096 2,504 2,528
------ ------ ------
$4,335 $4,759 $4,797
====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
5
<PAGE> 9
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------
1999 1998
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------ ----------- ------
(MILLIONS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
COMMON STOCK
Balance January 1.................................. 173,670,197 $ 2 172,569,889 $ 2
Issued pursuant to benefit plans.............. 135,983 -- 280,146 --
----------- ------ ----------- ------
Balance March 31................................... 173,806,180 2 172,850,035 2
=========== ------ =========== ------
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance January 1.................................. 2,710 2,679
Premium on common stock issued pursuant to
benefit plans............................... 3 11
------ ------
Balance March 31................................... 2,713 2,690
------ ------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance January 1.................................. (91) (122)
Other comprehensive income (loss)............. (77) (23)
------ ------
Balance March 31................................... (168) (145)
------ ------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1.................................. 142 89
Net income (loss)............................. (291) 75
Dividends on common stock..................... (51) (51)
------ ------
Balance March 31................................... (200) 113
------ ------
LESS -- COMMON STOCK HELD AS TREASURY STOCK, AT
COST
Balance January 1.................................. 6,757,678 259 2,928,189 120
Shares acquired............................... 1,060 -- 341,500 14
Shares issued pursuant to benefit and dividend
reinvestment plans.......................... (213,860) (8) (60,688) (2)
----------- ------ ----------- ------
Balance March 31................................... 6,544,878 251 3,209,001 132
=========== ------ =========== ------
Total......................................... $2,096 $2,528
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements of changes in shareowners' equity.
6
<PAGE> 10
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
------------- ------------- ------------- -------------
(MILLIONS)
<S> <C> <C> <C> <C>
NET INCOME (LOSS)........................ $(291) $ 75
----- ----
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance January 1...................... $ (82) $(122)
Translation of foreign currency
statements........................ (77) (77) (23) (23)
----- -----
Balance March 31....................... (159) (145)
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance January 1...................... (9) --
Additional minimum pension liability
adjustment........................ -- -- -- --
----- -----
Balance March 31....................... (9) --
----- -----
Balance March 31......................... $(168) $(145)
===== =====
----- ----
Other comprehensive income (loss)........ (77) (23)
----- ----
COMPREHENSIVE INCOME (LOSS).............. $(368) $ 52
===== ====
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements of comprehensive income (loss).
7
<PAGE> 11
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) In the opinion of Tenneco Inc. (the "Company"), the accompanying
unaudited consolidated financial statements of Tenneco Inc. and its consolidated
subsidiaries ("Tenneco") contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, cash flows, changes in shareowners' equity, and comprehensive income
for the periods indicated. The unaudited interim consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles.
The consolidated financial statements of Tenneco include all majority-owned
subsidiaries of the Company. Investments in 20% to 50% owned companies where the
Company has the ability to exert significant influence over operating and
financial policies are carried at cost plus equity in undistributed earnings and
cumulative translation adjustments since date of acquisition. Tenneco has no
investments in 20% to 50% owned companies where it does not carry the investment
at cost plus equity in undistributed earnings.
Prior year's financial statements have been reclassified where appropriate
to conform to 1999 presentations.
(2) In July 1998, Tenneco's Board of Directors authorized management to
develop a broad range of strategic alternatives which could result in the
separation of the automotive, paperboard packaging, and specialty packaging
businesses. As part of that strategic alternatives analysis, Tenneco has taken
the following actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint
venture with an affiliate of Madison Dearborn Partners, Inc. The
contribution of the containerboard assets to the joint venture was
completed in April 1999. Tenneco received consideration of cash and debt
assumption totaling approximately $2 billion and a 45 percent common
equity interest in the joint venture (now 43 percent due to subsequent
management equity issuances) valued at approximately $200 million.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operations, to
Caraustar Industries. This transaction closed in June 1999.
- Also in April 1999, Tenneco announced that its Board of Directors had
approved the separation of its automotive and specialty packaging
businesses into two separate, independent companies.
- In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture.
Tenneco expects the sale to be completed before the spin-off of the new
packaging company discussed below.
The separation of the automotive and packaging businesses will be
accomplished by the spin-off of the common stock of Tenneco Packaging Inc.
("Packaging") to Tenneco shareowners (the "Spin-off"). At the time of the
Spin-off, Packaging will include Tenneco's specialty packaging business,
Tenneco's administrative services operations and the remaining interest in the
containerboard joint venture if the sale has not been completed. Tenneco and
Packaging are, however, currently analyzing the alternatives with respect to the
administrative services operations.
Before the Spin-off, Tenneco will realign substantially all of its existing
debt through some combination of tender offers, exchange offers, prepayments,
and other refinancings. This debt realignment will be financed by internally
generated cash, borrowings by Tenneco under a new credit facility, the issuance
by Tenneco of subordinated debt, and borrowings by Packaging under new credit
facilities.
Also before the Spin-off, Tenneco will restructure its existing businesses,
assets, and liabilities through a series of corporate restructuring
transactions. As Tenneco is currently organized, ownership of its subsidiaries
is based on geographic location and tax considerations rather than on the
businesses in which the subsidiaries
8
<PAGE> 12
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
are involved. Therefore, Tenneco will need to restructure its existing
businesses so that the assets, liabilities, and operations of its packaging
business and administrative services operations will be owned by Packaging, and
the assets, liabilities, and operations of its automotive businesses will be
owned by Tenneco.
The Spin-off is subject to conditions, including formal declaration of the
Spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued
effectiveness of a determination that the Spin-off will be tax-free for U.S.
federal income tax purposes, and the successful completion of the debt
realignment and corporate restructuring transactions. In August 1999, Tenneco
received a letter ruling from the Internal Revenue Service that the Spin-off
will be tax-free for U.S. federal income tax purposes to Tenneco and its
shareowners.
(3) In connection with the containerboard transaction, in April 1999,
Tenneco received consideration of cash and debt assumption totaling
approximately $2 billion and a 45 percent interest in the joint venture (now 43
percent due to subsequent management equity issuances) valued at approximately
$200 million. The containerboard assets contributed to the joint venture
represented substantially all of the assets of the paperboard packaging segment
and included four mills, 67 corrugated products plants, and an ownership or
controlling interest in approximately 950,000 acres of timberland. Before the
transaction, Tenneco Packaging borrowed approximately $1.8 billion and used
approximately $1.2 billion to acquire assets used by the containerboard business
under operating leases and timber cutting rights and to purchase containerboard
business accounts receivable that had previously been sold to a third party. The
remainder of the borrowings was remitted to Tenneco and used to repay a portion
of short-term debt. Tenneco Packaging then contributed the containerboard
business assets (subject to the new indebtedness and the containerboard business
liabilities) to the joint venture in exchange for $247 million in cash and the
45 percent interest in the joint venture. As a result of the sale transaction,
Tenneco recognized a pre-tax loss of $293 million, $178 million after-tax or
$1.07 per diluted common share in the first quarter of 1999, based on the amount
by which the carrying amount of the containerboard assets exceeded the fair
value of those assets, less cost to sell. The estimate of fair value of the
containerboard assets was based on the fair value of the consideration received
by Tenneco from the joint venture.
In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture. Tenneco
expects the sale to be completed before the Spin-off. As a result of the
decision to sell the remaining interest in the containerboard joint venture,
Tenneco's paperboard packaging segment is presented as a discontinued operation
in the accompanying financial statements.
In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operations, to Caraustar
Industries. This transaction closed in June 1999.
9
<PAGE> 13
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Revenues and income for the paperboard packaging discontinued operations
are shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------
1999 1998
----- ----
<S> <C> <C>
Net sales and operating revenues............................ $ 392 $376
===== ====
Income before income taxes and interest allocation.......... $ 18 $ 34
Income tax (expense) benefit................................ (7) (14)
----- ----
Income before interest allocation........................... 11 20
Allocated interest expense, net of income tax............... (5) (6)
----- ----
Income from discontinued operations before disposition...... 6 14
Loss on disposition, net of income tax...................... (178) --
----- ----
Income (loss) from discontinued operations.................. $(172) $ 14
===== ====
</TABLE>
In August 1999, Tenneco received a letter ruling from the Internal Revenue
Service that the Spin-off will be tax-free for U.S. federal income tax purposes
to Tenneco and its shareowners and as a result has restated its financial
statements to reflect specialty packaging as a discontinued operation. As a
result, Tenneco's automotive segment ("Automotive") is its sole remaining
continuing operation. Since Tenneco would not have proceeded with the Spin-off
absent the receipt of a determination that the Spin-off would be tax-free, the
establishment of a measurement date for discontinued operations did not occur
until that determination was received. Revenues and income for the specialty
packaging discontinued operations are shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------
1999 1998
----- -----
<S> <C> <C>
Net sales and operating revenues............................ $666 $633
==== ====
Income before income taxes and interest allocation.......... $ 45 $ 69
Income tax (expense) benefit................................ (16) (30)
---- ----
Income before interest allocation........................... 29 39
Allocated interest expense, net of income tax............... (23) (21)
---- ----
Income (loss) from discontinued operations.................. $ 6 $ 18
==== ====
</TABLE>
Net assets of discontinued operations includes $2,548 million, $2,259
million and $2,456 million of debt allocated to discontinued operations as of
March 31, 1999 and 1998, and December 31, 1998, respectively.
(4) In the fourth quarter of 1998, Tenneco's Board of Directors approved an
extensive restructuring plan designed to reduce administrative and operational
overhead costs in every part of Tenneco's business. Tenneco recorded a pre-tax
charge to income from continuing operations of $53 million, $34 million
after-tax or $.20 per diluted common share. Of the pre-tax charge, for
operational restructuring plans, $36 million related to the consolidation of the
manufacturing and distribution operations of Automotive's North American
aftermarket business. A staff and related cost reduction plan, which covers
employees in the operating unit and at corporate, is expected to cost $17
million.
10
<PAGE> 14
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The Automotive aftermarket restructuring involves closing two plant
locations and five distribution centers, with the elimination of 302 positions
at those locations. The staff and related cost reduction plan involves the
elimination of 454 administrative positions.
The fixed assets at the locations to be closed were written down to their
fair value, less costs to sell, in the fourth quarter of 1998. As a result of
the single-purpose nature of the assets, fair value was estimated at scrap value
less cost to dispose. No significant net cash proceeds are expected to be
received from the ultimate disposal of these assets, which should be complete by
the fourth quarter of 2000. The effect of suspending depreciation for these
impaired assets is a reduction in depreciation and amortization of approximately
$2 million on an annual basis.
As of March 31, 1999, approximately 557 employees have been terminated. To
address customer service issues, the closure of one Automotive aftermarket
distribution center has been delayed until the second quarter of 2000. All other
restructuring actions, with the exception of the final disposal of certain
assets, are being executed according to the initial plan and are expected to be
complete by the fourth quarter of 1999. During the first quarter of 1999, the
Automotive aftermarket business closed one plant location and four distribution
centers.
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
1ST QUARTER
DECEMBER 31, 1998 1999 BALANCE AT
RESTRUCTURING CASH MARCH 31,
CHARGE BALANCE PAYMENTS 1999
----------------- ----------- ----------
(MILLIONS)
<S> <C> <C> <C>
Severance............................................... $15 $ 5 $10
Facility exit costs..................................... 1 -- 1
--- --- ---
$16 $ 5 $11
=== === ===
</TABLE>
(5) Tenneco is a party to various legal proceedings arising from its
operations. Tenneco believes that the outcome of these proceedings, individually
and in the aggregate, will not have a material adverse effect on its financial
position or results of operations.
(6) Tenneco is subject to a variety of environmental and pollution control
laws and regulations in all jurisdictions in which it operates. Tenneco has
provided reserves for compliance with these laws and regulations where it is
probable that a liability exists and where Tenneco can make a reasonable
estimate of the liability. The estimated liabilities recorded are subject to
change as more information becomes available regarding the magnitude of possible
cleanup costs and the timing, varying costs, and effectiveness of alternative
cleanup technologies. However, Tenneco believes that any additional costs which
may arise as more information becomes available will not have a material adverse
effect on its financial position or results of operations.
(7) In the first quarter of 1999, Tenneco recorded an extraordinary loss
for extinguishment of debt of $7 million (net of a $3 million income tax
benefit), or $.04 per diluted common share. The loss related to early retirement
of debt in connection with the sale of the containerboard assets.
(8) In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special
11
<PAGE> 15
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting treatment. This statement cannot
be applied retroactively and is effective for all fiscal years beginning after
June 15, 2000. Tenneco is currently evaluating the new standard but has not yet
determined the impact it will have on its financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Prior to January 1, 1999,
Tenneco capitalized certain costs related to start-up activities, primarily
engineering costs for new automobile original equipment platforms. Tenneco
adopted SOP 98-5 on January 1, 1999, and recorded an after-tax charge for the
cumulative effect of this change in accounting principle of $102 million (net of
a $50 million tax benefit), or $.61 per diluted common share. The change in
accounting principle decreased income from continuing operations by $4 million
(net of a $2 million tax benefit), or $.02 per diluted common share for the
three months ended March 31, 1999. If the new accounting method had been applied
retroactively, income from continuing operations for the three months ended
March 31, 1998, would have been lower by $3 million (net of a $2 million tax
benefit), or $.02 per diluted common share.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. This statement requires prospective application
for fiscal years beginning after December 15, 1998. Tenneco adopted SOP 98-1 on
January 1, 1999. The impact of this new standard did not have a significant
effect on Tenneco's financial position or results of operations.
Effective January 1, 1999, Tenneco changed its method of accounting for
customer acquisition costs from a deferral method to an expense-as-incurred
method. In connection with Tenneco's decision to separate its automotive and
specialty packaging businesses into separate public companies, Tenneco
determined that a change to an expense-as-incurred method of accounting for
automotive aftermarket customer acquisition costs was preferable in order to
permit improved comparability of stand-alone financial results with its
aftermarket industry competitors. The cumulative effect of the change in
accounting principle as of January 1, 1999, was $32 million (net of a $22
million tax benefit), or $.19 per diluted common share and is reflected as an
increase in the net loss for the three months ended March 31, 1999. The change
in accounting principle decreased income from continuing operations by $3
million (net of $2 million in income tax expense), or $.02 per diluted common
share for the three months ended March 31, 1999. If the new accounting method
had been applied retroactively, income from continuing operations for the three
months ended March 31, 1998, would have been lower by $4 million (net of a $3
million tax benefit), or $.02 per diluted common share.
12
<PAGE> 16
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(9) Earnings (loss) from continuing operations per share of common stock
outstanding were computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
----------- -----------
(MILLIONS EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
Basic Earnings Per Share --
Income from continuing operations............ $ 16 $ 43
=========== ===========
Average shares of common stock outstanding... 166,743,506 169,542,371
=========== ===========
Earnings from continuing operations per
average share of common stock.............. $ .10 $ .25
=========== ===========
Diluted Earnings Per Share --
Income from continuing operations............ $ 16 $ 43
=========== ===========
Average shares of common stock outstanding... 166,743,506 169,542,371
Effect of dilutive securities:
Restricted stock........................ 85,202 27,632
Stock options........................... -- 250,061
Performance shares...................... 351,889 245,648
----------- -----------
Average shares of common stock outstanding
including dilutive securities.............. 167,180,597 170,065,712
=========== ===========
Earnings from continuing operations per
average share of common stock.............. $ .10 $ .25
=========== ===========
</TABLE>
(10) Tenneco is a global manufacturer with a single operating segment:
Automotive -- Manufacture and sale of exhaust and ride control systems
for both the original equipment and replacement markets.
Tenneco evaluates business segment operating performance based primarily on
income before interest expense, income taxes, and minority interest, exclusive
of restructuring charges and other unusual items. Individual operating segments
have not been aggregated within this reportable segment.
13
<PAGE> 17
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table summarizes certain Tenneco segment information:
<TABLE>
<CAPTION>
SEGMENT RECLASS
----------------------- &
AUTOMOTIVE OTHER ELIMS CONSOLIDATED
---------- ---------- ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
AT MARCH 31, 1999, AND FOR THE THREE MONTHS THEN
ENDED
Revenues from external customers..................... $ 789 $ -- $ -- $ 789
Income before interest, income taxes, and minority
interest........................................... 57 (2) -- 55
Extraordinary loss................................... -- (7) -- (7)
Cumulative effect of change in accounting
principle.......................................... (101) (33) -- (134)
Total assets (Note).................................. 2,641 1,723 (29) 4,335
Net assets of discontinued operations................ -- 1,428 -- 1,428
AT MARCH 31, 1998, AND FOR THE THREE MONTHS THEN
ENDED
Revenues from external customers..................... $ 800 $ -- $ -- $ 800
Income before interest, income taxes, and minority
interest........................................... 89 (6) -- 83
Total assets (Note).................................. 2,846 2,013 (62) 4,797
Net assets of discontinued operations................ -- 1,768 -- 1,768
</TABLE>
- -------------------------
Note: The Other segment's total assets include the net assets of discontinued
operations.
The above notes are an integral part of the foregoing financial
statements.
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
STRATEGIC ALTERNATIVES ANALYSIS
In July 1998, Tenneco's Board of Directors authorized management to develop
a broad range of strategic alternatives which could result in the separation of
the automotive, paperboard packaging, and specialty packaging businesses. As
part of that strategic alternatives analysis, Tenneco has taken the following
actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint
venture with an affiliate of Madison Dearborn Partners, Inc. The
contribution of the containerboard assets to the joint venture was
completed in April 1999. Tenneco received consideration of cash and debt
assumption totaling approximately $2 billion and a 45 percent common
equity interest in the joint venture valued at approximately $200
million. Tenneco now owns a 43 percent common equity interest due to
subsequent management equity issuances.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operations, to
Caraustar Industries. This transaction closed in June 1999.
- Also in April 1999, Tenneco announced that its Board of Directors had
approved the separation of its automotive and specialty packaging
businesses into two separate, independent companies.
- In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture.
Tenneco expects the sale to be completed before the spin-off of the new
packaging company discussed below.
The containerboard assets contributed to the joint venture represented
substantially all of the assets of the paperboard packaging segment and included
four mills, 67 corrugated products plants, and an ownership or controlling
interest in approximately 950,000 acres of timberland. Before the transaction,
Tenneco Packaging borrowed approximately $1.8 billion and used approximately
$1.2 billion to acquire assets used by the containerboard business under
operating leases and timber cutting rights and to purchase containerboard
business accounts receivable that had previously been sold to a third party. The
remainder of the borrowings was remitted to Tenneco and used to repay a portion
of short-term debt. Tenneco Packaging then contributed the containerboard
business assets, subject to the new indebtedness and the containerboard business
liabilities, to the joint venture in exchange for $247 million in cash and the
45 percent interest in the joint venture. As a result of the sale transaction,
Tenneco recognized a pre-tax loss of $293 million, $178 million after-tax or
$1.07 per diluted common share. This loss was included in the results of
Tenneco's discontinued operations in the first quarter of 1999.
As a result of the decision to sell the remaining interest in the
containerboard joint venture, Tenneco's paperboard packaging segment is
presented as a discontinued operation in the accompanying financial statements.
Refer to Note 3 to the Financial Statements of Tenneco Inc. and Consolidated
Subsidiaries contained elsewhere in this document for further information.
The separation of the automotive and packaging businesses will be
accomplished by the spin-off of the common stock of Tenneco Packaging Inc.
("Packaging") to Tenneco shareowners (the "Spin-off"). At the time of the
Spin-off, Packaging will include Tenneco's specialty packaging business,
Tenneco's administrative services operations and the remaining interest in the
containerboard joint venture if the sale has not been completed. Tenneco and
Packaging are, however, currently analyzing the alternatives with respect to the
administrative services operations.
Before the Spin-off, Tenneco will realign substantially all of its existing
debt through some combination of tender offers, exchange offers, prepayments,
and other refinancings. This debt realignment will be financed by internally
generated cash, borrowings by Tenneco under a new credit facility, the issuance
by Tenneco of subordinated debt, and borrowings by Packaging under new credit
facilities. Tenneco currently expects that, subject to discussions with debt
rating agencies, the debt of Packaging will be rated investment grade and the
debt of the remaining automotive company ("Automotive") will be rated
non-investment grade.
15
<PAGE> 19
Also before the Spin-off, Tenneco will restructure its existing businesses,
assets, and liabilities through a series of corporate restructuring
transactions. As Tenneco is currently organized, ownership of its subsidiaries
is based on geographic location and tax considerations rather than on the
businesses in which the subsidiaries are involved. Therefore, Tenneco will need
to restructure its existing businesses so that the assets, liabilities, and
operations of its packaging business and administrative services operations will
be owned by Packaging, and the assets, liabilities, and operations of its
automotive businesses will be owned by Tenneco.
The Spin-off is subject to conditions, including formal declaration of the
Spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued
effectiveness of a determination that the Spin-off will be tax-free for U.S.
federal income tax purposes, and the successful completion of the debt
realignment and corporate restructuring transactions. In August 1999, Tenneco
received a letter ruling from the Internal Revenue Service that the Spin-off
will be tax-free for U.S. federal income tax purposes to Tenneco and its
shareowners and as a result the specialty packaging segment is presented as a
discontinued operation in the accompanying financial statements. After
discontinuing the specialty packaging segment, Tenneco's sole continuing
operation is its Automotive segment. Refer to Notes 2 and 3 to the Financial
Statements of Tenneco Inc. and Consolidated Subsidiaries contained elsewhere in
this document for further information.
RESULTS OF CONTINUING OPERATIONS
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
FIRST QUARTER
----------------------------
1999 1998 % CHANGE
------ ------ --------
(MILLIONS)
<S> <C> <C> <C>
Automotive.......................................... $ 789 $ 800 (1)%
</TABLE>
Automotive's global revenue was $789 million for the first quarter of 1999,
a 1 percent decrease from the $800 million recorded in the 1998 first quarter.
Original equipment ("OE") revenue increased 8 percent or $39 million versus
the prior year's quarter. Increases were achieved in North America, Europe and
Asia/Pacific of $20 million, $25 million and $1 million, respectively as
Automotive continued to place its products on many of the world's best selling
vehicles, including the top 10 selling light trucks and sport utility vehicles
in North America. Revenue in South America declined by $7 million primarily as a
result of troubled economic conditions in Brazil and Argentina and a currency
devaluation in Brazil.
Worldwide aftermarket revenues declined 16 percent or $50 million compared
to the prior year's quarter. Decreases of $34 million in North America and $9
million in Europe were primarily attributable to overall softness during the
quarter while North America was further impacted by a reduction in some of its
aftermarket sales programs and a decline in aftermarket replacement rates. The
decline of $7 million in South America was primarily attributable to the
economic conditions in Brazil and Argentina and the currency devaluation in
Brazil noted above.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST ("OPERATING
INCOME")
<TABLE>
<CAPTION>
FIRST QUARTER
------------------------
1999 1998 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Automotive............................................... $57 $89 (36)%
Other.................................................... (2) (6) NM
--- ---
$55 $83 (34) %
=== ===
</TABLE>
Automotive's operating income was $32 million lower for 1999's first
quarter than for the comparable period of 1998. Original equipment operating
income declined 24 percent or $13 million from last year's quarter. Higher costs
related to a first quarter 1999 change in accounting for platform start-up costs
from a
16
<PAGE> 20
capitalization to an expense basis and unfavorable currency impacts each lowered
income by $4 million. The balance of the decline in OE income was attributable
to pricing actions and product mix.
Aftermarket operating income declined 53 percent or $19 million from last
year's quarter. The reduction in income was principally attributable to the
lower level of revenue as discussed above.
The decrease in Tenneco's "Other" operating loss reflects the reduced cost
of factoring a lower level of receivables.
OPERATING INCOME AS A PERCENTAGE OF REVENUE
Operating income as a percentage of revenue for the first quarters of 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
FIRST QUARTER
----------------------------
1999 1998 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Automotive............................................ 7.2% 11.1% (35)%
Total................................................. 7.0% 10.4% (33)%
</TABLE>
Operating income as a percentage of revenue declined primarily as a result
of the factors cited in the discussion of operating income above since revenue
was essentially flat.
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1998, Tenneco's Board of Directors approved an
extensive restructuring plan designed to reduce administrative and operational
overhead costs in every part of Tenneco's business. Tenneco recorded a pre-tax
charge to income from continuing operations of $53 million, $34 million
after-tax or $.20 per diluted common share. Of the pre-tax charge, for
operational restructuring plans, $36 million related to the consolidation of the
manufacturing and distribution operations of Automotive's North American
aftermarket business. A staff and related costs reduction plan, which covers
employees in Automotive's operating unit and corporate operations, is expected
to cost $17 million.
The Automotive aftermarket restructuring involves closing two plant
locations and five distribution centers, with the elimination of 302 positions
at those locations. The staff and related cost reduction plan involves the
elimination of 454 administrative positions in Automotive's business unit and
its corporate operations.
The fixed assets at the locations to be closed were written down to their
fair value, less costs to sell, in the fourth quarter of 1998. As a result of
the single-purpose nature of the assets, fair value was estimated at scrap value
less cost to dispose. No significant net cash proceeds are expected to be
received from the ultimate disposal of these assets, which should be complete by
the fourth quarter of 2000. The effect of suspending depreciation for these
impaired assets is a reduction in depreciation and amortization of approximately
$2 million on an annual basis.
As of March 31, 1999, approximately 557 employees have been terminated. To
address customer service issues, the closure of one Automotive aftermarket
distribution center has been delayed until the second quarter of 2000. All other
restructuring actions, with the exception of the final disposal of certain
assets, are being executed according to the Company's initial plan and all
restructuring actions are expected to be complete by the fourth quarter of 1999.
During the first quarter of 1999, the Automotive aftermarket business closed one
plant location and four distribution centers.
17
<PAGE> 21
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1ST QUARTER 1999 BALANCE AT
RESTRUCTURING CASH MARCH 31,
CHARGE BALANCE PAYMENTS 1999
----------------- ------------------ ----------
(MILLIONS)
<S> <C> <C> <C>
Severance.......................................... $15 $ 5 $10
Facility exit costs................................ 1 -- 1
--- --- ---
$16 $ 5 $11
=== === ===
</TABLE>
Automotive expects to realize annual savings of $27 million as a result of
these restructuring initiatives, primarily from a reduction in salary and
related employee expenses. Tenneco expects these savings will be fully realized
beginning in the second quarter of 2000.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Interest expense increased by $6 million primarily as a result of increased
borrowings to cover the following activities since March 31, 1998: acquisitions,
net share repurchases, and capital expenditures and other investments in excess
of cash provided by operations.
INCOME TAXES
Tenneco's effective tax rate for the first quarter of 1999 was 39 percent
compared to 27 percent in the first quarter last year. The 1998 first quarter
rate was lower as a result of non-recurring domestic deferred tax adjustments in
that quarter.
MINORITY INTEREST
Minority interest is primarily composed of dividends on the preferred stock
of a U.S. subsidiary. The $2 million favorable variance versus last year's
quarter, however, is primarily attributable to lower earnings in Automotive's
joint ventures.
DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS
In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture. Tenneco
expects the sale to be completed before the Spin-off. As a result, Tenneco's
paperboard packaging segment has been reflected as discontinued operations.
In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operations, to Caraustar
Industries. This transaction closed in June 1999.
18
<PAGE> 22
Revenues and income for the paperboard packaging discontinued operations
are shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------
1999 1998
----- ----
(MILLIONS)
<S> <C> <C>
Net sales and operating revenues............................ $ 392 $376
===== ====
Income before income taxes and interest allocation.......... $ 18 $ 34
Income tax (expense) benefit................................ (7) (14)
----- ----
Income before interest allocation........................... 11 20
Allocated interest expense, net of income tax............... (5) (6)
----- ----
Income from discontinued operations before disposition...... 6 14
Loss on disposition, net of income tax...................... (178) --
----- ----
Income (loss) from discontinued operations.................. $(172) $ 14
===== ====
</TABLE>
In August 1999, Tenneco received a letter ruling from the Internal Revenue
Service that the Spin-off will be tax-free for U.S. federal income tax purposes
to Tenneco and its shareowners and as a result has restated its financial
statements to reflect its specialty packaging segment as a discontinued
operation. Revenues and income for the specialty packaging discontinued
operations are shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------
1999 1998
----- -----
(MILLIONS)
<S> <C> <C>
Net sales and operating revenues............................ $666 $633
==== ====
Income before income taxes and interest allocation.......... $ 45 $ 69
Income tax (expense) benefit................................ (16) (30)
---- ----
Income before interest allocation........................... 29 39
Allocated interest expense, net of income tax............... (23) (21)
---- ----
Income (loss) from discontinued operations.................. $ 6 $ 18
==== ====
</TABLE>
See Notes 2 and 3 to the unaudited consolidated financial statements of
Tenneco Inc. and Consolidated Subsidiaries contained elsewhere in this document
for further discussion of discontinued operations.
First quarter 1999 results from discontinued operations for the specialty
packaging segment includes a pre-tax charge of $29 million relating to a plan to
realign its headquarters functions. This plan involves the severance of
approximately 40 employees and the closing of the Greenwich, Connecticut
headquarters facility.
In the first quarter of 1999, Tenneco recorded an extraordinary loss for
extinguishment of debt of $7 million, net of a $3 million income tax benefit, or
$.04 per diluted common share. The loss was related to the early retirement of
debt in connection with the sale of the containerboard assets.
CHANGES IN ACCOUNTING PRINCIPLES
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which establishes
new accounting and reporting standards for the costs of computer software
developed or obtained for internal use. This statement requires prospective
application, for fiscal years beginning after December 15, 1998. Tenneco adopted
SOP 98-1 on January 1, 1999. The impact of this new standard did not have a
significant effect on Tenneco's financial position or results of operations.
19
<PAGE> 23
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. This statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Prior to January 1, 1999,
Tenneco capitalized costs related to start-up activities, primarily engineering
costs for new automobile original equipment platforms. Tenneco adopted SOP 98-5
on January 1, 1999, and recorded an after-tax charge for the cumulative effect
of this change in accounting principle of $102 million, net of a $50 million tax
benefit, or $.61 per diluted common share. The change in accounting principle
decreased income from continuing operations by $4 million, net of a $2 million
tax benefit, or $.02 per diluted common share for the three months ended March
31, 1999. If the new accounting method had been applied retroactively, income
from continuing operations for the three months ended March 31, 1998, would have
been lower by $3 million, net of a $2 million tax benefit, or $.02 per diluted
common share.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative instruments,
including derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment. This statement cannot be
applied retroactively and is effective for all fiscal years beginning after June
15, 2000. Tenneco is currently evaluating the new standard but has not yet
determined the impact it will have on its financial position or results of
operations.
Effective January 1, 1999, Tenneco changed its method of accounting for
customer acquisition costs from a deferral method to an expense-as-incurred
method. In connection with Tenneco's decision to separate its automotive and
specialty packaging businesses into separate public companies, Tenneco
determined that a change to an expense-as-incurred method of accounting for
automotive aftermarket customer acquisition costs was preferable in order to
permit improved comparability of stand-alone financial results with its
aftermarket industry competitors. The cumulative effect of the change in
accounting principles as of January 1, 1999, was $32 million, net of a $22
million tax benefit, or $.19 per diluted common share and is reflected as an
increase in the net loss for the three months ended March 31, 1999. The change
in accounting principle decreased income from continuing operations by $3
million, net of $2 million in income tax expense, or $.02 per diluted common
share for the three months ended March 31, 1999. If the new accounting method
had been applied retroactively, income from continuing operations for the three
months ended March 31, 1998, would have been lower by $4 million, net of a $3
million tax benefit, or $.02 per diluted common share.
EARNINGS PER SHARE
Income from continuing operations was $.10 per diluted common share for the
first quarter of 1999, compared to $.25 per diluted common share for last year's
quarter. (All references to earnings per share in this Management's Discussion
and Analysis are on a diluted basis unless otherwise noted.) Discontinued
operations generated a loss of $1.00 per diluted common share during this year's
quarter compared to income of $.19 per diluted common share for the prior year's
quarter. The current year's quarter also included a $.04 per diluted common
share extraordinary loss on early retirement of debt in connection with the sale
of the containerboard assets, and $.80 per diluted common share of charges
related to the cumulative effect of changes in accounting principles noted
above. The net loss for the first quarter of 1999 was $1.74 per diluted common
share compared to the net income for the prior year's quarter of $.44 per
diluted common share.
20
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
CAPITALIZATION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998 % CHANGE
--------- ------------ --------
(MILLIONS)
<S> <C> <C> <C>
Short-term debt and current maturities......... $ 368 $ 304
Long-term debt................................. 677 671
Debt allocated to discontinued operations...... 2,548 2,456
------ ------
Total debt..................................... 3,593 3,431 5%
Minority interest of continuing operations..... 407 407
Minority interest of discontinued operations... 15 14
------ ------
Total minority interest........................ 422 421 --%
Common shareowners' equity..................... 2,096 2,504 (16)%
------ ------
Total capitalization................. $6,111 $6,356 (4)%
====== ======
</TABLE>
Tenneco's debt to capitalization ratio was 58.8 percent at March 31, 1999,
compared to 54.0 percent at December 31, 1998. The increase in the ratio is
attributable to the additional short-term debt issued during the first quarter
of 1999 as well as the decline in equity attributable to a net loss of $291
million, common dividends of $51 million, and adverse changes in cumulative
translation adjustment of $77 million related to the strong U.S. dollar, offset
in part by net common stock issuances of $8 million.
Subsequent to March 31, 1999, Tenneco received the proceeds of the
divestitures of its containerboard business and its Greenwich, Connecticut
headquarters. After buyout of operating lease obligations and timber cutting
rights and the payment of fees, the net proceeds were used to reduce short-term
debt by approximately $775 million. Reduction of the March 31, 1999 debt and
total capitalization balances by this amount would have lowered Tenneco's debt
to total capitalization ratio by 6.0 percentage points to 52.8 percent.
Following Tenneco's series of announcements regarding its strategic
alternatives, Standard and Poor's and Moody's debt rating agencies are
continuing to review the ratings on Tenneco's debt pending further information
about the debt profile of the new companies. In consideration of the rating
agency actions and the requirement to realign Tenneco's long-term debt to
accomplish the distribution, Tenneco continues to finance its requirements with
short-term debt. Tenneco believes that its existing committed credit facility is
adequate to meet its 1999 capital requirements, including scheduled long-term
debt retirements of $250 million. Additional credit facilities will be required
in order to accomplish the debt realignment. Tenneco believes it can obtain the
necessary credit arrangements to complete the debt realignment at commercially
reasonable rates.
CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------
1999 1998
---- -----
(MILLIONS)
<S> <C> <C>
Cash provided (used) by:
Operating activities...................................... $(51) $ (34)
Investing activities...................................... (77) (103)
Financing activities...................................... 132 128
</TABLE>
OPERATING ACTIVITIES
Cash used by operating activities was $17 million greater in the first
quarter of 1999 than in the comparable quarter of 1998. Continuing operations
used $37 million less cash in this year's quarter, although income from
continuing operations was lower by $27 million. Discontinued operations
generated $54 million less cash in this year's quarter.
21
<PAGE> 25
INVESTING ACTIVITIES
Cash used by investing activities was $26 million lower in 1999's first
quarter compared to 1998's first quarter. Lower capital expenditures in
continuing operations contributed $7 million to the favorable variance, while
capital expenditures for discontinued operations were lower by $9 million. Net
proceeds from sale of assets generated an additional $4 million of the variance.
The remainder of the improvement was attributable to lower investment in the
discontinued foreign operations of specialty packaging, partially offset by
acquisitions for continuing operations.
FINANCING ACTIVITIES
Financing activities generated $4 million more cash flow in 1999's first
quarter than in 1998, primarily as a result of lower repurchases of common
stock.
YEAR 2000
Many computer software systems, as well as certain hardware and equipment
utilizing date-sensitive data, were structured to use a two-digit date field
meaning that they will not be able to properly recognize dates in the Year 2000.
Tenneco's significant technology transformation projects are addressing the Year
2000 issue in those areas where replacement systems are being installed for
other business reasons. Where existing systems and equipment are expected to
remain in place beyond 1999, Tenneco has a detailed process in place to identify
and assess Year 2000 issues and to remediate, replace or establish alternative
procedures addressing non-Year 2000 compliant systems, hardware, and equipment.
Tenneco has substantially completed inventorying its systems and equipment
including computer systems and business applications as well as date-sensitive
technology embedded in its equipment and facilities. Tenneco continues to plan
for and undertake remediation, replacement, or alternative procedures for non-
compliant Year 2000 systems and equipment; and test remediated, replaced or
alternative procedures for systems and equipment. As of March 31, 1999, Tenneco
believes that approximately 70 percent of this work has been completed. Tenneco
has confirmed that none of its products are date-sensitive. Remediation,
replacement, or alternative procedures for systems and equipment are being
undertaken on a business priority basis. This is ongoing and was completed at
some locations in 1998 with the remainder to be completed through the third
quarter of 1999. Testing will occur in the same time frame. Also, Tenneco is
contacting its major customers, suppliers, financial institutions, and others
with whom it conducts business to determine whether they will be able to resolve
in a timely manner Year 2000 problems possibly affecting Tenneco. As part of its
planning and readiness activities, Tenneco is developing Year 2000 contingency
plans for critical business processes such as banking, data center operations
and just-in-time manufacturing operations. Contingency plans also will be
developed on a business unit basis, where needed, to respond to previously
undetected Year 2000 problems and business interruption from suppliers.
Based upon current estimates, Tenneco believes it will incur costs which
may range from approximately $40 to $50 million to address Year 2000 issues and
implement the necessary changes to its existing systems and equipment. As of
March 31, 1999, approximately $22 million of the costs have already been
incurred. Approximately 40 percent of the range of costs estimated and of the
costs incurred to date are attributable to continuing operations. These costs
are being expensed as they are incurred, except that in certain instances
Tenneco may determine that replacing existing computer systems or equipment may
be more effective and efficient, particularly where additional functionality is
available. These replacements would be capitalized and would reduce the
estimated expense associated with Year 2000 issues.
In the event Tenneco is unable to complete the remediation, replacement, or
alternative procedures for critical systems and equipment in a timely manner or
if those with whom Tenneco conducts business are unsuccessful in implementing
timely solutions, Year 2000 issues could have a material adverse effect on
Tenneco's results of operations. At this time, the potential effect in the event
Tenneco and/or third parties are unable to timely resolve Year 2000 problems is
not determinable; however, Tenneco believes it will be able to resolve its own
Year 2000 issues.
22
<PAGE> 26
EURO CONVERSION
The European Monetary Union resulted in the adoption of a common currency,
the "Euro," among eleven European nations. The Euro is being adopted over a
three-year transition period beginning January 1, 1999. In October 1997, Tenneco
established a cross-functional Euro Committee, comprised of representatives of
the Company's operational divisions as well as its corporate offices. That
Committee had two principal objectives: (i) to determine the impact of the Euro
on the Company's business operations, and (ii) to recommend and facilitate
implementation of those steps necessary to ensure that Tenneco would be fully
prepared for the Euro's introduction. As of January 1, 1999, Tenneco has
implemented those Euro conversion procedures that it had determined to be
necessary and prudent to adopt by that date, and is on track to becoming fully
"Euro ready" on or before the conclusion of the three-year Euro transition
period. Tenneco believes that the costs associated with transitioning to the
Euro will not be material to its consolidated financial position or the results
of its operations.
23
<PAGE> 27
SECTION B.
This section presents Tenneco's restated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations previously included in Tenneco's Quarterly Report on Form 10-Q for
the three months and six months ended June 30, 1999.
24
<PAGE> 28
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues................. $ 868 $ 864 $ 1,657 $ 1,664
Other income --
Gain (loss) on sale of businesses and
assets, net............................... (2) (4) (3) (10)
Other income, net........................... 8 5 11 17
----------- ----------- ----------- -----------
874 865 1,665 1,671
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation shown
below)......................................... 627 587 1,212 1,161
Engineering, research, and development........... 16 2 27 13
Selling, general, and administrative............. 98 115 203 218
Depreciation and amortization.................... 36 37 71 72
----------- ----------- ----------- -----------
777 741 1,513 1,464
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND
MINORITY INTEREST.................................. 97 124 152 207
Interest expense (net of interest capitalized)... 23 17 42 30
Income tax expense............................... 30 36 44 55
Minority interest................................ 7 8 13 16
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS.................... 37 63 53 106
Income (loss) from discontinued operations, net of
income tax......................................... 55 74 (111) 106
----------- ----------- ----------- -----------
Income (loss) before extraordinary loss.............. 92 137 (58) 212
Extraordinary loss, net of income tax................ -- -- (7) --
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of change in
accounting principle............................... 92 137 (65) 212
Cumulative effect of change in accounting principle,
net of income tax.................................. -- -- (134) --
----------- ----------- ----------- -----------
NET INCOME (LOSS).................................... $ 92 $ 137 $ (199) $ 212
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE
Average shares of common stock outstanding --
Basic............................................ 167,119,483 169,174,444 166,937,362 169,341,555
Diluted.......................................... 167,501,881 169,869,703 167,319,412 169,936,676
Basic earnings (loss) per share of common stock --
Continuing operations............................ $ .21 $ .38 $ .32 $ .62
Discontinued operations.......................... .34 .43 (.67) .63
Extraordinary loss............................... -- -- (.04) --
Cumulative effect of change in accounting
principle...................................... -- -- (.80) --
----------- ----------- ----------- -----------
$ .55 $ .81 $ (1.19) $ 1.25
=========== =========== =========== ===========
Diluted earnings (loss) per share of common stock --
Continuing operations............................ $ .21 $ .38 $ .32 $ .62
Discontinued operations.......................... .34 .43 (.67) .63
Extraordinary loss............................... -- -- (.04) --
Cumulative effect of change in accounting
principle...................................... -- -- (.80) --
----------- ----------- ----------- -----------
$ .55 $ .81 $ (1.19) $ 1.25
=========== =========== =========== ===========
Cash dividends per share of common stock............. $ .30 $ .30 $ .60 $ .60
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements of income (loss).
25
<PAGE> 29
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1999 1998
------- -----
(MILLIONS)
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations........................... $ 53 $ 106
Adjustments to reconcile income from continuing operations
to cash provided (used) by operating activities --
Depreciation and amortization.......................... 71 72
Deferred income taxes.................................. (6) 49
(Gain) loss on sale of businesses and assets, net...... 3 10
Changes in components of working capital --
(Increase) decrease in receivables................ (112) (218)
(Increase) decrease in inventories................ (9) (7)
(Increase) decrease in prepayments and other
current assets................................... (11) (2)
Increase (decrease) in payables................... 26 22
Increase (decrease) in taxes accrued.............. (54) 9
Increase (decrease) in interest accrued........... 3 --
Increase (decrease) in other current
liabilities...................................... (38) (57)
Other.................................................. (14) (40)
------- -----
Cash provided (used) by continuing operations............... (88) (56)
Cash provided (used) by discontinued operations............. (93) 234
------- -----
Net cash provided (used) by operating activities............ (181) 178
------- -----
INVESTING ACTIVITIES
Net proceeds related to the sale of discontinued
operations................................................ 334 12
Net proceeds from sale of assets............................ 8 5
Expenditures for plant, property, and equipment............. (70) (80)
Acquisition of businesses................................... (35) --
Expenditures for plant, property, and equipment and business
acquisitions -- discontinued operations................... (1,206) (210)
Investments and other....................................... (7) (41)
------- -----
Net cash provided (used) by investing activities............ (976) (314)
------- -----
FINANCING ACTIVITIES
Issuance of common and treasury shares...................... 20 27
Purchase of common stock.................................... (4) (82)
Issuance of long-term debt.................................. 1,761 3
Retirement of long-term debt................................ (29) (15)
Net increase (decrease) in short-term debt excluding current
maturities on
long-term debt............................................ (478) 294
Dividends (common).......................................... (100) (102)
------- -----
Net cash provided (used) by financing activities............ 1,170 125
------- -----
Effect of foreign exchange rate changes on cash and
temporary cash investments................................ (2) --
------- -----
Increase (decrease) in cash and temporary cash
investments............................................... 11 (11)
Cash and temporary cash investments, January 1.............. 29 29
------- -----
Cash and temporary cash investments, June 30 (Note)......... $ 40 $ 18
======= =====
Cash paid during the period for interest.................... $ 126 $ 127
Cash paid during the period for income taxes (net of
refunds).................................................. $ 31 $ (5)
NON-CASH INVESTING AND FINANCING ACTIVITIES
Common equity interest received related to the sale of
containerboard operations................................. $ 194 $ --
Principal amount of long-term debt assumed by buyers of
containerboard
operations................................................ $(1,760) $ --
</TABLE>
- -------------------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
The accompanying notes to financial statements are an integral part of these
statements of cash flows.
26
<PAGE> 30
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
--------- ------------ ---------
1999 1998 1998
--------- ------------ ---------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments..................... $ 40 $ 29 $ 18
Receivables --
Customer notes and accounts, net................... 591 430 551
Income taxes....................................... -- 3 1
Other.............................................. 15 10 4
Inventories --
Finished goods..................................... 219 221 198
Work in process.................................... 76 79 74
Raw materials...................................... 68 73 67
Materials and supplies............................. 38 41 42
Deferred income taxes................................... 42 39 22
Prepayments and other................................... 87 139 179
------ ------ ------
1,176 1,064 1,156
------ ------ ------
Other assets:
Long-term notes receivable, net......................... 26 23 24
Goodwill and intangibles, net........................... 510 499 501
Deferred income taxes................................... 42 39 54
Pension assets.......................................... 97 101 97
Other................................................... 95 201 160
------ ------ ------
770 863 836
------ ------ ------
Plant, property, and equipment, at cost..................... 1,903 1,944 1,822
Less -- Reserves for depreciation and amortization...... 854 851 778
------ ------ ------
1,049 1,093 1,044
------ ------ ------
Net assets of discontinued operations....................... 1,421 1,739 1,793
------ ------ ------
$4,416 $4,759 $4,829
====== ====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt (including current maturities on
long-term debt)....................................... $ 206 $ 304 $ 168
Trade payables.......................................... 351 337 342
Taxes accrued........................................... 78 31 44
Accrued liabilities..................................... 166 161 130
Other................................................... 43 76 69
------ ------ ------
844 909 753
------ ------ ------
Long-term debt.............................................. 832 671 747
------ ------ ------
Deferred income taxes....................................... 39 98 197
------ ------ ------
Postretirement benefits..................................... 131 139 118
------ ------ ------
Deferred credits and other liabilities...................... 37 31 48
------ ------ ------
Commitments and contingencies
Minority interest........................................... 411 407 407
------ ------ ------
Shareowners' equity:
Common stock............................................ 2 2 2
Premium on common stock and other capital surplus....... 2,718 2,710 2,699
Accumulated other comprehensive income (loss)........... (194) (91) (142)
Retained earnings (accumulated deficit)................. (157) 142 199
------ ------ ------
2,369 2,763 2,758
Less -- Shares held as treasury stock, at cost.......... 247 259 199
------ ------ ------
2,122 2,504 2,559
------ ------ ------
$4,416 $4,759 $4,829
====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
27
<PAGE> 31
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1999 1998
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------ ----------- ------
(MILLIONS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
COMMON STOCK
Balance January 1.................................. 173,670,197 $ 2 172,569,889 $ 2
Issued pursuant to benefit plans.............. 334,816 -- 539,220 --
----------- ------ ----------- ------
Balance June 30.................................... 174,005,013 2 173,109,109 2
=========== ------ =========== ------
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance January 1.................................. 2,710 2,679
Premium on common stock issued pursuant to
benefit plans............................... 8 20
------ ------
Balance June 30.................................... 2,718 2,699
------ ------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance January 1.................................. (91) (122)
Other comprehensive income (loss)............. (103) (20)
------ ------
Balance June 30.................................... (194) (142)
------ ------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1.................................. 142 89
Net income (loss)............................. (199) 212
Dividends on common stock..................... (100) (102)
------ ------
Balance June 30.................................... (157) 199
------ ------
LESS -- COMMON STOCK HELD AS TREASURY STOCK, AT
COST
Balance January 1.................................. 6,757,678 259 2,928,189 120
Shares acquired............................... 121,867 4 2,202,423 88
Shares issued pursuant to benefit and dividend
reinvestment plans.......................... (417,961) (16) (219,711) (9)
----------- ------ ----------- ------
Balance June 30.................................... 6,461,584 247 4,910,901 199
=========== ------ =========== ------
Total......................................... $2,122 $2,559
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements of changes in shareowners' equity.
28
<PAGE> 32
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
------------- ------------- ------------- -------------
(MILLIONS)
<S> <C> <C> <C> <C>
NET INCOME (LOSS).......................... $ 92 $137
----- ----
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance April 1.......................... $(159) $(145)
Translation of foreign currency
statements.......................... (26) (26) 3 3
----- -----
Balance June 30.......................... (185) (142)
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance April 1.......................... (9) --
Additional minimum pension liability
adjustment.......................... -- -- -- --
----- -----
Balance June 30.......................... (9) --
----- -----
Balance June 30............................ $(194) $(142)
===== =====
----- ----
Other comprehensive income (loss).......... (26) 3
----- ----
COMPREHENSIVE INCOME (LOSS)................ $ 66 $140
===== ====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
------------- ------------- ------------- -------------
(MILLIONS)
<S> <C> <C> <C> <C>
NET INCOME (LOSS).......................... $(199) $212
----- ----
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance January 1........................ $ (82) $(122)
Translation of foreign currency
statements.......................... (103) (103) (20) (20)
----- -----
Balance June 30.......................... (185) (142)
----- -----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance January 1........................ (9) --
Additional minimum pension liability
adjustment.......................... -- -- -- --
----- -----
Balance June 30.......................... (9) --
----- -----
Balance June 30............................ $(194) $(142)
===== =====
----- ----
Other comprehensive income (loss).......... (103) (20)
----- ----
COMPREHENSIVE INCOME (LOSS)................ $(302) $192
===== ====
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements of comprehensive income (loss).
29
<PAGE> 33
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) In the opinion of Tenneco Inc. (the "Company"), the accompanying
unaudited financial statements of Tenneco Inc. and its consolidated subsidiaries
("Tenneco") contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position, results of operations, cash
flows, changes in shareowners' equity, and comprehensive income for the periods
indicated. The unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles. The consolidated
financial statements of Tenneco include all majority-owned subsidiaries of the
Company. Investments in 20% to 50% owned companies where the Company has the
ability to exert significant influence over operating and financial policies are
carried at cost plus equity in undistributed earnings and cumulative translation
adjustments since date of acquisition. Tenneco has no investments in 20% to 50%
owned companies where it does not carry the investment at cost plus equity in
undistributed earnings.
Prior year's financial statements have been reclassified where appropriate
to conform to 1999 presentations.
(2) In July 1998, Tenneco's Board of Directors authorized management to
develop a broad range of strategic alternatives which could result in the
separation of the automotive, paperboard packaging, and specialty packaging
businesses. As part of that strategic alternatives analysis, Tenneco has taken
the following actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint
venture with an affiliate of Madison Dearborn Partners, Inc. The
contribution to the joint venture was completed in April 1999. Tenneco
received consideration of cash and debt assumption totaling approximately
$2 billion and a 45 percent common equity interest in the joint venture
(now 43 percent due to subsequent management equity issuances) valued at
approximately $200 million.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operation, to
Caraustar Industries. This transaction closed in June 1999.
- Also in April 1999, Tenneco announced that its Board of Directors had
approved the separation of its automotive and packaging businesses into
two separate, independent companies.
- In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture.
Tenneco expects the sale to be completed before the spin-off discussed
below.
The separation of Tenneco's automotive and packaging businesses will be
accomplished by the spin-off of the common stock of Tenneco Packaging Inc.
("Packaging") to Tenneco shareowners (the "Spin-off"). At the time of the
Spin-off, Packaging will include Tenneco's specialty packaging business,
Tenneco's administrative services operations and the remaining interest in the
containerboard joint venture if the sale has not been completed. Tenneco and
Packaging are, however, currently analyzing the alternatives with respect to the
administrative services operations.
Before the Spin-off, Tenneco will realign substantially all of its existing
debt through some combination of tender offers, exchange offers, prepayments,
and other refinancings. This debt realignment will be financed by internally
generated cash, borrowings by Tenneco under a new credit facility, the issuance
by Tenneco of subordinated debt, and borrowings by Packaging under new credit
facilities.
Also before the Spin-off, Tenneco will restructure its existing businesses,
assets, and liabilities through a series of corporate restructuring
transactions. As Tenneco is currently organized, ownership of its subsidiaries
is based on geographic location and tax considerations rather than on the
businesses in which the subsidiaries
30
<PAGE> 34
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
are involved. Therefore, Tenneco will need to restructure its existing
businesses so that the assets, liabilities, and operations of its packaging
business and administrative services operations will be owned by Packaging, and
the assets, liabilities, and operations of its automotive businesses will be
owned by Tenneco.
The Spin-off is subject to conditions, including formal declaration of the
Spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued
effectiveness of a determination that the Spin-off will be tax-free for U.S.
federal income tax purposes, and the successful completion of the debt
realignment and corporate restructuring transactions. In August 1999, Tenneco
received a letter ruling from the Internal Revenue Service that the Spin-off
will be tax-free for U.S. federal income tax purposes to Tenneco and its
shareowners.
(3) In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint venture
with an affiliate of Madison Dearborn Partners, Inc. The contribution to the
joint venture was completed in April 1999. Tenneco received consideration of
cash and debt assumption totaling approximately $2 billion plus a 45 percent
common equity interest in the joint venture (now 43 percent due to subsequent
management equity issuances) valued at approximately $200 million. The
containerboard assets contributed to the joint venture represented substantially
all of the assets of Tenneco's paperboard packaging segment and included four
mills, 67 corrugated products plants, and an ownership or leasehold interest in
approximately 950,000 acres of timberland. Prior to the transaction, Tenneco
Packaging borrowed approximately $1.8 billion and used approximately $1.2
billion of those borrowings to acquire assets used by the containerboard
business under operating leases and timber cutting rights and to purchase
containerboard business accounts receivable that had previously been sold to a
third party. The remainder of the borrowings was remitted to Tenneco and used to
repay a portion of Tenneco's short-term debt. Tenneco Packaging then contributed
the containerboard business assets (subject to the new indebtedness and the
containerboard business liabilities) to the joint venture in exchange for $247
million in cash and the 45 percent interest in the joint venture. As a result of
the transaction, Tenneco recognized a pre-tax loss of $293 million, $178 million
after-tax or $1.07 per diluted common share, in the first quarter of 1999, based
on the amount by which the carrying amount of the containerboard assets exceeded
the fair value of those assets, less cost to sell. The estimate of fair value of
the containerboard assets was based on the fair value of the consideration
received by Tenneco from the joint venture.
In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture. Tenneco
expects the sale to be completed before the Spin-off. As a result of the
decision to sell the remaining interest in the containerboard joint venture,
Tenneco's paperboard packaging segment is presented as a discontinued operation
in the accompanying financial statements.
In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operation, to Caraustar
Industries. Tenneco received cash proceeds of $73 million from this transaction
which closed in June 1999. As a result of the sale transaction, Tenneco
recognized a pre-tax gain of $14 million, $9 million after-tax or $.05 per
diluted share which is included in discontinued operations in the second quarter
of 1999.
31
<PAGE> 35
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Revenues and income for the paperboard packaging discontinued operations
are shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- --------------
1999 1998 1999 1998
------ ------ ------ -----
(MILLIONS)
<S> <C> <C> <C> <C>
Net sales and operating revenues........................ $53 $394 $ 445 $770
=== ==== ===== ====
Income before income taxes and interest allocation...... $ 4 $ 32 $ 22 $ 66
Income tax (expense) benefit............................ (4) (12) (11) (26)
--- ---- ----- ----
Income before interest allocation....................... -- 20 11 40
Allocated interest expense, net of income tax........... -- (6) (5) (12)
--- ---- ----- ----
Income from discontinued operations before
disposition........................................... -- 14 6 28
Gain (loss) on disposition, net of income tax........... 9 9 (169) 9
--- ---- ----- ----
Income (loss) from discontinued operations.............. $ 9 $ 23 $(163) $ 37
=== ==== ===== ====
</TABLE>
In August 1999, Tenneco received a letter ruling from the Internal Revenue
Service that the Spin-off will be tax-free for U.S. federal income tax purposes
to Tenneco and its shareowners and as a result has restated its financial
statements to reflect specialty packaging as a discontinued operation. As a
result, Tenneco's automotive segment ("Automotive") is its sole remaining
continuing operation. Since Tenneco would not have proceeded with the Spin-off
absent the receipt of a determination that the Spin-off would be tax-free, the
establishment of a measurement date for discontinued operations did not occur
until that determination was received. Revenues and income for the specialty
packaging discontinued operations are shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Net sales and operating revenues...................... $738 $738 $1,404 $1,371
==== ==== ====== ======
Income before income taxes and interest allocation.... $ 99 $104 $ 144 $ 173
Income tax (expense) benefit.......................... (32) (30) (48) (60)
---- ---- ------ ------
Income before interest allocation..................... 67 74 96 113
Allocated interest expense, net of income tax......... (21) (23) (44) (44)
---- ---- ------ ------
Income (loss) from discontinued operations............ $ 46 $ 51 $ 52 $ 69
==== ==== ====== ======
</TABLE>
Net assets of discontinued operations includes $1,861 million, $2,302
million and $2,456 million of debt allocated to discontinued operations as of
June 30, 1999 and 1998, and December 31, 1998, respectively.
(4) In the fourth quarter of 1998, Tenneco's Board of Directors approved an
extensive restructuring plan designed to reduce administrative and operational
overhead costs in every part of Tenneco's business. Tenneco recorded a pre-tax
charge to income from continuing operations of $53 million, $34 million
after-tax or $.20 per diluted common share. Of the pre-tax charge, for
operational restructuring plans, $36 million related to the consolidation of the
manufacturing and distribution operations of Automotive's North American
aftermarket business. A staff and related cost reduction plan, which covers
employees in the operating unit and at corporate, is expected to cost $17
million.
32
<PAGE> 36
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The Automotive aftermarket restructuring involves closing two plant
locations and five distribution centers, with the elimination of 302 positions
at those locations. The staff and related cost reduction plan involves the
elimination of 454 administrative positions.
The fixed assets at the locations to be closed were written down to their
fair value, less costs to sell, in the fourth quarter of 1998. As a result of
the single-purpose nature of the assets, fair value was estimated at scrap value
less cost to dispose. No significant net cash proceeds are expected to be
received from the ultimate disposal of these assets, which should be complete by
the fourth quarter of 2000. The effect of suspending depreciation for these
impaired assets is a reduction in depreciation and amortization of approximately
$2 million on an annual basis.
As of June 30, 1999, approximately 670 employees have been terminated. To
address customer service issues, the closure of one Automotive aftermarket
distribution center has been delayed until the second quarter of 2000. All other
restructuring actions, with the exception of the final disposal of certain
assets, are being executed according to the initial plan and are expected to be
complete by the fourth quarter of 1999. During the six months ended June 30,
1999, the Automotive aftermarket business closed one plant location and four
distribution centers.
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
CASH
PAYMENTS
SIX
MONTHS
DECEMBER 31, 1998 ENDED BALANCE AT
RESTRUCTURING JUNE 30, JUNE 30,
CHARGE BALANCE 1999 1999
----------------- -------- ----------
(MILLIONS)
<S> <C> <C> <C>
Severance.............................................. $15 $ 6 $ 9
Facility exit costs.................................... 1 -- 1
--- --- ---
$16 $ 6 $10
=== === ===
</TABLE>
(5) Tenneco is a party to various legal proceedings arising from its
operations. Tenneco believes that the outcome of these proceedings, individually
and in the aggregate, will not have a material adverse effect on its financial
position or results of operations.
(6) Tenneco is subject to a variety of environmental and pollution control
laws and regulations in all jurisdictions in which it operates. Tenneco has
provided reserves for compliance with these laws and regulations where it is
probable that a liability exists and where Tenneco can make a reasonable
estimate of the liability. The estimated liabilities recorded are subject to
change as more information becomes available regarding the magnitude of possible
cleanup costs and the timing, varying costs, and effectiveness of alternative
cleanup technologies. However, Tenneco believes that any additional costs which
may arise as more information becomes available will not have a material adverse
effect on its financial position or results of operations.
(7) In the first quarter of 1999, Tenneco recorded an extraordinary loss
for extinguishment of debt of $7 million (net of a $3 million income tax
benefit), or $.04 per diluted common share. The loss related to early retirement
of debt in connection with the sale of the containerboard assets.
(8) In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as
33
<PAGE> 37
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting treatment. This statement cannot be applied
retroactively and is effective for all fiscal years beginning after June 15,
2000. Tenneco is currently evaluating the new standard but has not yet
determined the impact it will have on its financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Prior to January 1, 1999,
Tenneco capitalized certain costs related to start-up activities, primarily
engineering costs for new automobile original equipment platforms. Tenneco
adopted SOP 98-5 on January 1, 1999, and recorded an after-tax charge for the
cumulative effect of this change in accounting principle of $102 million (net of
a $50 million tax benefit), or $.61 per diluted common share. The change in
accounting principle decreased income from continuing operations by $6 million
(net of a $3 million tax benefit), or $.04 per diluted common share for the six
months ended June 30, 1999. If the new accounting method had been applied
retroactively, income from continuing operations for the six months ended June
30, 1998, would have been lower by $5 million (net of a $4 million tax benefit),
or $.03 per diluted common share. For the three months ended June 30, 1999, the
change in accounting principle decreased income from continuing operations by $2
million (net of a $2 million tax benefit), or $.01 per diluted common share. If
the new accounting method had been applied retroactively, income from continuing
operations for the three months ended June 30, 1998, would have been lower by $2
million (net of a $2 million tax benefit), or $.01 per diluted common share.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. This statement requires prospective application
for fiscal years beginning after December 15, 1998. Tenneco adopted SOP 98-1 on
January 1, 1999. The impact of this new standard did not have a significant
effect on Tenneco's financial position or results of operations.
Effective January 1, 1999, Tenneco changed its method of accounting for
customer acquisition costs from a deferral method to an expense-as-incurred
method. In connection with Tenneco's decision to separate its automotive and
specialty packaging businesses into independent public companies, Tenneco
determined that a change to an expense-as-incurred method of accounting for
automotive aftermarket customer acquisition costs was preferable in order to
permit improved comparability of stand-alone financial results with its
aftermarket industry competitors. Tenneco recorded an after-tax charge for the
cumulative effect of this change in accounting principle of $32 million (net of
a $22 million tax benefit), or $.19 per diluted common share. The change in
accounting principle increased income from continuing operations by $5 million
(net of $4 million in income tax expense), or $.03 per diluted common share for
the six months ended June 30, 1999. If the new accounting principle had been
applied retroactively, income from continuing operations for the six months
ended June 30, 1998, would have been lower by $2 million (net of a $1 million
tax benefit), or $.01 per diluted common share. For the three months ended June
30, 1999, the change in accounting principle increased income from continuing
operations by $2 million (net of $2 million in income tax expense), or $.01 per
diluted common share. If the new accounting principle had been applied
retroactively, income from continuing operations for the three months ended June
30, 1998, would have been higher by $2 million (net of $2 million in income tax
expense), or $.01 per diluted common share.
34
<PAGE> 38
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(9) Earnings from continuing operations per share of common stock
outstanding were computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Basic Earnings Per Share --
Income from continuing
operations........... $ 37 $ 63 $ 53 $ 106
=========== =========== =========== ===========
Average shares of
common stock
outstanding.......... 167,119,483 169,174,444 166,937,362 169,341,555
=========== =========== =========== ===========
Earnings from
continuing operations
per average share of
common stock......... $ .21 $ .38 $ .32 $ .62
=========== =========== =========== ===========
Diluted Earnings Per Share--
Income from continuing
operations........... $ 37 $ 63 $ 53 $ 106
=========== =========== =========== ===========
Average shares of
common stock
outstanding.......... 167,119,483 169,174,444 166,937,362 169,341,555
Effect of dilutive
securities:
Restricted
stock........... 64,370 52,224 64,831 39,512
Stock options..... -- 364,170 -- 296,498
Performance
shares.......... 318,028 278,865 317,219 259,111
----------- ----------- ----------- -----------
Average shares of
common stock
outstanding including
dilutive
securities........... 167,501,881 169,869,703 167,319,412 169,936,676
=========== =========== =========== ===========
Earnings from
continuing operations
per average share of
common stock......... $ .21 $ .38 $ .32 $ .62
=========== =========== =========== ===========
</TABLE>
(10) Tenneco is a global manufacturer with a single operating segment:
Automotive -- Manufacture and sale of exhaust and ride control systems
for both the original equipment and replacement markets.
Tenneco evaluates business segment operating performance based primarily on
income before interest expense, income taxes, and minority interest, exclusive
of restructuring charges and other unusual items. Individual operating segments
have not been aggregated within this reportable segment.
35
<PAGE> 39
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table summarizes certain Tenneco segment information:
<TABLE>
<CAPTION>
SEGMENT RECLASS
------------------- &
AUTOMOTIVE OTHER ELIMS CONSOLIDATED
---------- ------ ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 1999
Revenues from external customers....................... $ 868 $ -- $ -- $ 868
Income (loss) before interest, income taxes, and
minority interest.................................... 99 (2) -- 97
FOR THE THREE MONTHS ENDED JUNE 30, 1998
Revenues from external customers....................... $ 864 $ -- $ -- $ 864
Income (loss) before interest, income taxes, and
minority interest.................................... 130 (6) -- 124
AT JUNE 30, 1999, AND FOR THE SIX MONTHS THEN ENDED
Revenues from external customers....................... $1,657 $ -- $ -- $1,657
Income (loss) before interest, income taxes, and
minority interest.................................... 156 (4) -- 152
Extraordinary loss..................................... -- (7) -- (7)
Cumulative effect of change in accounting principle.... (101) (33) -- (134)
Total assets (Note).................................... 2,765 1,678 (27) 4,416
Net assets of discontinued operations.................. -- 1,421 -- 1,421
AT JUNE 30, 1998, AND FOR THE SIX MONTHS THEN ENDED
Revenues from external customers....................... $1,664 $ -- $ -- $1,664
Income (loss) before interest, income taxes, and
minority interest.................................... 219 (12) -- 207
Total assets (Note).................................... 2,796 2,064 (31) 4,829
Net assets of discontinued operations.................. -- 1,793 -- 1,793
</TABLE>
- -------------------------
Note: The Other segment's total assets include the net assets of discontinued
operations.
The above notes are an integral part of the foregoing financial
statements.
36
<PAGE> 40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STRATEGIC ALTERNATIVES ANALYSIS
In July 1998, Tenneco's Board of Directors authorized management to develop
a broad range of strategic alternatives which could result in the separation of
the automotive, paperboard packaging, and specialty packaging businesses. As
part of that strategic alternatives analysis, Tenneco has taken the following
actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint
venture with an affiliate of Madison Dearborn Partners, Inc. The
contribution of the containerboard assets to the joint venture was
completed in April 1999. Tenneco received consideration of cash and debt
assumption totaling approximately $2 billion and a 45 percent common
equity interest in the joint venture valued at approximately $200
million. Tenneco now owns a 43 percent common equity interest due to
subsequent management equity issuances.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operations, to
Caraustar Industries. This transaction closed in June 1999.
- Also in April 1999, Tenneco announced that its Board of Directors had
approved the separation of its automotive and specialty packaging
businesses into two separate, independent companies.
- In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture.
Tenneco expects the sale to be completed before the spin-off of the new
packaging company discussed below.
The containerboard assets contributed to the joint venture represented
substantially all of the assets of the paperboard packaging segment and included
four mills, 67 corrugated products plants, and an ownership or controlling
interest in approximately 950,000 acres of timberland. Before the transaction,
Tenneco Packaging borrowed approximately $1.8 billion and used approximately
$1.2 billion to acquire assets used by the containerboard business under
operating leases and timber cutting rights and to purchase containerboard
business accounts receivable that had previously been sold to a third party. The
remainder of the borrowings was remitted to Tenneco and used to repay a portion
of short-term debt. Tenneco Packaging then contributed the containerboard
business assets, subject to the new indebtedness and the containerboard business
liabilities, to the joint venture in exchange for $247 million in cash and the
45 percent interest in the joint venture. As a result of the sale transaction,
Tenneco recognized a pre-tax loss of $293 million, $178 million after-tax or
$1.07 per diluted common share. This loss was included in the results of
Tenneco's discontinued operations in the first quarter of 1999.
As a result of the decision to sell the remaining interest in the
containerboard joint venture, Tenneco's paperboard packaging segment is
presented as a discontinued operation in the accompanying financial statements.
Refer to Note 3 to the Financial Statements of Tenneco Inc. and Consolidated
Subsidiaries contained elsewhere in this document for further information.
The separation of the automotive and packaging businesses will be
accomplished by the spin-off of the common stock of Tenneco Packaging Inc.
("Packaging") to Tenneco shareowners (the "Spin-off"). At the time of the
Spin-off, Packaging will include Tenneco's specialty packaging business,
Tenneco's administrative services operations and the remaining interest in the
containerboard joint venture if the sale has not been completed. Tenneco and
Packaging are, however, currently analyzing the alternatives with respect to the
administrative services operations.
Before the Spin-off, Tenneco will realign substantially all of its existing
debt through some combination of tender offers, exchange offers, prepayments,
and other refinancings. This debt realignment will be financed by internally
generated cash, borrowings by Tenneco under a new credit facility, the issuance
by Tenneco of subordinated debt, and borrowings by Packaging under new credit
facilities. Tenneco currently expects that, subject to discussions with debt
rating agencies, the debt of Packaging will be rated investment grade and the
debt of the remaining automotive company ("Automotive") will be rated
non-investment grade.
37
<PAGE> 41
Also before the Spin-off, Tenneco will restructure its existing businesses,
assets, and liabilities through a series of corporate restructuring
transactions. As Tenneco is currently organized, ownership of its subsidiaries
is based on geographic location and tax considerations rather than on the
businesses in which the subsidiaries are involved. Therefore, Tenneco will need
to restructure its existing businesses so that the assets, liabilities, and
operations of its packaging business and administrative services operations will
be owned by Packaging, and the assets, liabilities, and operations of its
automotive businesses will be owned by Tenneco.
The Spin-off is subject to conditions, including formal declaration of the
Spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued
effectiveness of a determination that the Spin-off will be tax-free for U.S.
federal income tax purposes, and the successful completion of the debt
realignment and corporate restructuring transactions. In August 1999, Tenneco
received a letter ruling from the Internal Revenue Service that the Spin-off
will be tax-free for U.S. federal income tax purposes to Tenneco and its
shareowners and as a result the specialty packaging segment is presented as a
discontinued operation in the accompanying financial statements. After
discontinuing the specialty packaging segment, Tenneco's sole continuing
operation is its Automotive segment. Refer to Notes 2 and 3 to the Financial
Statements of Tenneco Inc. and Consolidated Subsidiaries contained elsewhere in
this document for further information.
RESULTS OF CONTINUING OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 1999 AND 1998
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
SECOND QUARTER
------------------------
1999 1998 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Automotive............................................. $868 $864 --%
</TABLE>
Automotive's global revenue was $868 million for the second quarter of
1999, essentially flat with the $864 million recorded in the 1998 second
quarter.
Original equipment ("OE") revenue increased 10 percent or $48 million
versus the prior year's quarter. Increases were achieved in North America,
Europe and Asia/Pacific of $45 million, $6 million and $5 million, respectively
as Automotive continued to place its products on many of the world's best
selling vehicles, including the top 10 selling light trucks and sport utility
trucks in North America and placed its products on 20 new vehicle launches
worldwide. Revenue in South America declined by $8 million primarily as a result
of a currency devaluation in Brazil and economic conditions in Brazil and
Argentina.
Worldwide aftermarket revenues declined 12 percent or $44 million compared
to the prior year's quarter. Revenue declined by $23 million in North America as
Automotive discontinued some of its aftermarket sales programs and as
aftermarket replacement rates declined. In the European market, high customer
inventories and economic weakness in Russia and Eastern Europe contributed to
lower revenues of $16 million. The decline of $6 million in South America was
primarily attributable to the economic conditions in Brazil and Argentina and
the currency devaluation in Brazil noted above. Revenue in Asia increased by $1
million.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST ("OPERATING
INCOME")
<TABLE>
<CAPTION>
SECOND QUARTER
------------------------
1999 1998 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Automotive.............................................. $99 $130 (24)%
Other................................................... (2) (6) NM
--- ----
$97 $124 (22)%
=== ====
</TABLE>
Automotive's operating income was $31 million lower for 1999's second
quarter than for the comparable period of 1998. The decline was primarily
attributable to soft North American and European aftermarkets and a higher level
of research and development investment in the European original equipment
business partially offset by an increase in the North American original
equipment business.
38
<PAGE> 42
Aftermarket operating income declined 42 percent or $27 million compared to
1998's second quarter. Unfavorable currency impacts reduced operating income by
$5 million. The balance of the reduction in income was primarily attributable to
the lower level of revenue as discussed above.
The decrease in Tenneco's "Other" operating loss reflects the reduced cost
of factoring a lower level of receivables.
OPERATING INCOME AS A PERCENTAGE OF REVENUE
Operating income as a percentage of revenue for the second quarters of 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
SECOND QUARTER
---------------------------
1999 1998 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Automotive............................................ 11.4% 15.0% (24)%
Total................................................. 11.2% 14.4% (22)%
</TABLE>
Operating income as a percentage of revenue declined primarily as a result
of the factors cited in the discussion of operating income above since revenue
was essentially flat.
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1998, Tenneco's Board of Directors approved an
extensive restructuring plan designed to reduce administrative and operational
overhead costs in every part of Tenneco's business. Tenneco recorded a pre-tax
charge to income from continuing operations of $53 million, $34 million
after-tax or $.20 per diluted common share. Of the pre-tax charge, for
operational restructuring plans, $36 million related to the consolidation of the
manufacturing and distribution operations of Automotive's North American
aftermarket business. A staff and related cost reduction plan, which covers
employees in Automotive's operating unit and corporate operations, is expected
to cost $17 million.
The Automotive aftermarket restructuring involves closing two plant
locations and five distribution centers, with the elimination of 302 positions
at those locations. The staff and related cost reduction plan involves the
elimination of 454 administrative positions in Automotive's business unit and
its corporate operations.
The fixed assets at the locations to be closed were written down to their
fair value, less costs to sell, in the fourth quarter of 1998. As a result of
the single-purpose nature of the assets, fair value was estimated at scrap value
less cost to dispose. No significant net cash proceeds are expected to be
received from the ultimate disposal of these assets, which should be complete by
the fourth quarter of 2000. The effect of suspending depreciation for these
impaired assets is a reduction in depreciation and amortization of approximately
$2 million on an annual basis.
As of June 30, 1999, approximately 670 employees have been terminated. To
address customer service issues, the closure of one Automotive aftermarket
distribution center has been delayed until the second quarter of 2000. All other
restructuring actions, with the exception of the final disposal of certain
assets, are being executed according to the initial plan and are expected to be
complete by the fourth quarter of 1999. During the six months ended June 30,
1999, the Automotive aftermarket business closed one plant location and four
distribution centers.
39
<PAGE> 43
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
CASH
PAYMENTS
SIX
MONTHS
DECEMBER 31, 1998 ENDED BALANCE AT
RESTRUCTURING JUNE 30, JUNE 30,
CHARGE BALANCE 1999 1999
----------------- -------- ----------
(MILLIONS)
<S> <C> <C> <C>
Severance................................................. $15 $ 6 $ 9
Facility exit costs....................................... 1 -- 1
--- --- ---
$16 $ 6 $10
=== === ===
</TABLE>
Automotive expects to realize annual savings of $27 million as a result of
these restructuring initiatives, primarily from a reduction in salary and
related employee expenses. Reduced depreciation charges comprise $2 million of
the balance. Tenneco expects these savings will be fully realized beginning in
the second quarter of 2000.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
For the quarter ended June 30, 1998, Tenneco allocated $44 million of
pre-tax interest expense to the discontinued specialty packaging and paperboard
packaging operations. For the comparable period in 1999, $31 million in interest
expense was allocated to discontinued operations. Adjusting for this allocation,
interest expense was $7 million lower in the second quarter of 1999 than in the
comparable period in 1998. The lower interest expense is primarily attributable
to debt reduction from the proceeds of the formation of the containerboard joint
venture early in the second quarter of 1999.
INCOME TAXES
Tenneco's effective tax rate for the second quarter of 1999 was 41 percent
compared to 34 percent in the second quarter last year. The 1998 second quarter
rate was lower as a result of certain non-recurring state tax benefits in that
quarter.
MINORITY INTEREST
Minority interest is primarily composed of dividends on the preferred stock
of a U.S. subsidiary.
DISCONTINUED OPERATIONS
In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture. Tenneco
expects the sale to be completed before the Spin-off. As a result, Tenneco's
paperboard packaging segment has been reflected as discontinued operations.
In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operation, to Caraustar
Industries. Tenneco received cash proceeds of $73 million from this transaction
which closed in June 1999. As a result of the sale transaction, Tenneco
recognized a pre-tax gain of $14 million, $9 million after-tax or $.05 per
diluted share which is included in discontinued operations in the second quarter
of 1999.
40
<PAGE> 44
Revenues and income for the paperboard packaging discontinued operations
are shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30,
------------
1999 1998
---- ----
(MILLIONS)
<S> <C> <C>
Net sales and operating revenues............................ $ 53 $394
==== ====
Income before income taxes and interest allocation.......... $ 4 $ 32
Income tax (expense) benefit................................ (4) (12)
---- ----
Income before interest allocation........................... -- 20
Allocated interest expense, net of income tax............... -- (6)
---- ----
Income from discontinued operations before disposition...... -- 14
Gain (loss) on disposition, net of income tax............... 9 9
---- ----
Income (loss) from discontinued operations.................. $ 9 $ 23
==== ====
</TABLE>
In August 1999, Tenneco received a letter ruling from the Internal Revenue
Service that the Spin-off will be tax-free for U.S. federal income tax purposes
to Tenneco and its shareowners and as a result has restated its financial
statements to reflect its specialty packaging segment as a discontinued
operation. Revenues and income for the specialty packaging discontinued
operations are shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30,
------------
1999 1998
---- ----
(MILLIONS)
<S> <C> <C>
Net sales and operating revenues............................ $738 $738
==== ====
Income before income taxes and interest allocation.......... $ 99 $104
Income tax (expense) benefit................................ (32) (30)
---- ----
Income before interest allocation........................... 67 74
Allocated interest expense, net of income tax............... (21) (23)
---- ----
Income (loss) from discontinued operations.................. $ 46 $ 51
==== ====
</TABLE>
See Notes 2 and 3 to the unaudited consolidated financial statements of
Tenneco Inc. and Consolidated Subsidiaries contained elsewhere in this document
for further discussion of discontinued operations.
OUTLOOK
See Section D "Third Quarter 1999 Outlook" for information concerning
Tenneco's expectations for third quarter 1999 results of operations.
CHANGES IN ACCOUNTING PRINCIPLES
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which establishes
new accounting and reporting standards for the costs of computer software
developed or obtained for internal use. This statement requires prospective
application for fiscal years beginning after December 15, 1998. Tenneco adopted
SOP 98-1 on January 1, 1999. The impact of this new standard did not have a
significant effect on Tenneco's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. This statement requires previously capitalized costs related
to start-up
41
<PAGE> 45
activities to be expensed as a cumulative effect of a change in accounting
principle when the statement is adopted. Prior to January 1, 1999, Tenneco
capitalized costs related to start-up activities, primarily engineering costs
for new automobile original equipment platforms. Tenneco adopted SOP 98-5 on
January 1, 1999, and recorded an after-tax charge for the cumulative effect of
this change in accounting principle of $102 million, net of a $50 million tax
benefit, or $.61 per diluted common share. The change in accounting principle
decreased income from continuing operations by $6 million, net of a $3 million
tax benefit, or $.04 per diluted common share for the six months ended June 30,
1999. If the new accounting method had been applied retroactively, income from
continuing operations for the six months ended June 30, 1998, would have been
lower by $5 million, net of a $4 million tax benefit, or $.03 per diluted common
share. For the three months ended June 30, 1999, the change in accounting
principle decreased income from continuing operations by $2 million, net of a $2
million tax benefit, or $.01 per diluted common share. If the new accounting
method had been applied retroactively, income from continuing operations for the
three months ended June 30, 1998, would have been lower by $2 million, net of a
$2 million tax benefit, or $.01 per diluted common share.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative instruments,
including derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment. This statement cannot be
applied retroactively and is effective for all fiscal years beginning after June
15, 2000. Tenneco is currently evaluating the new standard but has not yet
determined the impact it will have on its financial position or results of
operations.
Effective January 1, 1999, Tenneco changed its method of accounting for
customer acquisition costs from a deferral method to an expense-as-incurred
method. In connection with Tenneco's decision to separate its automotive and
specialty packaging businesses into independent public companies, Tenneco
determined that a change to an expense-as-incurred method of accounting for
automotive aftermarket customer acquisition costs was preferable in order to
permit improved comparability of stand-alone financial results with its
aftermarket industry competitors. Tenneco recorded an after-tax charge for the
cumulative effect of this change in accounting principles of $32 million, net of
a $22 million tax benefit, or $.19 per diluted common share. The change in
accounting principle increased income from continuing operations by $5 million,
net of $4 million in income tax expense, or $.03 per diluted common share for
the six months ended June 30, 1999. If the new accounting principle had been
applied retroactively, income from continuing operations for the six months
ended June 30, 1998, would have been lower by $2 million, net of a $1 million
tax benefit, or $.01 per diluted common share. For the three months ended June
30, 1999, the change in accounting principle increased income from continuing
operations by $2 million, net of $2 million in income tax expense, or $.01 per
diluted common share. If the new accounting principle had been applied
retroactively, income from continuing operations for the three months ended June
30, 1998, would have been higher by $2 million, net of $2 million in income tax
expense, or $.01 per diluted common share.
EARNINGS PER SHARE
Income from continuing operations was $.21 per diluted common share for the
second quarter of 1999, compared to $.38 per diluted common share for last
year's quarter. Discontinued operations generated income of $.34 per diluted
common share during this year's quarter compared to $.43 per diluted common
share for the prior year's quarter. Net income was $.55 per diluted common share
for the second quarter of 1999, compared to $.81 per diluted common share in
last year's quarter.
42
<PAGE> 46
RESULTS OF CONTINUING OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998 % CHANGE
------ ------ --------
(MILLIONS)
<S> <C> <C> <C>
Automotive.......................................... $1,657 $1,664 --%
</TABLE>
Automotive's global revenue was $1,657 million for the first half of 1999,
essentially flat with the $1,664 million recorded in the comparable period of
1998.
Original equipment revenue increased 9 percent or $87 million versus the
first half of the prior year. Increases were achieved in North America, Europe
and Asia/Pacific of $65 million, $31 million and $6 million, respectively as
Automotive continued to place its products on many of the world's best selling
vehicles, including the top 10 selling light trucks and sport utility vehicles
in North America and placed its products on 20 new vehicle launches worldwide.
Revenue in South America declined by $15 million primarily as a result of
troubled economic conditions in Brazil and Argentina and a currency devaluation
in Brazil.
Worldwide aftermarket revenues declined by 14 percent or $94 million
compared to the previous year's first half. Decreases of $57 million in North
America and $26 million in Europe were primarily attributable to overall
softness during the first half of 1999 while North America was further impacted
by a reduction in some of its aftermarket sales programs and a decline in
aftermarket replacement rates. The decline of $13 million in South America was
primarily attributable to the economic conditions in Brazil and Argentina and
the currency devaluation in Brazil noted above. Revenue from Australia and Asia
increased by $2 million.
OPERATING INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Automotive........................................... $156 $219 (29)%
Other................................................ (4) (12) NM
---- ----
$152 $207 (27)%
==== ====
</TABLE>
Automotive's operating income for 1999's first half declined $63 million
versus the comparable period of 1998. Original equipment operating income was
down 14 percent or $16 million from 1998's first half. Higher costs related to a
first quarter 1999 change in accounting for platform start-up costs from a
capitalization to an expense basis and unfavorable currency impacts lowered
income by $4 million and $6 million, respectively. The balance of the decline in
original equipment income was principally attributable to pricing actions and
product mix.
Aftermarket operating income declined 46 percent or $47 million compared to
1998's first half. Unfavorable currency impacts reduced income by $6 million.
The balance of the reduction in income was principally attributable to the lower
level of revenue as discussed above.
The decrease in Tenneco's "Other" operating loss reflects reduced costs of
factoring a lower level of receivables.
OPERATING INCOME AS A PERCENTAGE OF REVENUE
Operating income as a percentage of revenue for the first six months of
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 1998 % CHANGE
---- ----- --------
<S> <C> <C> <C>
Automotive........................................... 9.4% 13.2% (29)%
Total................................................ 9.2% 12.4% (26)%
</TABLE>
43
<PAGE> 47
Operating income as a percentage of revenue declined primarily as a result
of the factors cited in the discussion of operating income above since revenue
was essentially flat.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
For the six months ended June 30, 1998, Tenneco allocated $87 million in
interest expense to the discontinued specialty packaging and paperboard
packaging operations. For the comparable period in 1999, $75 million in interest
expense was allocated to discontinued operations. Adjusting for the allocations,
interest expense was the same in the first six months of 1998 and 1999. The
second quarter 1999 interest savings generated from the use of the proceeds from
the formation of the containerboard joint venture was offset by borrowings made
since June 30, 1998 to finance capital expenditures, acquisitions, net share
repurchases and other investments which were in excess of cash provided by
operations.
INCOME TAXES
Tenneco's effective tax rate for the first half of 1999 was 40 percent
compared to 31 percent in the first half of last year. The 1998 first half rate
was lower as a result of certain non-recurring state tax benefits.
MINORITY INTEREST
Minority interest is primarily composed of dividends on the preferred stock
of a U.S. subsidiary. The $3 million favorable variance versus last year's first
half, however, is primarily attributable to lower earnings in Automotive's joint
ventures.
DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS
In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture. Tenneco
expects the sale to be completed before the Spin-off. As a result, Tenneco's
paperboard packaging segment has been reflected as discontinued operations.
In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operation, to Caraustar
Industries. Tenneco received cash proceeds of $73 million from this transaction
which closed in June 1999. As a result of the sale transaction, Tenneco
recognized a pre-tax gain of $14 million, $9 million after-tax or $.05 per
diluted share which is included in discontinued operations in the second quarter
of 1999.
Revenues and income for the paperboard packaging discontinued operations
are shown in the following table:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------
1999 1998
------ ------
(MILLIONS)
<S> <C> <C>
Net sales and operating revenues........................... $ 445 $ 770
====== ======
Income before income taxes and interest allocation......... $ 22 $ 66
Income tax (expense) benefit............................... (11) (26)
------ ------
Income before interest allocation.......................... 11 40
Allocated interest expense, net of income tax.............. (5) (12)
------ ------
Income from discontinued operations before disposition..... 6 28
Gain (loss) on disposition, net of income tax.............. (169) 9
------ ------
Income (loss) from discontinued operations................. $ (163) $ 37
====== ======
</TABLE>
In August 1999, Tenneco received a letter ruling from the Internal Revenue
Service that the Spin-off will be tax-free for U.S. federal income tax purposes
to Tenneco and its shareowners and as a result has restated its
44
<PAGE> 48
financial statements to reflect its specialty packaging segment as a
discontinued operation. Revenues and income for the specialty packaging
discontinued operations are shown in the following table:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------
1999 1998
------ ------
(MILLIONS)
<S> <C> <C>
Net sales and operating revenues........................... $1,404 $1,371
====== ======
Income before income taxes and interest allocation......... $ 144 $ 173
Income tax (expense) benefit............................... (48) (60)
------ ------
Income before interest allocation.......................... 96 113
Allocated interest expense, net of income tax.............. (44) (44)
------ ------
Income (loss) from discontinued operations................. $ 52 $ 69
====== ======
</TABLE>
See Notes 2 and 3 to the unaudited consolidated financial statements of
Tenneco Inc. and Consolidated Subsidiaries contained elsewhere in this document
for further discussion of discontinued operations.
Six months ended June 30, 1999 results from discontinued operations for the
specialty packaging segment includes a pre-tax charge of $29 million relating to
a plan to realign its headquarters functions. This plan involves the severance
of approximately 40 employees and the closing of the Greenwich, Connecticut
headquarters facility.
In the first quarter of 1999, Tenneco recorded an extraordinary loss for
extinguishment of debt of $7 million, net of a $3 million income tax benefit, or
$.04 per diluted common share. The loss related to early retirement of debt in
connection with the sale of the containerboard assets.
EARNINGS PER SHARE
Income from continuing operations was $.32 per diluted common share for the
first half of 1999, compared to $.62 per diluted common share in the same period
last year. Discontinued operations generated a loss of $.67 per diluted common
share during the first six months of 1999 compared to income of $.63 per diluted
common share for the prior year period. The current year period also included a
$.04 per diluted common share extraordinary loss on early retirement of debt in
connection with the sale of the containerboard assets, and $.80 per diluted
common share of charges related to the cumulative effect of changes in
accounting principles noted above. Net loss was $1.19 per diluted common share
for the first half of 1999, compared to net income of $1.25 per diluted common
share in the comparable period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
CAPITALIZATION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998 % CHANGE
-------- ------------ --------
(MILLIONS)
<S> <C> <C> <C>
Short-term debt and current maturities.......... $ 206 $ 304
Long-term debt.................................. 832 671
Debt allocated to discontinued operations....... 1,861 2,456
------ ------
Total debt...................................... 2,899 3,431 (16)%
------ ------
Minority interest of continuing operations...... 411 407
Minority interest of discontinued operations.... 14 14
------ ------
Total minority interest......................... 425 421 1%
------ ------
Common shareowners' equity...................... 2,122 2,504 (15)%
------ ------
Total capitalization.................. $5,446 $6,356 (14)%
====== ======
</TABLE>
45
<PAGE> 49
Tenneco's debt to capitalization ratio was 53.2 percent at June 30, 1999,
compared to 54.0 percent at December 31, 1998. The decrease in the ratio is
attributable to lower debt resulting from the use of the proceeds from the April
1999 containerboard transaction and Greenwich, Connecticut headquarters sale,
and the June 1999 folding carton sale to reduce short-term debt. The effect on
the ratio of the debt reduction was, however, partially offset by an equity
decline. The equity decline resulted from the net loss for the first six months
of 1999 of $199 million, common stock dividends of $100 million, and adverse
changes in the cumulative translation adjustment of $103 million. Tenneco issued
$20 million in common stock during the six-month period for employee benefit and
dividend reinvestment plans.
Following Tenneco's series of announcements regarding its strategic
alternatives, Standard and Poor's and Moody's debt rating agencies are
continuing to review the ratings on Tenneco's debt pending further information
about the debt profile of the new companies. In consideration of the rating
agency actions and the requirement to realign Tenneco's long-term debt to
accomplish the Spin-off, Tenneco continues to finance its requirements with
short-term debt. Tenneco believes that its existing committed credit facility is
adequate to meet its 1999 capital requirements, including scheduled long-term
debt retirements of $250 million.
As described above, Tenneco intends to realign its debt before the
Spin-off. As part of this debt realignment, Tenneco intends to (1) enter into a
new senior secured credit facility and (2) issue new senior subordinated debt.
Tenneco plans to use the proceeds of the senior subordinated debt issue and
initial borrowings under the new senior credit facility to fund a portion of the
debt realignment. These borrowings will remain obligations of Automotive,
Tenneco's continuing operations after the Spin-off. Also as part of this debt
realignment, Tenneco expects that Packaging will (1) issue new public debt
securities in exchange for certain outstanding series of Tenneco's public debt
and (2) make new borrowings under new credit facilities to be entered into in
connection with the Spin-off. Cash proceeds will be remitted to Tenneco to fund
the debt realignment.
Definitive agreements for these financings are being negotiated and have
not been completed. Accordingly, the terms of such arrangements described below
are preliminary and may change as a result of the negotiation of definitive
agreements. In addition, funding under the financings described below will be
subject to the satisfaction of numerous conditions.
Tenneco believes that cash flows from operations, combined with available
borrowing capacity under the new senior secured credit facility described below,
will generally be sufficient to meet Automotive's future capital requirements
for the following year. Tenneco's management believes that, after the Spin-off,
Packaging's cash flows from operations, combined with available borrowing
capacity under the new credit facilities described below, will generally be
sufficient to meet Packaging's future capital requirements for the following
year.
NEW AUTOMOTIVE CREDIT FACILITY
Tenneco intends to enter into a senior secured credit facility with a
syndicate, or group, of banks and financial institutions. Tenneco expects the
total available borrowing capacity under the senior secured credit facility to
amount to $1,650 million including a $500 million revolving credit facility,
with commitment terms ranging from six to eight and one-half years.
Tenneco expects that the terms of the senior secured credit facility will
require the revolving credit facility to be repaid on or before the date that is
the sixth anniversary of the funding date. Tenneco expects that the revolving
credit facility will terminate in 2005. Tenneco expects the term loans under the
senior secured credit facility will have varying maturities from six to eight
and one-half years, a portion of which will be payable in quarterly installments
beginning 18 months after funding and the remainder of which will be payable at
maturity.
Tenneco expects the senior secured credit facility to be secured by a
perfected security interest in (1) substantially all of the tangible and
intangible assets of Automotive and its domestic subsidiaries, (2) the capital
stock of Automotive's domestic subsidiaries, and (3) up to 65% of the capital
stock of Automotive's
46
<PAGE> 50
first-tier foreign subsidiaries, excluding joint venture interests. It is
expected that the senior secured credit facility will require Tenneco to
maintain compliance with the following financial tests:
- minimum interest coverage ratio, which is the ratio of consolidated
pretax earnings before interest, taxes, minority interest, depreciation
and amortization (EBITDA) to consolidated cash interest expense;
- minimum fixed charge coverage ratio, which is the ratio of consolidated
EBITDA less consolidated capital expenditures to consolidated cash
interest expense; and
- maximum leverage ratio, which is the ratio of consolidated indebtedness
to consolidated EBITDA.
In addition, the senior credit facility will contain restrictions on
Tenneco's operations that are customary for similar facilities and transactions.
Tenneco expects these restrictions will place substantial limitations on
Tenneco's ability to operate the Automotive business after the Spin-off. Tenneco
expects the senior credit facility to include limitations on: (a) incurring
additional liens; (b) liquidations and dissolutions; (c) incurring additional
indebtedness or guarantees; (d) sales or other dispositions of assets; (e)
capital expenditures; (f) dividends; (g) mergers and consolidations; (h) loans
and advances; (i) prepayments and modifications of subordinated and other debt
instruments; and (j) sales and leasebacks.
It is expected that the borrowings under the senior secured credit facility
will bear interest at floating rates, generally based on a base rate defined in
the facility or the Eurodollar rate plus an applicable margin, at Tenneco's
option.
NEW AUTOMOTIVE SUBORDINATED DEBT
In connection with the Spin-off, Tenneco intends to offer approximately
$500 million of senior subordinated notes in a private placement for resale
pursuant to Rule 144A under the Securities Act of 1933, as amended. The senior
subordinated notes will be general unsecured obligations of Tenneco, junior to
all senior indebtedness of Tenneco. While the interest rate, interest payment
dates, maturity and other material terms of the senior subordinated notes have
not been finalized, Tenneco expects that the senior subordinated notes will have
terms customary for senior subordinated note offerings of issuers similar to
Tenneco. Tenneco also expects that the senior subordinated notes will:
- mature in 10 years;
- be guaranteed by all of Tenneco's material domestic wholly-owned
subsidiaries;
- have registration rights;
- be redeemable at the option of the holders upon a change of control; and
- include customary limitations on Tenneco for this type of financing,
including limitations on indebtedness, liens, dividends, stock
repurchases, investments, assets sales, mergers, subsidiary stock
issuances and affiliate transactions.
NEW PACKAGING PUBLIC DEBT
The terms of Packaging's new public debt securities will be substantially
identical to the terms of the corresponding series of Tenneco's original
securities for which they are exchanged, except that (1) Packaging will be the
issuer and (2) the interest rates will be different. The terms of these new
securities will not restrict Packaging's ability to make dividends or capital
expenditures or incur additional unsecured debt.
NEW PACKAGING CREDIT FACILITIES
In addition, Packaging intends to enter into a five year, $750 million
long-term revolving credit facility and a $250 million 364-day revolving credit
facility in connection with the Spin-off. Initial borrowings under these
facilities will be used to fund a portion of the debt realignment. After the
Spin-off, additional borrowings may be used for general corporate purposes.
Although the terms of these facilities have not been finalized, Packaging does
not expect these facilities to include any general restrictions on its ability
to pay dividends or
47
<PAGE> 51
make capital expenditures, although they may include limitations on incurring
liens, or incurring debt and guarantee obligations at the subsidiary level.
Packaging does expect, however, that these facilities will require it to comply
with specified financial ratios, as well as other customary covenants and
agreements. Borrowings under these facilities are expected to bear interest at a
floating rate based on LIBOR, adjusted for reserve requirements, plus a
specified margin or based on a specified prime or reference rate plus a
specified margin, at Packaging's option. Borrowings under these facilities may
also bear interest based on competitive bids.
A lender has committed to provide Packaging up to $1.5 billion of term loan
financing, which Packaging intends to use in the event it does not sell its
containerboard joint venture interest before the Spin-off, for general corporate
and other purposes. Although the terms of this financing have not been
finalized, Packaging expects that borrowings under this facility would be due 18
months after funding and bear interest at a floating rate based on LIBOR,
adjusted for reserve requirements, plus a specified margin or based on a
specified prime or reference rate plus a specific margin, at Packaging's option.
Packaging expects this financing would include covenants similar to those
described above for the revolving credit facilities.
Before the spin-off Packaging expects to enter into a $175 million
syndicated lease facility with a third party lessor and various lenders, the
proceeds of which will be used to restructure or replace certain existing
operating leases and public warehouse arrangements and to facilitate additional
leasing arrangements for other operating facilities. Packaging expects that the
syndicated lease facility will contain customary terms and conditions, including
a residual value guarantee, default provisions and financial covenants.
CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
---------------
1999 1998
------ -----
(MILLIONS)
<S> <C> <C>
Cash provided (used) by:
Operating activities...................................... $ (181) $ 178
Investing activities...................................... (976) (314)
Financing activities...................................... 1,170 125
</TABLE>
OPERATING ACTIVITIES
Cash flow used by continuing operations increased by $32 million for the
first six months of 1999 compared to the comparable 1998 period. Lower income
from continuing operations and lower deferred income taxes were partially offset
by lower increases in working capital.
Cash flow from Tenneco's discontinued operations declined by $327 million
in the first six months of 1999 compared to the 1998 period. The decline in the
paperboard packaging business resulted from lower linerboard and medium prices
along with the repurchase of accounts receivable in contemplation of the
formation of the containerboard joint venture in April. Higher working capital
and unfavorable deferred taxes in the specialty packaging business generated the
balance of the variance.
INVESTING ACTIVITIES
Excluding the effects of the discontinued specialty packaging and
paperboard packaging operations, cash used by investing activities was lower
during the first six months of 1999 by $12 million compared to the first six
months of 1998. Lower capital spending, lower systems related expenditures and
lower investment were partially offset by the second quarter 1999 acquisition of
Kinetic Ltd.
During the second quarter of 1999, Tenneco acquired for approximately $1.1
billion certain assets previously used by the containerboard business under
operating leases and timber cutting rights. This was required in order to
complete the April containerboard sale. The source of the funds for these
capital expenditures was borrowings by Packaging prior to the containerboard
sale. See "Financing Activities" below.
48
<PAGE> 52
Tenneco also received approximately $300 million in cash proceeds (before giving
effect to the financing transactions described below) related to the
containerboard and folding carton sale transactions.
FINANCING ACTIVITIES
Absent the borrowings required to complete the containerboard sale
transaction, cash used by financing activities was $590 million for the first
six months of 1999. This primarily reflected the use of the net proceeds of the
containerboard sale transaction to reduce Tenneco's short-term debt.
Before the containerboard sale transaction, Packaging borrowed
approximately $1.8 billion. Approximately $1.2 billion of these borrowings were
used to acquire the assets used under operating leases and timber cutting rights
described under "Investing Activities" above, and to purchase the containerboard
business accounts receivable described under "Operating Activities" above.
Packaging remitted the balance of the borrowings to Tenneco to retire short-term
debt. Packaging contributed the containerboard business to the new joint venture
subject to the approximately $1.8 billion in new debt. The debt reduction which
resulted from this contribution is shown on the Statements of Cash Flows as a
non-cash financing activity.
YEAR 2000
Many computer software systems, as well as some hardware and equipment
utilizing date-sensitive data, were designed to use a two-digit date field.
Consequently, these systems will not be able to properly recognize dates beyond
the year 1999 ("the Year 2000 issue"). Tenneco's significant technology
transformation projects have addressed the Year 2000 issue in those areas where
replacement systems are being installed for other business reasons. Where
existing systems and equipment are expected to remain in place beyond 1999,
Tenneco has a detailed process in place to identify and assess Year 2000 issues
and to remediate, replace or establish alternative procedures addressing
non-Year 2000 compliant systems, hardware, and equipment.
Tenneco has substantially completed inventorying its systems and equipment,
including computer systems and business applications, as well as date-sensitive
technology embedded in its equipment and facilities. Tenneco continues to plan
for and undertake remediation, replacement, or establishment of alternative
procedures for non-compliant Year 2000 systems and equipment; and test
remediated, replaced or alternative procedures for systems and equipment.
Tenneco believes that approximately 85 percent of its major business
applications systems and approximately 90 to 95 percent of its manufacturing
equipment had achieved Year 2000 compliance as of June 30, 1999. Tenneco has
confirmed that none of its products are date-sensitive. Remediation,
replacement, or establishment of alternative procedures for systems and
equipment have been and are being undertaken on a business priority basis. This
is ongoing and was completed at some locations in 1998 with the remainder to be
completed through the third quarter of 1999. Testing will occur in the same time
frame.
Based upon current estimates, Tenneco believes that costs to address Year
2000 issues and implement necessary changes to its existing systems and
equipment, including costs incurred to date, will range from $40 to $50 million.
As of June 30, 1999, approximately $30 million of the costs had been incurred.
Approximately 40 percent of the range of costs estimated and of the costs
incurred to date are attributable to continuing operations. These costs are
being expensed as they are incurred, except that in some instances Tenneco may
determine that replacing existing computer systems or equipment may be more
effective and efficient, particularly where additional functionality is
available. These replacements would be capitalized and would reduce the
estimated expense associated with Year 2000 issues.
Tenneco has also contacted its major suppliers, financial institutions, and
others with whom it conducts business to determine whether they will be able to
resolve in a timely manner Year 2000 problems possibly affecting Tenneco. A
majority of these entities, including critical suppliers, have responded by
advising as to the status of their efforts and by stating that they expect to
become Year 2000 compliant in a timely manner. Based on these responses,
critical suppliers have been assigned a risk rating. This process is ongoing.
Tenneco intends to continue corresponding with critical high risk third parties
to obtain information and updates on
49
<PAGE> 53
their Year 2000 efforts, and to assess new suppliers, financial institutions and
others with whom it begins to conduct business.
If Tenneco is unable to complete on a timely and cost-effective basis the
remediation or replacement of critical systems or equipment not yet in
compliance, or develop alternative procedures, or if those with whom Tenneco
conducts business are unsuccessful in implementing timely solutions, Year 2000
issues could have a material adverse effect on Tenneco's financial condition or
results of operations. Possible worst case scenarios include interruptions in
Tenneco's ability to manufacture its products, process and ship orders, and bill
and collect accounts receivable due to internal systems failures or the systems
failures of its suppliers or customers. Tenneco believes it will be able to
timely resolve its own Year 2000 issues.
As part of its planning and readiness activities, Tenneco is developing
Year 2000 contingency plans for critical business processes such as banking,
data center operations and just-in-time manufacturing operations. Contingency
plans are being developed on a business unit basis, where needed, to respond to
previously undetected Year 2000 problems and business interruption from
suppliers. Contingency plans will include alternative suppliers, as necessary,
and assuring the availability of key personnel at year end to address unforeseen
Year 2000 problems.
EURO CONVERSION
The European Monetary Union resulted in the adoption of a common currency,
the "Euro," among eleven European nations. The Euro is being adopted over a
three-year transition period beginning January 1, 1999. In October 1997, Tenneco
established a cross-functional Euro Committee, comprised of representatives of
the Company's operational divisions as well as its corporate offices. That
Committee had two principal objectives: (i) to determine the impact of the Euro
on the Company's business operations, and (ii) to recommend and facilitate
implementation of those steps necessary to ensure that Tenneco would be fully
prepared for the Euro's introduction. As of January 1, 1999, Tenneco implemented
those Euro conversion procedures that it had determined to be necessary and
prudent to adopt by that date, and is on track to becoming fully "Euro ready" on
or before the conclusion of the three-year Euro transition period. Tenneco
believes that the costs associated with transitioning to the Euro will not be
material to its consolidated financial position or the results of its
operations.
50
<PAGE> 54
SECTION C.
This section presents Tenneco's restated Selected Financial Data,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Financial Statements and Supplementary Data previously included
in Tenneco's Annual Report on Form 10-K for the year ended December 31, 1998
(subsequently restated in the Current Report on Form 8-K dated July 14, 1999).
51
<PAGE> 55
SELECTED FINANCIAL DATA
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998(A) 1997(A) 1996(A) 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA(b):
Net sales and operating revenues from
continuing operations.................. $ 3,237 $ 3,226 $ 2,980 $ 2,479 $ 1,989
=========== =========== =========== =========== ===========
Income from continuing operations before
interest expense, income taxes, and
minority interest --
Automotive........................... $ 248 $ 407 $ 249 $ 240 $ 223
Other................................ (21) (12) (7) 8 7
----------- ----------- ----------- ----------- -----------
Total............................. 227 395 242 248 230
Interest expense (net of interest
capitalized)(c)........................ 69 58 60 44 33
Income tax expense....................... 13 80 79 91 52
Minority interest........................ 29 23 21 23 --
----------- ----------- ----------- ----------- -----------
Income from continuing operations........ 116 234 82 90 145
Income from discontinued operations, net
of income tax(d)....................... 139 127 564 645 307
Extraordinary loss, net of income
tax(e)................................. -- -- (236) -- (5)
Cumulative effect of changes in
accounting principles, net of income
tax(f)................................. -- (46) -- -- (39)
----------- ----------- ----------- ----------- -----------
Net income............................... 255 315 410 735 408
Preferred stock dividends................ -- -- 12 12 60
----------- ----------- ----------- ----------- -----------
Net income to common stock............... $ 255 $ 315 $ 398 $ 723 $ 348
=========== =========== =========== =========== ===========
Average number of shares of common stock
outstanding(g) --
Basic................................ 168,505,573 170,264,731 169,609,373 172,764,198 162,307,189
Diluted.............................. 168,834,531 170,801,636 170,526,112 173,511,654 162,912,425
Earnings per average share of common
stock(g) --
Basic:
Continuing operations............. $ .69 $ 1.37 $ .49 $ .52 $ .90
Discontinued operations(d)........ .83 .75 3.25 3.67 1.52
Extraordinary loss(e)............. -- -- (1.39) -- (.03)
Cumulative effect of changes in
accounting principles(f)........ -- (.27) -- -- (.24)
----------- ----------- ----------- ----------- -----------
$ 1.52 $ 1.85 $ 2.35 $ 4.19 $ 2.15
=========== =========== =========== =========== ===========
Diluted:
Continuing operations............. $ .68 $ 1.36 $ .49 $ .52 $ .89
Discontinued operations(d)........ .83 .75 3.23 3.65 1.52
Extraordinary loss(e)............. -- -- (1.38) -- (.03)
Cumulative effect of changes in
accounting principles(f)........ -- (.27) -- -- (.24)
----------- ----------- ----------- ----------- -----------
$ 1.51 $ 1.84 $ 2.34 $ 4.17 $ 2.14
=========== =========== =========== =========== ===========
Cash dividends per common share.......... $ 1.20 $ 1.20 $ 1.80 $ 1.60 $ 1.60
</TABLE>
52
<PAGE> 56
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31, -- (CONTINUED)
(MILLIONS)
<TABLE>
<CAPTION>
1998(A) 1997(A) 1996(A) 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(b):
Net assets of discontinued operations.... $ 1,739 $ 1,771 $ 1,883 $ 1,469 $ 700
Total assets............................. 4,759 4,682 4,653 3,635 2,315
Short-term debt(c)....................... 304 75 74 109 31
Long-term debt(c)........................ 671 713 639 469 303
Debt allocated to discontinued
operations(c).......................... 2,456 2,123 1,590 1,454 813
Minority interest........................ 407 408 304 301 301
Shareowners' equity...................... 2,504 2,528 2,646 3,148 2,900
STATEMENT OF CASH FLOWS DATA(b):
Net cash provided by operating
activities............................. $ 532 $ 519 $ 253 $ 1,443 $ 450
Net cash used by investing activities.... (754) (887) (685) (1,162) (113)
Net cash provided (used) by financing
activities............................. 216 354 147 (356) (151)
Capital expenditures for continuing
operations............................. (195) (221) (188) (208) (114)
</TABLE>
- -------------------------
(a) For a discussion of the significant items affecting comparability of the
financial information for 1998, 1997, and 1996, see Item 5, Section C.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this Form 8-K. See also Notes 1 and 2 to the Financial
Statements of Tenneco Inc. and Consolidated Subsidiaries for the three years
ended December 31, 1998 included in this Form 8-K for a discussion of the
1996 corporate reorganization transactions and Note 2 for a discussion of
the spin-off of Tenneco's packaging business.
(b) During the years presented, Tenneco completed numerous acquisitions related
to its continuing operations, the most significant of which was Clevite for
$328 million in July 1996. See Note 4 to the Financial Statements of Tenneco
Inc. and Consolidated Subsidiaries for additional information.
(c) Debt amounts for 1998, 1997, and 1996 are net of allocations for corporate
debt to the net assets of discontinued specialty packaging and paperboard
packaging operations. Debt amounts for 1995 and 1994 are net of allocations
for corporate debt to the net assets of discontinued specialty packaging,
paperboard packaging, energy, and shipbuilding operations. Interest expense
for all periods is net of interest expense allocated to income from
discontinued operations. The allocation is based on the proportion of
Tenneco's investment in the specialty packaging operations', paperboard
packaging operations', energy operations', and shipbuilding operations' net
assets to Tenneco consolidated net assets plus debt. See Note 1 to the
Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for
additional information.
(d) Discontinued operations reflected in the above periods include Tenneco's
specialty packaging operations which were discontinued in August 1999, its
paperboard packaging operations which were discontinued in June 1999, its
energy and shipbuilding operations, which were discontinued in December
1996, its farm and construction equipment operations, which were
discontinued in March 1996, and its chemicals and brakes operations, which
were discontinued during 1994.
(e) Represents Tenneco's costs related to prepayment of debt, including the 1996
loss recognized in the realignment of Tenneco's consolidated indebtedness
preceding its 1996 corporate reorganization. See Note 2 to the Financial
Statements of Tenneco Inc. and Consolidated Subsidiaries.
(f) In 1997, Tenneco implemented Financial Accounting Standards Board's Emerging
Issues Task Force Issue 97-13, "Accounting for Costs Incurred in Connection
with a Consulting Contract that Combines Business Process Reengineering and
Information Technology Transformation." In 1994, Tenneco adopted Statement
of Financial Accounting Standards ("FAS") No. 112, "Employers' Accounting
for Postemployment Benefits." See Note 1 to the Financial Statements of
Tenneco Inc. and Consolidated Subsidiaries for additional information
regarding changes in accounting principles.
(g) The average number of shares of common stock outstanding and earnings per
share amounts have been restated to reflect the adoption of FAS No. 128,
"Earnings per Share," effective December 15, 1997. See Note 1 and Note 8 to
the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for
information regarding the computation of earnings per share of common stock.
53
<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
STRATEGIC ALTERNATIVES ANALYSIS
In July 1998, Tenneco's Board of Directors authorized management to develop
a broad range of strategic alternatives which could result in the separation of
the automotive, paperboard packaging, and specialty packaging businesses. As
part of that strategic alternatives analysis, Tenneco has taken the following
actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint
venture with an affiliate of Madison Dearborn Partners, Inc. The
contribution of the containerboard assets to the joint venture was
completed in April 1999. Tenneco received consideration of cash and debt
assumption totaling approximately $2 billion and a 45 percent common
equity interest in the joint venture valued at approximately $200
million. Tenneco now owns a 43 percent common equity interest due to
subsequent management equity issuances.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operation, to
Caraustar Industries. This transaction closed in June 1999.
- Also in April 1999, Tenneco announced that its Board of Directors had
approved the separation of its automotive and specialty packaging
businesses into two separate, independent companies.
- In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture.
Tenneco expects the sale to be completed prior to the spin-off of the new
packaging company discussed below.
The containerboard assets contributed to the joint venture represented
substantially all of the assets of the paperboard packaging segment and included
four mills, 67 corrugated products plants, and an ownership or controlling
interest in approximately 950,000 acres of timberland. Before the transaction,
Tenneco Packaging borrowed approximately $1.8 billion and used approximately
$1.2 billion to acquire assets used by the containerboard business under
operating leases and timber cutting rights and to purchase containerboard
business accounts receivable that had previously been sold to a third party. The
remainder of the borrowings was remitted to Tenneco and used to repay a portion
of short-term debt. Tenneco Packaging then contributed the containerboard
business assets, subject to the new indebtedness and the containerboard business
liabilities, to the joint venture in Exchange for $247 million in cash and the
45 percent interest in the joint venture. As a result of the sale transaction,
Tenneco recognized a pre-tax loss of $293 million, $178 million after-tax or
$1.07 per diluted common share. This loss was included in the results of
Tenneco's discontinued operations in the first quarter of 1999.
As a result of the decision to sell the remaining interest in the
containerboard joint venture, Tenneco's paperboard packaging segment is
presented as a discontinued operation in the accompanying financial statements.
Refer to Note 2 to the Financial Statements of Tenneco Inc. and Consolidated
Subsidiaries contained elsewhere in this document for further information.
The separation of the automotive and packaging businesses will be
accomplished by the spin-off of the common stock of Tenneco Packaging Inc.
("Packaging") to Tenneco shareowners (the "Spin-off"). At the time of the
Spin-off, Packaging will include Tenneco's specialty packaging business,
Tenneco's administrative services operations and the remaining interest in the
containerboard joint venture if the sale has not been completed. Tenneco and
Packaging are, however, currently analyzing the alternatives with respect to the
administrative services operations.
Before the Spin-off, Tenneco will realign substantially all of its existing
debt through some combination of tender offers, exchange offers, prepayments,
and other refinancings. This debt realignment will be financed by internally
generated cash, borrowings by Tenneco under a new credit facility, the issuance
by Tenneco of subordinated debt, and borrowings by Packaging under new credit
facilities. Tenneco currently expects that, subject to discussions with debt
rating agencies, the debt of Packaging will be rated investment grade and the
debt of the automotive company ("Automotive") will be rated non-investment
grade.
54
<PAGE> 58
Also before the Spin-off, Tenneco will restructure its existing businesses,
assets, and liabilities through a series of corporate restructuring
transactions. As Tenneco is currently organized, ownership of its subsidiaries
is based on geographic location and tax considerations rather than on the
businesses in which the subsidiaries are involved. Therefore, Tenneco will need
to restructure its existing businesses so that the assets, liabilities, and
operations of its packaging business and administrative services operations will
be owned by Packaging, and the assets, liabilities, and operations of its
automotive businesses will be owned by Tenneco.
The Spin-off is subject to conditions, including formal declaration of the
Spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued
effectiveness of a determination that the Spin-off will be tax-free for U.S.
federal income tax purposes, and the successful completion of the debt
realignment and corporate restructuring transactions. In August 1999, Tenneco
received a letter ruling from the Internal Revenue Service that the Spin-off
will be tax-free for U.S. federal income tax purposes to Tenneco and its
shareowners and as a result the specialty packaging segment is presented as a
discontinued operation in the accompanying financial statements. After
discontinuing the specialty packaging segment, Tenneco's sole continuing
operation is its Automotive segment. Refer to Note 2 to the Financial Statements
of Tenneco Inc. and Consolidated Subsidiaries contained elsewhere in this
document for further information.
YEARS 1998 AND 1997
RESULTS OF CONTINUING OPERATIONS
Tenneco reported income from continuing operations of $116 million for the
year ended December 31, 1998, compared to $234 million for the same period in
1997. The 1998 figure includes a $34 million after-tax charge to restructure the
automotive aftermarket business and to reduce overhead and manufacturing costs
throughout every part of the business. Excluding the restructuring charge,
Tenneco's income from continuing operations for the 1998 period was $150 million
compared to $234 million for the year ended December 31, 1997. The decline
results from lower Automotive operating income combined with higher interest
expense and minority interest.
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
%
1998 1997 CHANGE
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Automotive............................................ $3,237 $3,226 --%
</TABLE>
Automotive's revenue for 1998 was essentially flat with 1997 as increases
in original equipment revenue in North America and Europe of $215 million were
offset by a $165 million decline in aftermarket revenues throughout the world, a
$54 million reduction due to the adverse impact of a strong U.S. dollar, with
the remaining change due to the mix of products sold. Original equipment revenue
increased as Automotive continued to place its ride control and exhaust products
on many of the world's best-selling vehicles. Lower aftermarket demand was
driven by customer consolidations that temporarily increased field inventory
levels in North America and Europe; milder than normal winter weather; and
continuing soft Asian and South American replacement markets. Additionally,
Automotive began reducing its quarterly promotional programs in an effort to
better balance supply and demand going into 1999.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST
("OPERATING INCOME")
The following table presents operating income for the years 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Automotive........................................... $248 $407 (39)%
Other................................................ (21) (12) NM
---- ----
$227 $395 (43)%
==== ====
</TABLE>
55
<PAGE> 59
Excluding restructuring charges, a comparison of Tenneco's 1998 and 1997
operating income is as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Automotive........................................... $301 $407 (26)%
Other................................................ (21) (12) NM
---- ----
$280 $395 (29)%
==== ====
</TABLE>
Automotive's operating income in 1998 reflected strong volume growth in the
original equipment business which was more than offset by lower volumes in the
aftermarket. The net impact of volume was a decline in operating income of $43
million. Adverse currency movements caused a further deterioration of $14
million. The 1997 operating income included $10 million related to the favorable
resolution of a legal action and a net reduction of $4 million in certain
reserves, primarily related to ongoing reorganization initiatives which had
proceeded more rapidly and efficiently than planned, allowing Automotive to
adjust its cost estimate for completing the initiatives. Charges in 1998 for bad
debts, a higher level of costs related to customer acquisition activity and
marketing, and pricing adjustments in the original equipment business produced
the balance of the earnings decline.
Tenneco's "Other" operating loss in 1997 reflects gain on liquidation of
overseas subsidiaries.
OPERATING INCOME AS A PERCENTAGE OF REVENUE
Operating income as a percentage of revenue for 1998 and 1997, including
the fourth quarter 1998 restructuring charge, were as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Automotive............................................ 7.7% 12.6% (39)%
Total................................................. 7.0% 12.2% (43)%
</TABLE>
Operating income as a percentage of revenue declined primarily as a result
of the factors cited in the discussion of operating income above since revenue
was essentially flat.
Excluding the fourth quarter 1998 restructuring charge described below,
operating income as a percentage of revenue for the same periods were as
follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Automotive............................................ 9.3% 12.6% (26)%
Total................................................. 8.7% 12.2% (29)%
</TABLE>
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1998, Tenneco's Board of Directors approved an
extensive restructuring plan designed to reduce administrative and operational
costs in every part of Tenneco's business. Tenneco recorded a pre-tax charge to
income from continuing operations of $53 million, $34 million after-tax or $.20
per diluted common share, in the fourth quarter of 1998 related to this
restructuring plan. Of the pre-tax charge for operational restructuring plans,
$36 million is related to the consolidation of the manufacturing and
distribution operations of Automotive's North American aftermarket business. A
staff and related cost reduction plan, which covers employees in Automotive's
operating unit and corporate operations, is expected to cost $17 million.
The Automotive aftermarket restructuring involves closing two plant
locations and five distribution centers and the elimination of 302 positions at
those locations. The staff and related cost reduction plan involves the
elimination of 454 administrative positions in Automotive's business unit and
its corporate operations.
56
<PAGE> 60
The fixed assets at the locations to be closed were written down to their
fair value, less costs to sell, in the fourth quarter of 1998. As a result of
the single-purpose nature of the assets, fair value was estimated at scrap value
less cost to dispose. No significant net cash proceeds are expected to be
received from the ultimate disposal of these assets, which should be complete by
the fourth quarter of 2000. The effect of suspending depreciation for these
impaired assets is a reduction in depreciation and amortization of approximately
$2 million on an annual basis.
As of December 31, 1998, approximately 350 employees had been terminated.
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
1998 FOURTH QUARTER CHARGED BALANCE AT
RESTRUCTURING 1998 TO ASSET DECEMBER 31,
CHARGE PAYMENTS ACCOUNTS 1998
------------- -------------- -------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
Severance....................... $19 $ 4 $-- $15
Asset impairments............... 33 -- 33 --
Facility exit costs............. 1 -- -- 1
--- --- --- ---
$53 $ 4 $33 $16
=== === === ===
</TABLE>
Automotive expects to realize annual savings of $27 million as a result of
these restructuring initiatives, primarily from a reduction in salary and
related employee expenses. Tenneco expects these savings will be fully realized
beginning in the second quarter of 2000.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Tenneco incurred interest expense of $69 million, a $11 million increase
over 1997. For the year 1998, $171 million of interest expense was allocated to
discontinued operations compared with $158 million during 1997. Adjusting for
the allocation, interest expense increased by $24 million. This increase was
attributable to higher average debt levels in 1998 resulting from inclusion for
the full year of amounts used to acquire the protective and flexible packaging
business of KNP BT in late April 1997 for the specialty packaging segment, a
higher level of working capital to support higher revenue levels and Tenneco's
share repurchase activity.
INCOME TAXES
Tenneco's effective tax rate for 1998 was 8 percent, compared to 24 percent
for 1997. The 1998 effective tax rate was lower than the statutory rate as a
result of certain non-recurring foreign and state tax benefits, lower foreign
tax rates and a reduction in Tenneco's estimated tax liabilities related to
certain global tax audits. The 1997 effective tax rate benefitted from the
non-recurring impact of certain foreign tax benefits and the benefit of
previously unrecognized deferred tax assets.
MINORITY INTEREST
Minority interest was $29 million in 1998, compared to $23 million in 1997.
This primarily represents dividends on the preferred stock of a U.S. subsidiary.
In December 1997, this subsidiary issued additional preferred stock. See Note 10
to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries
contained elsewhere in this document for additional information.
DISCONTINUED OPERATIONS
In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture. Tenneco
expects the sale to be completed before the Spin-off. As a result, Tenneco's
paperboard packaging segment has been reflected as discontinued operations. In
August 1999, Tenneco received a letter ruling from the Internal Revenue Service
that the Spin-off will be tax-free for U.S. federal income tax purposes to
Tenneco and its shareowners and as a result the specialty packaging operations
have been reflected as discontinued operations. For 1998, discontinued
operations for the paperboard
57
<PAGE> 61
packaging and specialty packaging segments generated $139 million or $.83 per
diluted common share) of income compared to $127 million or $.75 per diluted
common share for 1997.
See Note 2 to the Financial Statements of Tenneco Inc. and Consolidated
Subsidiaries contained elsewhere in this document for further discussion of
discontinued operations.
Fourth quarter 1998 results from discontinued operations for the paperboard
packaging segment include a pre-tax charge of $14 million related to Tenneco's
restructuring plan to reduce administrative and operational overhead costs. The
Paperboard Packaging restructuring plan involves closing four box plants and the
elimination of 78 manufacturing and 198 administrative positions.
Income from the discontinued paperboard packaging segment in 1998 also
included a $15 million pre-tax gain on the sale of its remaining 20 percent
interest in a recycled paperboard joint venture with Caraustar Industries and a
$17 million pre-tax gain on the sale of non-strategic timberland assets. In
1997, income from discontinued operations included a $38 million pre-tax gain on
refinancing of two containerboard mill leases and a $5 million pre-tax gain from
a timberland management transaction.
Fourth quarter 1998 results from discontinued operations for the specialty
packaging segment includes a pre-tax charge of $32 million related to Tenneco's
restructuring plan to reduce administrative and operational overhead costs. The
specialty packaging restructuring plan involves the elimination of product lines
at two plants, exiting four joint ventures and elimination of 104 manufacturing
positions and 184 administrative positions in the operations and corporate
offices.
CHANGES IN ACCOUNTING PRINCIPLE
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which establishes
new accounting and reporting standards for the costs of computer software
developed or obtained for internal use. This statement will be applied
prospectively and is effective for fiscal years beginning after December 15,
1998. Tenneco currently capitalizes costs for purchase and development of
software which is used in its business operations. Consequently, the impact of
this new standard will not have a significant effect on Tenneco's financial
position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Prior to January 1, 1999,
Tenneco capitalized costs related to start-up activities, primarily engineering
costs for new automobile original equipment platforms. Tenneco expects to record
an after-tax charge for the cumulative effect of this change in accounting
principle upon adoption of approximately $100 million. Tenneco will adopt this
new accounting principle in the first quarter of 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes new accounting and reporting standards
requiring that all derivative instruments, including derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. This statement cannot be applied retroactively and is effective for
all fiscal years beginning after June 15, 2000. Tenneco is currently evaluating
the new standard but has not yet determined the impact it will have on its
financial position or results of operations.
Tenneco adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," and SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement
58
<PAGE> 62
Benefits," in 1998. Disclosures required by these statements for earlier periods
presented have been restated on a comparative basis.
As required by the FASB's Emerging Issues Task Force ("EITF") Issue 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation," Tenneco recorded an after-tax charge of $46 million, net of a
tax benefit of $28 million, or $.27 per common share on both the basic and
diluted bases in the fourth quarter of 1997. EITF 97-13 establishes the
accounting treatment and an allocation methodology for certain consulting and
other costs incurred in connection with information technology transformation
efforts. This charge was reported as a cumulative effect of change in accounting
principle.
EARNINGS PER SHARE
Income from continuing operations was $.68 per diluted common share for
1998, compared to $1.36 per diluted common share in 1997. (All references to
earnings per share in this Management's Discussion and Analysis are on a diluted
basis unless otherwise noted.) Discontinued operations contributed $.83 per
diluted common share for 1998 compared to $.75 per diluted common share for
1997. For 1997, Tenneco also recorded a charge for the cumulative effect of a
change in accounting principle noted above of $.27 per diluted common share,
resulting in net income of $1.84 per diluted common share compared to $1.51 per
diluted common share for 1998.
LIQUIDITY AND CAPITAL RESOURCES
CAPITALIZATION
<TABLE>
<CAPTION>
%
1998 1997 CHANGE
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Short-term debt and current maturities.............. $ 304 $ 75
Long-term debt...................................... 671 713
Debt allocated to discontinued operations........... 2,456 2,123
------ ------
Total debt.......................................... 3,431 2,911 18%
Minority interest................................... 407 408
Minority interest allocated to discontinued
operations........................................ 14 16
------ ------
Total minority interest............................. 421 424 (1)%
------ ------
Common shareowners' equity.......................... 2,504 2,528 (1)%
------ ------
Total capitalization...................... $6,356 $5,863 8%
====== ======
</TABLE>
Tenneco's debt to capitalization ratio was 54.0 percent at December 31,
1998, compared to 49.7 percent at December 31, 1997. The increase in the ratio
is attributable to the additional debt issued during 1998 as described under
"Cash Flow-Financing Activities" below, as well as a decline in equity resulting
from net income in 1998 being more than offset by dividends and share
repurchases.
CASH FLOWS
<TABLE>
<CAPTION>
1998 1997
----- -----
(MILLIONS)
<S> <C> <C>
Cash provided (used) by:
Operating activities...................................... $ 532 $ 519
Investing activities...................................... (754) (887)
Financing activities...................................... 216 354
</TABLE>
59
<PAGE> 63
OPERATING ACTIVITIES
Cash flow provided by operating activities was $13 million higher in 1998
than in 1997. Income before depreciation, depletion and amortization was $78
million lower than in 1997, largely as a result of higher interest expense and
the restructuring charge taken during the fourth quarter of 1998, for which the
bulk of the cash outflows will occur during 1999. Noncash charges for deferred
income taxes were higher in 1997 than in 1998, primarily as a result of tax
benefits derived from the 1996 reorganization and debt realignment and a 1996
tax net operating loss which was carried back to earlier years.
INVESTING ACTIVITIES
Investing activities used $133 million less cash in 1998 than in 1997.
Capital expenditures for continuing operations declined by $26 million in 1998.
Capital expenditures and acquisitions for discontinued operations decreased in
1998 by $124 million, as lower acquisitions in 1998 were partially offset by
higher capital spending. During 1998, the most significant acquisitions were
Richter Manufacturing, a North American protective packaging business, and the
Belvidere, Illinois dual-ovenable paperboard tray manufacturing facility of
Champion International. Acquisition activity in 1997 primarily related to the
purchase of KNP BT's protective and flexible packaging business. The higher
capital expenditures were primarily a result of $84 million spent to acquire
certain leased timberlands in contemplation of the separation of the
containerboard assets from Tenneco's other businesses.
FINANCING ACTIVITIES
Financing activities in 1998 generated $138 million less cash than in 1997.
During 1997, a Tenneco subsidiary issued preferred stock, the net proceeds of
which were $99 million. During 1998, Tenneco repurchased $22 million more of its
common stock than in 1997. During 1997, Tenneco refinanced a portion of its
short-term debt by issuing $100 million of 10-year 7 1/2% notes, $200 million of
30-year 7 7/8% debentures, and $300 million of 20-year 7 5/8% debentures. The
net proceeds of these debt offerings was $593 million. During 1998, Tenneco's
short-term debt (excluding current maturities on long-term debt) increased by
$540 million.
LIQUIDITY
At December 31, 1998, Tenneco's credit facility was a $1.75 billion
committed financing arrangement with a syndicate of banks which expires in 2001.
Committed borrowings under this credit facility bear interest at an annual rate
equal to, at the borrower's option, either (i) a rate consisting of the higher
of Morgan Guaranty Trust Company of New York's prime rate or the federal funds
rate plus 50 basis points; (ii) the London Interbank Offering Rate plus a margin
determined based on the credit rating of Tenneco's unsecured senior debt; or
(iii) a rate based on money market rates pursuant to competitive bids by the
syndicate banks. Tenneco maintains unused availability under this line of credit
at least equal to 100 percent of its commercial paper notes outstanding which
were $576 million at December 31, 1998. There were no borrowings under this
credit facility at December 31, 1998.
The credit facility requires that Tenneco's ratio of debt to total
capitalization, as defined in the credit facility, not exceed 70%. Compliance
with this requirement is a condition for any incremental borrowings under the
credit facility, and failure to meet the requirement enables the syndicate banks
to require repayment of any outstanding loans after a 30-day cure period. At
December 31, 1998, Tenneco's ratio of debt to total capitalization as defined in
the credit facility was 57.9 percent. In addition, the credit facility imposes
certain other restrictions, none of which are expected to limit Tenneco's
ability to operate its businesses in the ordinary course.
Following Tenneco's July 21, 1998 announcement regarding its analysis of
strategic alternatives, Standard and Poor's and Moody's debt rating agencies
placed the rating on Tenneco's debt in review, pending the outcome of Tenneco's
strategic alternatives analysis. In consideration of the rating agency actions
and the possibility that the strategic alternatives analysis could result in the
separation of the automotive, specialty packaging, and containerboard
businesses, which could require a realignment of Tenneco's long-term debt,
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<PAGE> 64
Tenneco financed its capital needs with short-term debt during 1998.
Consequently, Tenneco's short-term debt at December 31, 1998 was approximately
$550 million higher than at December 31, 1997. Tenneco believes that its
existing committed credit facility, supplemented by the net proceeds from the
sale of the containerboard business, are adequate to meet its 1999 capital
requirements, including scheduled long-term debt retirements of $250 million.
CAPITAL COMMITMENTS
Tenneco estimates that expenditures of approximately $231 million will be
required by its Automotive and specialty packaging businesses after December 31,
1998, to complete facilities and projects authorized at such date, and
substantial commitments have been made in connection therewith. Of this amount,
approximately $121 million pertains to the continuing Automotive operations and
approximately $110 million pertains to the discontinued specialty packaging
operations.
DIVIDENDS ON COMMON STOCK
Tenneco Inc. declared dividends on its common shares of $.30 per share for
each quarter in 1998. Declaration of dividends is at the discretion of the 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,
including past and projected earnings, cash flows, economic, business and
securities market conditions, and anticipated developments concerning Tenneco's
business and operations.
Following the Spin-off, Automotive's dividend policy will be established by
its board of directors from time to time based on the results of Automotive's
operations, financial condition and other business considerations that its board
of directors deems relevant. Also, Tenneco expects Automotive to be highly
leveraged after the Spin-off and restricted with respect to the payment of
dividends, by the terms of its financing arrangements. Accordingly, its annual
dividend is expected to be nominal.
The combined annual dividends of Packaging and Automotive after the
Spin-off will be less than Tenneco's annual dividend before the Spin-off.
ENVIRONMENTAL MATTERS
Tenneco and certain of its subsidiaries and affiliates are parties to
environmental proceedings. Expenditures for ongoing compliance with
environmental regulations that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and which do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments indicate that remedial efforts are probable and the costs can be
reasonably estimated. Estimates of the liability are based upon currently
available facts, existing technology, and presently enacted laws and regulations
taking into consideration the likely effects of inflation and other societal and
economic factors. All available evidence is considered including prior
experience in remediation of contaminated sites, other companies' clean-up
experience and data released by the United States Environmental Protection
Agency or other organizations. These estimated liabilities are subject to
revision in future periods based on actual costs or new information. These
liabilities are included in the balance sheet at their undiscounted amounts.
Recoveries are evaluated separately from the liability and, when assured, are
recorded and reported separately from the associated liability in the financial
statements.
At July 1, 1999, Tenneco had been designated as a potentially responsible
party in seven Superfund sites. Tenneco has estimated its share of the
remediation costs for these sites to be approximately $4 million in the
aggregate and has established reserves that it believes are adequate for such
costs. This amount is evenly split between continuing operations and
discontinued operations. In addition, Tenneco may have the obligation to
remediate current or former facilities and estimates its share of remediation
costs at these facilities to be approximately $19 million for continuing
operations and $4 million for discontinued operations. For both the Superfund
sites and its current and former facilities, Tenneco has established reserves
that it believes are adequate for these costs. Although Tenneco believes its
estimates of remediation costs are reasonable and are
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<PAGE> 65
based on the latest available information, the clean-up costs are estimates and
are subject to revision as more information becomes available about the extent
of remediation required. At some sites, Tenneco expects that other parties will
contribute to the remediation costs. In addition, at the Superfund sites, the
Comprehensive Environmental Response, Compensation and Liability Act provides
that Tenneco's liability could be joint and several, meaning that Tenneco could
be required to pay in excess of its share of remediation costs. Tenneco's
understanding of the financial strength of other potentially responsible parties
has been considered, where appropriate, in Tenneco's determination of its
estimated liability. Tenneco believes that the costs associated with its current
status as a potentially responsible party in the Superfund sites referenced
above, or as a liable party at its current or former facilities will not be
material to its consolidated financial position or results of operations.
Tenneco estimates that its capital expenditures for environmental matters
for 1999 and 2000 will not be material
Tenneco is party to various other legal proceedings arising from its
operations. Tenneco believes that the outcome of these other proceedings,
individually and in the aggregate, will not have a material adverse effect on
its financial position or results of operations.
DERIVATIVE FINANCIAL INSTRUMENTS
FOREIGN CURRENCY EXCHANGE RATE RISK
Tenneco uses derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
its exposure to changes in foreign currency exchange rates. Tenneco's primary
exposure to changes in foreign currency rates results from intercompany loans
made between Tenneco affiliates to minimize the need for borrowings from third
parties. Additionally, Tenneco enters into foreign currency forward purchase and
sale contracts to mitigate its exposure to changes in exchange rates on
intercompany and third party trade receivables and payables. Tenneco has from
time to time also entered into forward contracts to hedge its net investment in
foreign subsidiaries. Tenneco does not currently enter into derivative financial
instruments for speculative purposes.
In managing its foreign currency exposures, Tenneco identifies and
aggregates naturally occurring offsetting positions and then hedges residual
exposures through third party derivative contracts. The following table
summarizes by major currency the notional amounts, weighted average settlement
rates, and fair value
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<PAGE> 66
for foreign currency forward purchase and sale contracts as of December 31,
1998. All contracts in the following table mature in 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------
WEIGHTED
NOTIONAL AMOUNT AVERAGE FAIR VALUE
IN FOREIGN CURRENCY SETTLEMENT RATES IN U.S. DOLLARS
------------------- ---------------- ---------------
(MILLIONS EXCEPT SETTLEMENT RATES)
<S> <C> <C> <C> <C>
Belgian Francs -Purchase 594 0.029 $ 17
-Sell (644) 0.029 (19)
British Pounds -Purchase 98 1.660 163
-Sell (152) 1.660 (252)
Canadian Dollars -Purchase 112 0.654 73
-Sell (176) 0.654 (115)
Danish Krone -Purchase 79 0.157 12
-Sell -- -- --
French Francs -Purchase 497 0.179 89
-Sell (97) 0.179 (17)
German Marks -Purchase 3 0.599 2
-Sell (56) 0.599 (33)
Portuguese Escudo -Purchase 1,947 0.006 11
-Sell (30) 0.006 --
Spanish Pesetas -Purchase 4,545 0.007 32
-Sell (325) 0.007 (2)
U.S. Dollars -Purchase 105 1.000 105
-Sell (33) 1.000 (33)
Other -Purchase 395 .043 17
-Sell (719) 0.068 (49)
-----
$ 1
=====
</TABLE>
INTEREST RATE RISK
Tenneco's financial instruments that are sensitive to market risk for
changes in interest rates are its debt securities. Tenneco primarily uses
commercial paper to finance its short-term capital requirements. Since
commercial paper generally matures in three months or less, Tenneco pays a
current market rate of interest on these borrowings. Tenneco finances its
long-term capital requirements with long-term debt with original maturity dates
ranging up to 30 years. All of Tenneco's existing long-term debt obligations
have fixed interest rates. Consequently, Tenneco is not exposed to cash flow or
fair value risk from market interest rate changes on its long-term debt
portfolio. Should Tenneco decide to redeem its long-term debt securities prior
to their stated maturities, it would generally incur costs based on the fair
value of the debt at that time.
The table below provides information about Tenneco's financial instruments
that are sensitive to interest rate risk.
<TABLE>
<CAPTION>
ESTIMATED MATURITY DATES FAIR VALUE AT
---------------------------------------------------------- DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998(A)
---- ---- ---- ---- ---- ---------- ------ -------------
(MILLIONS EXCEPT EFFECTIVE INTEREST RATES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term debt (excluding
current maturities)(b)...... $821 $ -- $ -- $ -- $ -- $ -- $ 821 $ 821
Average effective interest
rate..................... 5.9% --% --% --% --% --%
Long-term debt (including
current maturities)(b)...... $250 $ 10 $187 $498 $ 7 $1,583 $2,535 $2,606
Average effective interest
rate..................... 6.4% 12.0% 6.8% 6.8% 11.2% 7.6%
</TABLE>
- -------------------------
(a) Fair value of short-term debt was considered to be the same as or was not
determined to be materially different from the carrying amount. The fair
value of fixed-rate long term debt was generally based on the market value
of Tenneco debt offered in open market exchanges at December 31, 1998.
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<PAGE> 67
(b) Amounts include corporate debt allocated to net assets of discontinued
operations. See Notes 1 and 5 to the Financial Statements of Tenneco Inc.
and Consolidated Subsidiaries contained elsewhere in this document.
Tenneco also has other obligations which are sensitive to changes in the
market rate of interest. A subsidiary has issued preferred stock with a rate
amount of $400 million which pays a dividend based upon the current market rate
of interest. See Note 10 to the Financial Statements of Tenneco Inc. and
Consolidated Subsidiaries contained elsewhere in this document.
In connection with the Spin-off, the above described financial instruments,
which are sensitive to interest rate risk, are expected to be refinanced.
The statements and other information (including the tables) in this
"Derivative Financial Instruments" section constitute "forward-looking
statements."
YEAR 2000
Many computer software systems, as well as certain hardware and equipment
utilizing date-sensitive data, were structured to use a two-digit date field
meaning that they will not be able to properly recognize dates in the Year 2000.
Tenneco's significant technology transformation projects are addressing the Year
2000 issue in those areas where replacement systems are being installed for
other business reasons. Where existing systems and equipment are expected to
remain in place beyond 1999, Tenneco has a detailed process in place to identify
and assess Year 2000 issues and to remediate, replace or establish alternative
procedures addressing non-Year 2000 compliant systems, hardware, and equipment.
Tenneco has substantially completed inventorying its systems and equipment
including computer systems and business applications as well as date-sensitive
technology embedded in its equipment and facilities. Tenneco continues to plan
for and undertake remediation, replacement, or alternative procedures for non-
compliant Year 2000 systems and equipment; and test remediated, replaced, or
alternative procedures for systems and equipment. Tenneco has confirmed that
none of its products are date-sensitive. Remediation, replacement, or
alternative procedures for systems and equipment are being undertaken on a
business priority basis. This is ongoing and was completed at some locations in
1998 with the remainder to be completed through the third quarter of 1999.
Testing will occur in the same time frame. Also, Tenneco is contacting its major
customers, suppliers, financial institutions, and others with whom it conducts
business to determine whether they will be able to resolve in a timely manner
Year 2000 problems possibly affecting Tenneco. As part of its planning and
readiness activities, Tenneco is developing Year 2000 contingency plans for
critical business processes such as banking, data center operations and
just-in-time manufacturing operations. Contingency plans also will be developed
on a business unit basis, where needed, to respond to previously undetected Year
2000 problems and business interruption from suppliers.
Based upon current estimates, Tenneco believes it will incur costs which
may range from approximately $40 to $50 million to address Year 2000 issues and
implement the necessary changes to its existing systems and equipment. As of
December 31, 1998, approximately $14 million of the costs have already been
incurred. Approximately 40 percent of the range of costs estimated, and 45
percent of the costs incurred through December 31, 1998 are attributable to
continuing operations. These costs are being expensed as they are incurred,
except that in certain instances Tenneco may determine that replacing existing
computer systems or equipment may be more effective and efficient, particularly
where additional functionality is available. These replacements would be
capitalized and would reduce the estimated expense associated with Year 2000
issues.
In the event Tenneco is unable to complete the remediation, replacement, or
alternative procedures for critical systems and equipment in a timely manner or
if those with whom Tenneco conducts business are unsuccessful in implementing
timely solutions, Year 2000 issues could have a material adverse effect on
Tenneco's results of operations. At this time, the potential effect in the event
Tenneco and/or third parties are unable to timely resolve Year 2000 problems is
not determinable; however, Tenneco believes it will be able to resolve its own
Year 2000 issues.
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<PAGE> 68
EURO CONVERSION
The European Monetary Union resulted in the adoption of a common currency,
the "Euro", among eleven European nations. The Euro is being adopted over a
three-year transition period beginning January 1, 1999. In October 1997, Tenneco
established a cross-functional Euro Committee, comprised of representatives of
the Company's operational divisions as well as its corporate offices. That
Committee had two principal objectives: (i) to determine the impact of the Euro
on the Company's business operations, and (ii) to recommend and facilitate
implementation of those steps necessary to ensure that Tenneco would be fully
prepared for the Euro's introduction. As of January 1, 1999, Tenneco has
implemented those Euro conversion procedures that it had determined to be
necessary and prudent to adopt by that date, and is on track to becoming fully
"Euro ready" on or before the conclusion of the three-year Euro transition
period. Tenneco believes that the costs associated with transitioning to the
Euro will not be material to its consolidated financial position or the results
of its operations.
YEARS 1997 AND 1996
The year ended December 31, 1997, represents the first full year of Tenneco
Inc. and consolidated subsidiaries' operation as a global manufacturing company
focused on its automotive parts and packaging businesses.
Tenneco Inc. was spun-off from the company previously known as Tenneco Inc.
("Old Tenneco") on December 11, 1996, following a series of transactions
undertaken to realign the assets, liabilities and operations of Old Tenneco such
that the automotive parts ("Automotive"), packaging ("Specialty Packaging" and
"Paperboard Packaging") and the administrative services ("Tenneco Business
Services") businesses were owned by Tenneco Inc. and the shipbuilding business
was owned by Newport News Shipbuilding Inc. ("Newport News"). Old Tenneco
distributed the shares of Tenneco Inc. and Newport News to its shareowners on
December 11, 1996. On December 12, 1996, Old Tenneco, which then consisted
primarily of the energy business ("Energy") and certain previously discontinued
operations of Old Tenneco, merged with a subsidiary of El Paso Natural Gas
Company.
Although the separation of Tenneco Inc. from Old Tenneco was structured as
a spin-off for legal, tax and other reasons, Tenneco Inc. kept certain important
aspects of Old Tenneco, including its executive management, Board of Directors
and headquarters. Most importantly, the combined assets, revenues, and operating
income of Automotive, Specialty Packaging and Paperboard Packaging represented
more than half the assets, revenues and operating income of Old Tenneco prior to
the distributions and merger. Consequently, this Management's Discussion and
Analysis of Financial Condition and Results of Operations and Tenneco's
financial statements for periods prior to the distributions and merger present
the net assets and results of operations of Old Tenneco's shipbuilding and
energy businesses, as well as its farm and construction equipment business which
was disposed of before the distributions and merger, as discontinued operations.
Refer to Note 2 to the Financial Statements of Tenneco Inc. and Consolidated
Subsidiaries contained elsewhere in this document for further discussion.
For purposes of this Management's Discussion and Analysis "Tenneco" or the
"Company" refers to Old Tenneco and its subsidiaries before the above described
corporate reorganization transactions and to Tenneco Inc., formerly known as New
Tenneco Inc., and its subsidiaries after those transactions.
The following review of Tenneco's financial condition and results of
operations should be read in conjunction with the financial statements and
related notes of Tenneco Inc. and Consolidated Subsidiaries.
RESULTS OF CONTINUING OPERATIONS
Tenneco reported income from continuing operations for the year ended
December 31, 1997, of $234 million compared to $82 million for the same period
in 1996. The improvement resulted from record operating results at Automotive
and a lower effective tax rate for 1997 compared to 1996.
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<PAGE> 69
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
%
1997 1996 CHANGE
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Automotive............................................ $3,226 $2,980 8%
</TABLE>
Automotive's revenue increase over 1996 resulted from acquisition
performance, volume gains, and improved pricing and product mix. Companies
acquired in 1996 and 1997 contributed $238 million to revenue gains during 1997.
For companies acquired in 1996, these revenue gains include only revenues earned
through the first anniversary of the 1996 acquisition. Performance following the
first year of ownership is included in the other year over year measures of
performance. Volume growth with both existing and new customers resulted in
revenue increases of $128 million, while improved price realizations and a more
favorable product mix added $35 million to 1997 revenues. These revenue gains
were partially offset by the impact of the strong U.S. dollar in overseas
markets, which resulted in $141 million in lower revenues than would have been
realized had the U.S. dollar not strengthened during the year.
OPERATING INCOME
<TABLE>
<CAPTION>
%
1997 1996 CHANGE
---- ---- ------
(MILLIONS)
<S> <C> <C> <C>
Automotive............................................... $407 $249 63%
Other.................................................... (12) (7) NM
---- ----
$395 $242 63%
==== ====
</TABLE>
During 1996, Automotive recorded a pre-tax charge of $64 million to
streamline certain exhaust operations and realign the ride control product line.
Absent this charge, 1996 operating income would have been $313 million. The
remaining increase in operating income during 1997 is primarily attributable to
acquisition performance, cost reduction initiatives, and improved realizations,
partially offset by the impact of the strong U.S. dollar in overseas markets.
Acquisitions, including the impact of 1996 transactions calculated through the
first anniversary of the date of each acquisition, added $35 million to 1997
operating income. Cost reduction initiatives contributed more than $40 million
to the 1997 operating income improvement while improved pricing realization and
product mix combined with volume growth resulted in higher 1997 operating income
of more than $30 million. During the third quarter of 1997, Automotive benefited
from a net reduction of $4 million in certain reserves, primarily related to
ongoing reorganization initiatives which have proceeded more rapidly and
efficiently than planned, allowing Automotive to adjust its cost estimates for
completing these initiatives. Additionally, favorable resolution of a legal
action contributed $10 million to third quarter 1997 results. Partially
offsetting these operating income gains was the impact of the strong U.S. dollar
on overseas earnings, which reduced 1997 operating income by $22 million, and
fourth quarter charges totaling $4 million related to a customer bankruptcy and
a prior asset sale.
The increase in Tenneco's "Other" operating loss reflects the cost of
factoring a higher level of receivables, offset in part by gain recognized on
liquidation of overseas subsidiaries in 1997.
OPERATING INCOME AS A PERCENTAGE OF REVENUE
Operating income as a percentage of revenue for 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
%
1997 1996 CHANGE
---- ---- ------
(MILLIONS)
<S> <C> <C> <C>
Automotive................................................. 12.6% 8.4% 50%
Total...................................................... 12.2% 8.1% 51%
</TABLE>
Automotive's operating income as a percentage of revenue increased as
operating income grew 63 percent while revenues increased by 8 percent.
66
<PAGE> 70
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Tenneco incurred interest expense of $216 million during 1997, an increase
of $21 million over 1996. These amounts include $158 million and $135 million of
interest allocated to discontinued operations in 1997 and 1996, respectively.
The increase reflects a higher level of borrowings during 1997, resulting
primarily from acquisitions made in both Specialty Packaging and Automotive, as
well as Tenneco's share repurchase activity.
INCOME TAXES
Tenneco's effective tax rate for 1997 was 24 percent, compared to 43
percent for 1996. The 1997 tax rate was lower than the statutory rate due to the
non-recurring impact of certain foreign tax benefits and the benefit of
previously unrecognized deferred tax assets. For 1996, the effective tax rate
was in excess of the statutory rate primarily as a result of the realignment
charges recorded for Automotive's European operations which were not fully
benefited for tax purposes.
MINORITY INTEREST
Minority interest in 1997 was $23 million compared to $21 million in 1996.
This primarily represents dividends on the preferred stock of a U.S. subsidiary.
In December 1997, this subsidiary issued additional preferred stock. See Note 10
to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries
contained elsewhere in this document for additional information.
DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS
For 1997, discontinued operations include the Paperboard Packaging and the
Specialty Packaging operations, which were discontinued in June and August 1999,
respectively. The Paperboard Packaging operations generated income of $21
million after income tax expense of $10 million, or $.12 per diluted common
share. The Specialty Packaging operations generated income of $106 million after
income tax expense of $75 million, or $.63 per diluted common share.
For 1996, discontinued operations include the Paperboard Packaging and
Specialty Packaging operations, as well as, the energy and shipbuilding
operations, which were discontinued in December 1996, and the farm and
construction equipment operations, which were discontinued in March 1996. During
this year, income from discontinued operations from Paperboard Packaging was $71
million, net of income tax expense of $48 million; income from Specialty
Packaging discontinued operations was $65 million, net of income tax expense of
$67 million; income from discontinued operations for energy was $127 million,
net of income tax expense of $32 million; income from discontinued operations
for shipbuilding was $70 million, net of income tax expense of $32 million; loss
from discontinued operations for farm and construction equipment was $1 million,
net of an income tax benefit of $1 million. Additionally, income from
discontinued operations included a $340 million gain, net of income tax expense
of $83 million, on the sale of Tenneco's remaining investment in the farm and
construction equipment business, and transaction costs -- consisting primarily
of financial advisory, legal, accounting, printing, and other costs -- of $108
million, net of an income tax benefit of $17 million, that were incurred in
connection with the 1996 corporate reorganization. In total, discontinued
operations generated $564 million of income, net of income tax expense of $244
million, or $3.23 per diluted common share.
See Note 2 to the Financial Statements of Tenneco Inc. and Consolidated
Subsidiaries contained elsewhere in this document for further discussion of
discontinued operations.
Income from discontinued operations in 1997 included a one-time $38 million
pre-tax gain which resulted from the refinancing of two containerboard mill
leases. Income from the discontinued Paperboard Packaging business in 1996
included a $50 million pre-tax gain on the sale of certain recycled paperboard
assets to a joint venture with Caraustar Industries and a pre-tax charge of $6
million to reorganize Packaging's folding carton operations.
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<PAGE> 71
Extraordinary loss for 1996 was $236 million, net of an income tax benefit
of $126 million, or $1.38 per diluted common share. The extraordinary loss was
incurred as a result of the debt realignment undertaken before the December 1996
corporate reorganization and consists principally of the fair value paid in the
cash tender offers and the fair value of debt exchanged in the debt exchange
offers in excess of the historical net carrying value for the debt tendered and
exchanged.
CHANGE IN ACCOUNTING PRINCIPLE
As required by the FASB's Emerging Issues Task Force Issue 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation," Tenneco recorded an after-tax charge of $46 million or $.27 per
diluted common share in the fourth quarter of 1997, which was reported as a
cumulative effect of a change in accounting principle.
EARNINGS PER SHARE
Income from continuing operations was $1.36 per diluted common share in
1997, up from $.49 per diluted common share in 1996. Tenneco also recorded
income from discontinued operations of $.75 per diluted common share and a
charge for the cumulative effect of a change in accounting principle discussed
above of $.27 per diluted common share, resulting in net income of $1.84 per
diluted common share for 1997. During 1996, discontinued operations earned $3.23
per diluted common share while Tenneco recorded an extraordinary loss on
retirement of debt of $1.38 per diluted common share. Net income in 1996 was
$2.34 per diluted common share. Average shares of common stock outstanding
increased slightly during 1997. For further information regarding the
calculation of earnings per share, refer to Note 8 to the Financial Statements
of Tenneco Inc. and Consolidated Subsidiaries contained elsewhere in this
document.
LIQUIDITY AND CAPITAL RESOURCES
CAPITALIZATION
<TABLE>
<CAPTION>
%
1997 1996 CHANGE
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Short-term debt and current maturities...................... $ 75 $ 74
Long-term debt.............................................. 713 639
Debt allocated to discontinued operations................... 2,123 1,590
------ ------
Total debt.................................................. 2,911 2,303 26%
------ ------
Minority interest of continuing operations.................. 408 304
Minority interest of discontinued operations................ 16 --
------ ------
Total minority interest..................................... 424 304 39%
------ ------
Common shareowners' equity.................................. 2,528 2,646 (4)%
------ ------
Total capitalization...................................... $5,863 $5,253 12%
====== ======
</TABLE>
Tenneco's debt to capitalization ratio was 49.7 percent at December 31,
1997, compared to 43.9 percent at December 31, 1996. The increase in the ratio
is attributable to the additional debt issued during 1997 as described under
"Cash Flow -- Financing Activities" below, as well as a decline in equity
resulting from net income during 1997 being more than offset by dividends and
share repurchases.
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<PAGE> 72
CASH FLOWS
<TABLE>
<CAPTION>
1997 1996
----- -----
(MILLIONS)
<S> <C> <C>
Cash provided (used) by:
Operating activities...................................... $ 519 $ 253
Investing activities...................................... (887) (685)
Financing activities...................................... 354 147
</TABLE>
OPERATING ACTIVITIES
Cash flow provided by operating activities was $266 million higher in 1997
than 1996. Tenneco's discontinued operations generated $308 million in 1997 and
used $15 million in cash flow in 1996, for an improvement of $323 million.
Within continuing operations, income before depreciation was higher in 1997 by
$168 million. Tenneco also generated cash flow benefits from tax refunds during
1997, resulting primarily from the December 1996 reorganization and debt
realignment and a 1996 tax net operating loss which was carried back to earlier
years. These positive benefits were more than offset by increased working
capital associated with higher revenue levels and increased cash outflows
associated with the realignment plan implemented in the fourth quarter of 1996.
INVESTING ACTIVITIES
During 1996 Tenneco's investing cash flows included expenditures of $425
million for businesses acquired, primarily for Clevite. Capital expenditures for
continuing operations in 1997 were $33 million higher than in 1996. The sale of
discontinued operations provided $24 million in 1997 and $1,197 million in 1996
of investing cash flow. The 1996 amount arose primarily from sale of Tenneco's
remaining Case Corporation shares and a business owned by Energy. Tenneco also
spent $622 million in 1997 and $1,106 million in 1996 for capital expenditures
and business acquisitions for discontinued operations. In April 1997, Specialty
Packaging acquired the flexible and protective packaging businesses of KNP BT.
In 1996, Specialty Packaging acquired the foam products business.
FINANCING ACTIVITIES
During 1997, Tenneco refinanced a portion of its short term debt by issuing
$100 million of 10 year 7 1/2% notes, $200 million of 30 year 7 7/8% debentures,
and $300 million of 20 year 7 5/8% debentures. The net proceeds to Tenneco of
these debt offerings was $593 million. Tenneco retired $23 million in long-term
debt during 1997 according to its terms and reduced short-term debt by a net $31
million. A subsidiary of Tenneco also issued preferred stock, the net proceeds
of which were $99 million. During 1996, financing activities included the debt
realignment executed in December to facilitate the separation of New Tenneco,
Energy, and Newport News, as well as the issuance of $296 million in preferred
stock by Old Tenneco which remained with Old Tenneco in the Energy merger.
During 1997, Tenneco issued $48 million in common stock, related to employee
benefit plans, and repurchased $132 million in common stock under its common
stock repurchase plan. Tenneco also paid 1997 dividends on its common stock of
$204 million. Activity in 1996 included common stock issued of $164 million,
common stock repurchases of $172 million, common and preferred stock dividends
of $313 million and cash of $99 million transferred to Energy and Newport News
in the December 1996 corporate reorganization.
69
<PAGE> 73
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE OF TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent public accountants.................... 71
Statements of income for each of the three years in the
period ended December 31, 1998............................ 72
Balance sheets -- December 31, 1998 and 1997................ 73
Statements of cash flows for each of the three years in the
period ended December 31, 1998............................ 74
Statements of changes in shareowners' equity for each of the
three years in the period ended December 31, 1998......... 75
Statements of comprehensive income for each of the three
years in the period ended December 31, 1998............... 76
Notes to financial statements............................... 77
Schedule II -- Valuation and Qualifying Accounts............ 107
</TABLE>
70
<PAGE> 74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tenneco Inc.:
We have audited the accompanying balance sheets of Tenneco Inc. (a Delaware
corporation) and consolidated subsidiaries (see Note 1) as of December 31, 1998
and 1997, and the related statements of income, cash flows, changes in
shareowners' equity and comprehensive income for each of the three years in the
period ended December 31, 1998. These financial statements and the schedule
referred to below are the responsibility of Tenneco Inc.'s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Tenneco Inc. and
consolidated subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in the fourth quarter
of 1997, Tenneco Inc. and consolidated subsidiaries changed their method of
accounting for certain costs incurred in connection with information technology
transformation projects.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
index to the financial statements and schedule relating to Tenneco Inc. and
consolidated subsidiaries is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The supplemental schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
of Tenneco Inc. and consolidated subsidiaries taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 17, 1999
(except with respect to the
matters discussed in Note 2,
as to which the date is
August 20, 1999)
71
<PAGE> 75
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Net sales and operating revenues........................ $ 3,237 $ 3,226 $ 2,980
Other income, net....................................... (25) 37 (22)
----------- ----------- -----------
3,212 3,263 2,958
----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation shown below)... 2,332 2,303 2,140
Engineering, research, and development.................. 31 34 70
Selling, general, and administrative.................... 472 421 412
Depreciation and amortization........................... 150 110 94
----------- ----------- -----------
2,985 2,868 2,716
----------- ----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY
INTEREST................................................ 227 395 242
Interest expense (net of interest capitalized)........ 69 58 60
Income tax expense.................................... 13 80 79
Minority interest..................................... 29 23 21
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS......................... 116 234 82
Income from discontinued operations, net of income tax.... 139 127 564
----------- ----------- -----------
Income before extraordinary loss.......................... 255 361 646
Extraordinary loss, net of income tax..................... -- -- (236)
----------- ----------- -----------
Income before cumulative effect of change in accounting
principle............................................... 255 361 410
Cumulative effect of change in accounting principle, net
of income tax........................................... -- (46) --
----------- ----------- -----------
NET INCOME................................................ 255 315 410
Preferred stock dividends................................. -- -- 12
----------- ----------- -----------
NET INCOME TO COMMON STOCK................................ $ 255 $ 315 $ 398
=========== =========== ===========
EARNINGS PER SHARE
Average shares of common stock outstanding --
Basic................................................. 168,505,573 170,264,731 169,609,373
Diluted............................................... 168,834,531 170,801,636 170,526,112
Basic earnings per share of common stock --
Continuing operations................................. $ .69 $ 1.37 $ .49
Discontinued operations............................... .83 .75 3.25
Extraordinary loss.................................... -- -- (1.39)
Cumulative effect of change in accounting principle... -- (.27) --
----------- ----------- -----------
$ 1.52 $ 1.85 $ 2.35
=========== =========== ===========
Diluted earnings per share of common stock --
Continuing operations................................. $ .68 $ 1.36 $ .49
Discontinued operations............................... .83 .75 3.23
Extraordinary loss.................................... -- -- (1.38)
Cumulative effect of change in accounting principle... -- (.27) --
----------- ----------- -----------
$ 1.51 $ 1.84 $ 2.34
=========== =========== ===========
Cash dividends per share of common stock.................. $ 1.20 $ 1.20 $ 1.80
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements of income.
72
<PAGE> 76
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and temporary cash investments....................... $ 29 $ 29
Receivables --
Customer notes and accounts, net....................... 430 402
Income taxes........................................... 3 38
Other.................................................. 10 4
Inventories............................................... 414 378
Deferred income taxes..................................... 39 21
Prepayments and other..................................... 139 178
------ ------
1,064 1,050
------ ------
Other assets:
Long-term notes receivable, net........................... 23 26
Goodwill and intangibles, net............................. 499 505
Deferred income taxes..................................... 39 55
Pension assets............................................ 101 93
Other..................................................... 201 153
------ ------
863 832
------ ------
Plant, property, and equipment, at cost..................... 1,944 1,767
Less -- Reserves for depreciation and amortization........ 851 738
------ ------
1,093 1,029
------ ------
Net assets of discontinued operations....................... 1,739 1,771
------ ------
$4,759 $4,682
====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current liabilities:
Short-term debt (including current maturities on long-term
debt).................................................. $ 304 $ 75
Trade payables............................................ 337 286
Taxes accrued............................................. 31 73
Accrued liabilities....................................... 161 141
Other..................................................... 76 116
------ ------
909 691
------ ------
Long-term debt.............................................. 671 713
------ ------
Deferred income taxes....................................... 98 165
------ ------
Postretirement benefits..................................... 139 110
------ ------
Deferred credits and other liabilities...................... 31 67
------ ------
Commitments and contingencies
Minority interest........................................... 407 408
------ ------
Shareowners' equity:
Common stock.............................................. 2 2
Premium on common stock and other capital surplus......... 2,710 2,679
Accumulated other comprehensive income (loss)............. (91) (122)
Retained earnings......................................... 142 89
------ ------
2,763 2,648
Less -- Shares held as treasury stock, at cost............ 259 120
------ ------
2,504 2,528
------ ------
$4,759 $4,682
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
73
<PAGE> 77
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -------
(MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations........................... $ 116 $ 234 $ 82
Adjustments to reconcile income from continuing operations
to cash provided (used) by continuing operations--
Depreciation and amortization........................... 150 110 94
Deferred income taxes................................... (76) 31 10
(Gain) loss on sale of businesses and assets, net....... 20 20 1
Changes in components of working capital--
(Increase) decrease in receivables.................... (88) (25) 128
(Increase) decrease in inventories.................... (32) (12) 22
(Increase) decrease in prepayments and other current
assets............................................... 26 (79) 45
Increase (decrease) in payables....................... (12) 107 (39)
Increase (decrease) in taxes accrued.................. (9) (8) (9)
Increase (decrease) in interest accrued............... -- 30 6
Increase (decrease) in other current liabilities...... 10 (108) 45
Other................................................... (42) (89) (117)
----- ----- -------
Cash provided (used) by continuing operations............... 63 211 268
Cash provided (used) by discontinued operations............. 469 308 (15)
----- ----- -------
Net cash provided (used) by operating activities............ 532 519 253
----- ----- -------
INVESTING ACTIVITIES
Net proceeds related to the sale of discontinued
operations................................................ 22 24 1,197
Net proceeds from sale of businesses and assets............. 10 5 3
Expenditures for plant, property, and equipment............. (195) (221) (188)
Acquisitions of businesses.................................. (3) (29) (425)
Expenditures for plant, property, and equipment and business
acquisitions--discontinued operations..................... (498) (622) (1,106)
Investments and other....................................... (90) (44) (166)
----- ----- -------
Net cash provided (used) by investing activities............ (754) (887) (685)
----- ----- -------
FINANCING ACTIVITIES
Issuance of common, treasury, and SECT shares............... 50 48 164
Purchase of common stock.................................... (154) (132) (172)
Issuance of NPS Preferred Stock............................. -- -- 296
Issuance of equity securities by a subsidiary............... -- 99 --
Redemption of preferred stock............................... -- -- (20)
Issuance of long-term debt.................................. 4 597 2,800
Retirement of long-term debt................................ (21) (23) (2,288)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt.............................. 540 (31) (221)
Cash transferred in Merger and Distributions................ -- -- (99)
Dividends (common and preferred)............................ (203) (204) (313)
----- ----- -------
Net cash provided (used) by financing activities............ 216 354 147
----- ----- -------
Effect of foreign exchange rate changes on cash and
temporary cash investments................................ 6 3 1
----- ----- -------
Increase (decrease) in cash and temporary cash
investments............................................... -- (11) (284)
Cash and temporary cash investments, January 1.............. 29 40 324
----- ----- -------
Cash and temporary cash investments, December 31 (Note)..... $ 29 $ 29 $ 40
===== ===== =======
Cash paid during the year for interest...................... $ 259 $ 206 $ 489
Cash paid during the year for income taxes (net of
refunds).................................................. $ 80 $(145) $ 685
</TABLE>
- -------------------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
The accompanying notes to financial statements are an integral part of these
statements of cash flows.
74
<PAGE> 78
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------ ----------- ------ ----------- ------
(MILLIONS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
Balance January 1................................ -- $ -- -- $ -- -- $ --
Issuance of NPS Preferred Stock................ -- -- -- -- 6,000,000 296
Merger of energy business...................... -- -- -- -- (6,000,000) (296)
----------- ------ ----------- ------ ----------- ------
Balance December 31.............................. -- -- -- -- -- --
=========== ------ =========== ------ =========== ------
COMMON STOCK
Balance January 1................................ 172,569,889 2 171,567,658 2 191,351,615 957
Issued pursuant to benefit plans............... 1,100,308 -- 1,002,231 -- 84,796 --
Recapitalization of New Tenneco................ -- -- -- -- (19,868,753) (955)
----------- ------ ----------- ------ ----------- ------
Balance December 31.............................. 173,670,197 2 172,569,889 2 171,567,658 2
=========== ------ =========== ------ =========== ------
STOCK EMPLOYEE COMPENSATION TRUST (SECT)
Balance January 1................................ -- -- (215)
Shares issued.................................. -- -- 216
Adjustment to market value..................... -- -- (1)
------ ------ ------
Balance December 31.............................. -- -- --
------ ------ ------
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance January 1................................ 2,679 2,642 3,602
Premium on common stock issued pursuant to
benefit plans................................ 31 37 28
Adjustment of SECT to market value............. -- -- 1
Merger of energy business...................... -- -- (372)
Distribution of shipbuilding business.......... -- -- (270)
Recapitalization of New Tenneco................ -- -- (348)
Other.......................................... -- -- 1
------ ------ ------
Balance December 31.............................. 2,710 2,679 2,642
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance January 1................................ (122) 23 26
Other comprehensive income..................... 31 (145) (3)
------ ------ ------
Balance December 31.............................. (91) (122) 23
------ ------ ------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1................................ 89 (21) (469)
Net income..................................... 255 315 410
Dividends--
Preferred stock.............................. -- -- (9)
Common stock................................. (202) (205) (312)
Accretion of excess of redemption value of
preferred stock over fair value at date of
issue........................................ -- -- (3)
Recapitalization of New Tenneco................ -- -- 362
------ ------ ------
Balance December 31.............................. 142 89 (21)
------ ------ ------
LESS -- COMMON STOCK HELD AS TREASURY STOCK, AT
COST
Balance January 1................................ 2,928,189 120 -- -- 16,422,619 753
Shares acquired................................ 4,380,382 161 3,280,755 134 5,118,904 267
Shares issued pursuant to benefit and dividend
reinvestment plans........................... (550,893) (22) (352,566) (14) (1,672,770) (79)
Recapitalization of New Tenneco................ -- -- -- -- (19,868,753) (941)
----------- ------ ----------- ------ ----------- ------
Balance December 31.............................. 6,757,678 259 2,928,189 120 -- --
=========== ------ =========== ------ =========== ------
Total........................................ $2,504 $2,528 $2,646
====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements of changes in shareowners' equity.
75
<PAGE> 79
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
ACCUMULATED ACCUMULATED ACCUMULATED
OTHER OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME INCOME INCOME
------------- ------------- ------------- ------------- ------------- -------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME........................ $ 255 $ 315 $ 410
------------- ------------- -------------
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
CUMULATIVE TRANSLATION
ADJUSTMENT
Balance January 1............... $ (122) $ 23 $ 26
Translation of foreign
currency statements......... 40 40 (160) (160) 39 39
Hedges of net investment in
foreign subsidiaries........ -- -- 23 23 (47) (47)
Income tax benefit
(expense)................... -- -- (8) (8) 16 16
Reclassification adjustment
for disposition of
investments in foreign
subsidiaries................ -- -- -- -- (11) (11)
------------- ------------- -------------
Balance December 31............. (82) (122) 23
------------- ------------- -------------
ADDITIONAL MINIMUM PENSION
LIABILITY ADJUSTMENT
Balance January 1............... -- -- --
Additional minimum pension
liability adjustment........ (15) (15) -- -- -- --
Income tax benefit
(expense)................... 6 6 -- -- -- --
------------- ------------- -------------
Balance December 31............. (9) -- --
------------- ------------- -------------
Balance December 31............... $ (91) $ (122) $ 23
============= ============= =============
------------- ------------- -------------
Other comprehensive income
(loss).......................... 31 (145) (3)
------------- ------------- -------------
COMPREHENSIVE INCOME.............. $ 286 $ 170 $ 407
============= ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements of comprehensive income.
76
<PAGE> 80
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Consolidation and Presentation
The financial statements of Tenneco Inc. and consolidated subsidiaries
("Tenneco") include all majority-owned subsidiaries. Investments in 20% to 50%
owned companies where Tenneco has the ability to exert significant influence
over operating and financial policies are carried at cost plus equity in
undistributed earnings since the date of acquisition and cumulative translation
adjustments. Tenneco has no investments in 20% to 50% owned companies where it
does not carry the investment at cost plus equity in undistributed earnings. All
significant intercompany transactions have been eliminated.
In December 1996, Tenneco Inc. was spun-off from the company formerly known
as Tenneco Inc. ("Old Tenneco") in a series of transactions (the "Transaction"),
which included distributions (the "Distributions") to Old Tenneco shareowners
and a subsequent merger (the "Merger"). Following the Transaction, Tenneco owned
the automotive parts ("Automotive"), packaging ("Specialty Packaging" and
"Paperboard Packaging") and administrative services ("Tenneco Business
Services") businesses of Old Tenneco. These transactions and their accounting
treatment are described in more detail in Note 2, "Discontinued Operations,
Disposition of Assets, and Extraordinary Loss."
Beginning in January 1999, Tenneco began a series of transactions that
ultimately resulted in the discontinuance of its Paperboard Packaging operations
in June 1999 and its Specialty Packaging operations in August 1999. See Note 2
for information regarding these transactions.
For purposes of these financial statements, "Tenneco" or the "Company"
refers to Old Tenneco and its subsidiaries before the Transaction and to Tenneco
Inc., formerly known as New Tenneco Inc. ("New Tenneco"), and its subsidiaries
subsequent to the Transaction.
Changes in Accounting Principles
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. This statement
cannot be applied retroactively and is effective for all fiscal years beginning
after June 15, 2000. Tenneco is currently evaluating the new standard but has
not yet determined the impact it will have on its financial position or results
of operations.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Prior to January 1, 1999,
Tenneco capitalized certain costs related to start-up activities, primarily
engineering costs for new automobile original equipment platforms. Tenneco
expects to record an after-tax charge for the cumulative effect of this change
in accounting principle upon adoption of approximately $100 million. Tenneco
will adopt this new accounting principle in the first quarter of 1999.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the
77
<PAGE> 81
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
costs of computer software developed or obtained for internal use. This
statement will be applied prospectively and is effective for fiscal years
beginning after December 15, 1998. The impact of this new standard will not have
a significant effect on Tenneco's financial position or results of operations.
Tenneco adopted FAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," and FAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," in 1998. Disclosures required by
these statements for earlier periods presented have been restated on a
comparative basis.
As required by the FASB's Emerging Issues Task Force ("EITF") Issue 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation," Tenneco recorded an after-tax charge of $46 million ($.27 per
common share on both the basic and diluted bases), net of a tax benefit of $28
million, in the fourth quarter of 1997. EITF 97-13 establishes the accounting
treatment and an allocation methodology for certain consulting and other costs
incurred in connection with information technology transformation efforts. This
charge was reported as a cumulative effect of change in accounting principle.
Inventories
At December 31, 1998 and 1997, inventory by major classification was as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Finished goods.............................................. $221 $187
Work in process............................................. 79 72
Raw materials............................................... 73 76
Materials and supplies...................................... 41 43
---- ----
$414 $378
==== ====
</TABLE>
Inventories are stated at the lower of cost or market. A portion of total
inventories (28% and 31% at December 31, 1998 and 1997, respectively) is valued
using the "last-in, first-out" method. All other inventories are valued on the
"first-in, first-out" ("FIFO") or "average" methods. If the FIFO or average
method of inventory accounting had been used by Tenneco for all inventories,
inventories would have been $15 million and $16 million higher at December 31,
1998 and 1997, respectively.
Customer Acquisition Costs
Tenneco capitalizes certain costs it incurs in connection with the
acquisition of new customer contracts to sell its automotive aftermarket
products. These new customer acquisition costs are incurred in exchange for
contracts in which the aftermarket customer agrees to purchase Tenneco's
automotive aftermarket products exclusively for periods of time ranging up to
three years. These costs are amortized over the initial contract period. At
December 31, 1998 and 1997, the net capitalized costs related to these
activities was $54 million and $47 million, respectively.
78
<PAGE> 82
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and Intangibles, net
At December 31, 1998 and 1997, goodwill and intangibles, net of
amortization, by major category were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Goodwill.................................................... $487 $497
Other intangible assets..................................... 12 8
---- ----
$499 $505
==== ====
</TABLE>
Goodwill is being amortized on a straight-line basis over periods ranging
from 20 years to 40 years. Such amortization amounted to $16 million, $14
million, and $7 million for 1998, 1997, and 1996, respectively, and is included
in the statements of income caption "Depreciation and amortization."
Tenneco has capitalized certain intangible assets, primarily trademarks and
patents, based on their estimated fair value at date of acquisition.
Amortization is provided on these intangible assets on a straight-line basis
over periods ranging from 5 to 40 years. Such amortization amounted to $2
million, $6 million, and $2 million in 1998, 1997, and 1996, respectively, and
is included in the statements of income caption "Depreciation and amortization."
Plant, Property, and Equipment, at Cost
At December 31, 1998 and 1997, plant, property, and equipment, at cost, by
major category was as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Land, buildings, and improvements........................... $ 341 $ 265
Machinery and equipment..................................... 1,395 1,320
Other, including construction in progress................... 208 182
------ ------
$1,944 $1,767
====== ======
</TABLE>
Depreciation of Tenneco's properties is provided on a straight-line basis
over the estimated useful lives of the assets. Useful lives range from 10 to 40
years for buildings and improvements and from 3 to 25 years for machinery and
equipment.
Notes Receivable and Allowance for Doubtful Accounts
Short and long-term notes receivable of $36 million and $37 million were
outstanding at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, the short and long-term allowance for
doubtful accounts on accounts and notes receivable was $39 million and $20
million, respectively.
Other Long-Term Assets
Tenneco capitalizes certain costs related to start-up activities, primarily
engineering costs for new automobile original equipment platforms, which are
included in the balance sheet caption "Other assets -- Other." The platform
engineering costs are amortized over the life of the underlying supply
agreements and other start-up costs are amortized over the periods benefited,
generally two years. Start-up costs capitalized, net of amortization, at
December 31, 1998 and 1997, were $111 million and $79 million, respectively, for
79
<PAGE> 83
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
continuing operations and $41 million and $20 million, respectively, for
discontinued operations. Tenneco will adopt a new accounting standard in the
first quarter of 1999, which will require these costs to be expensed. Refer to
"Changes in Accounting Principles" discussed previously in this footnote.
Tenneco capitalizes certain costs related to the purchase and development
of software which is used in its business operations. The costs attributable to
these software systems are amortized 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, at December 31, 1998 and 1997, were $67
million and $47 million, respectively, for continuing operations and $140
million and $104 million, respectively, for discontinued operations. As
described previously in this footnote, Tenneco will adopt SOP 98-1 regarding
software cost capitalization. The impact of this new standard will not have a
significant effect on Tenneco's financial position or results of operations.
Environmental Liabilities
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation are expensed.
Liabilities are recorded when environmental assessments indicate that remedial
efforts are probable and the costs can be reasonably estimated. Estimates of the
liability are based upon currently available facts, existing technology, and
presently enacted laws and regulations taking into consideration the likely
effects of inflation and other societal and economic factors. All available
evidence is considered including prior experience in remediation of contaminated
sites, other companies' clean-up experience, and data released by the United
States Environmental Protection Agency or other organizations. These estimated
liabilities are subject to revision in future periods based on actual costs or
new information. These liabilities are included in the balance sheet at their
undiscounted amounts. Recoveries are evaluated separately from the liability
and, when assured, are recorded and reported separately from the associated
liability in the financial statements. For further information on this subject,
refer to Note 13, "Commitments and Contingencies."
Income Taxes
Tenneco utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. Deferred tax
assets are reduced by a valuation allowance when, based upon management's
estimates, it is more likely than not that a portion of the deferred tax assets
will not be realized in a future period. The estimates utilized in the
recognition of deferred tax assets are subject to revision in future periods
based on new facts or circumstances.
Tenneco does not provide for U.S. income taxes on unremitted earnings of
foreign subsidiaries as it is the present intention of management to reinvest
the unremitted earnings in its foreign operations. Unremitted earnings of
foreign subsidiaries are approximately $755 million for continuing operations
and $95 million for discontinued operations at December 31, 1998. It is not
practicable to determine the amount of U.S. income taxes that would be payable
upon remittance of the assets that represent those earnings.
Earnings Per Share
According to the requirements of FAS No. 128, "Earnings Per Share," basic
earnings per share are computed by dividing income available to common
shareowners 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 the weighted-average number of shares outstanding
is adjusted to include estimates of additional shares that would be issued if
potentially dilutive common shares had been issued. In
80
<PAGE> 84
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
addition, income available to common shareowners is adjusted to include any
changes in income or loss that would result from the assumed issuance of the
dilutive common shares.
In 1996, Tenneco's preferred stock outstanding before the Merger was
converted into El Paso Natural Gas Company ("El Paso") common stock as part of
the Merger; therefore, preferred stock dividends have been deducted from income
from discontinued operations in determining earnings per share. For more
information regarding the Merger, see Note 2, "Discontinued Operations,
Disposition of Assets, and Extraordinary Loss."
Allocation of Corporate Debt and Interest Expense
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco has been
allocated to discontinued operations based upon the ratio of the discontinued
operations' net assets to Tenneco's consolidated net assets plus debt. Interest
expense, net of tax, has been allocated to Tenneco's discontinued operations
based on the same allocation methodology. See Note 2, "Discontinued Operations,
Disposition of Assets, and Extraordinary Loss," for further discussion.
Research and Development
Research and development costs are expensed as incurred. Research and
development expenses were $30 million, $19 million, and $36 million for 1998,
1997, and 1996, respectively, and are included in the income statement caption
"Engineering, research, and development expenses."
Realignment Charges
In 1996, the Company recorded charges to income from continuing operations
of approximately $64 million in connection with the realignment of Automotive's:
(i) Walker exhaust system original equipment and aftermarket manufacturing
operations in Europe, (ii) Walker aftermarket operations in North America, and
(iii) Monroe ride control product line. All actions related to the realignment
plan have been completed.
Foreign Currency Translation
Financial statements of international operations are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and the weighted average exchange rate for each applicable period
for revenues, expenses, and gains and losses. Translation adjustments are
reflected in the balance sheet caption "Accumulated other comprehensive income
(loss)."
Risk Management Activities
Tenneco uses derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
its exposure to changes in foreign currency exchange rates. Tenneco's primary
exposure to changes in foreign currency rates results from intercompany loans
made between Tenneco affiliates to minimize the need for borrowings from third
parties. Net gains or losses on these foreign currency exchange contracts that
are designated as hedges are recognized in the income statement to offset the
foreign currency gain or loss on the underlying transaction. Additionally,
Tenneco enters into foreign currency forward purchase and sale contracts to
mitigate its exposure to changes in exchange rates on intercompany and third
party trade receivables and payables. Since these anticipated transactions are
not firm commitments, Tenneco marks these forward contracts to market each
period and records any gain or loss in the income statement. Tenneco has from
time to time also entered into forward contracts to hedge its net
81
<PAGE> 85
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
investment in foreign subsidiaries. The after-tax net gains or losses on these
contracts are recognized on the accrual basis in the balance sheet caption
"Accumulated other comprehensive income (loss)." In the statement of cash flows,
cash receipts or payments related to these exchange contracts are classified
consistent with the cash flows from the transaction being hedged.
Tenneco does not currently enter into derivative financial instruments for
speculative purposes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of Tenneco's assets,
liabilities, revenues, and expenses. Reference is made to the "Income Taxes" and
"Environmental Liabilities" sections of this footnote and Notes 11 and 13 for
additional information on significant estimates included in Tenneco's financial
statements.
Reclassifications
Prior years' financial statements have been reclassified where appropriate
to conform to 1998 presentations.
2. DISCONTINUED OPERATIONS, DISPOSITION OF ASSETS, AND EXTRAORDINARY LOSS
Strategic Alternatives Analysis
In July 1998, Tenneco's Board of Directors authorized management to develop
a broad range of strategic alternatives which could result in the separation of
the automotive, containerboard packaging, and specialty packaging businesses. As
part of that strategic alternative analysis, Tenneco has taken the following
actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint
venture with an affiliate of Madison Dearborn Partners, Inc. The
contribution of the containerboard assets to the joint venture was
completed in April 1999. Tenneco received consideration of cash and debt
assumption totaling approximately $2 billion and a 45 percent common
equity interest in the joint venture (now 43 percent due to subsequent
management equity issuances) valued at approximately $200 million.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operation, to
Caraustar Industries. This transaction closed in June 1999.
- Also in April 1999, Tenneco announced that its Board of Directors had
approved the separation of its automotive and specialty packaging
businesses into two separate, independent companies.
- In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture.
Tenneco expects the sale to be completed before the spin-off of the new
packaging company discussed below.
The separation of the automotive and packaging businesses will be
accomplished by the spin-off of the common stock of Tenneco Packaging Inc.
("Packaging") to Tenneco shareowners (the "Spin-off"). At the time of the
Spin-off, Packaging will include Tenneco's specialty packaging business,
Tenneco's administrative services operations and the remaining interest in the
containerboard joint venture if the sale has not been completed. Tenneco and
Packaging are, however, currently analyzing the alternatives with respect to the
administrative services operations.
Before the Spin-off, Tenneco will realign substantially all of its existing
debt through some combination of tender offers, exchange offers, prepayments,
and other refinancings. This debt realignment will be financed
82
<PAGE> 86
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
with internally generated cash, borrowings by Tenneco under a new credit
facility, the issuance by Tenneco of subordinated debt, and borrowings by
Packaging under new credit facilities.
The Spin-off is subject to conditions, including formal declaration of the
Spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued
effectiveness of a determination that the Spin-off will be tax-free for U.S.
federal income tax purposes, and the successful completion of the debt
realignment and the corporate restructuring transactions. In August 1999,
Tenneco received a letter ruling from the Internal Revenue Service that the
Spin-off will be tax-free for U.S. federal income tax purposes to Tenneco and
its shareowners.
Discontinued Operations
The Specialty Packaging Business
In April 1999, Tenneco Inc.'s Board of Directors approved the separation of
its automotive and specialty packaging businesses into two separate, independent
companies. This separation will be accomplished by the Spin-off, contingent
upon, among other things, Tenneco's receipt, and the continued effectiveness of
a determination that the Spin-off will be tax-free for U.S. federal income tax
purposes. In August 1999, Tenneco received a letter ruling from the Internal
Revenue Service that the Spin-off will be tax-free for U.S. federal income tax
purposes to Tenneco and its shareowners, and as a result has restated its
financial statements to reflect its specialty packaging segment as a
discontinued operation. Since Tenneco would not have proceeded with the Spin-off
absent the receipt of a determination that the Spin-off would be tax-free, the
establishment of a measurement date for discontinued operations did not occur
until that determination was received.
Net assets as of December 31, 1998, 1997, and 1996, and results of
operations for the years then ended for the specialty packaging business were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Net assets at December 31................................... $1,373 $1,348 $1,424
====== ====== ======
Net sales and operating revenues............................ $2,791 $2,563 $1,987
====== ====== ======
Income before income taxes and interest allocation.......... 280 302 231
Income tax (expense) benefit................................ (113) (118) (103)
------ ------ ------
Income before interest allocation........................... 167 184 128
Allocated interest expense, net of income tax (Note)........ (85) (78) (63)
------ ------ ------
Income from discontinued operations......................... $ 82 $ 106 $ 65
====== ====== ======
</TABLE>
- ---------------
Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation
of Corporate Debt and Interest Expense," for a discussion of the
allocation of corporate debt and interest expense to discontinued
operations.
The Paperboard Packaging Business
In connection with the containerboard transaction, in April 1999, Tenneco
received consideration of cash and debt assumption totaling approximately $2
billion and a 45 percent interest in the joint venture (now 43 percent due to
subsequent management equity issuances) valued at approximately $200 million.
The containerboard assets contributed to the joint venture represented
substantially all of the assets of the paperboard packaging segment and included
four mills, 67 corrugated products plants, and an ownership or controlling
interest in approximately 950,000 acres of timberland. Before the transaction,
Tenneco Packaging borrowed approximately $1.8 billion and used approximately
$1.2 billion to acquire assets used by the containerboard business under
operating leases and timber cutting rights and to purchase containerboard
83
<PAGE> 87
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
business accounts receivable that had previously been sold to a third party. The
remainder of the borrowings was remitted to Tenneco and used to repay a portion
of short-term debt. Packaging then contributed the containerboard business
assets (subject to the new indebtedness and the containerboard business
liabilities) to the joint venture in exchange for $247 million in cash and the
45 percent interest in the joint venture. As a result of the sale transaction,
Tenneco recognized a pre-tax loss of $293 million, $178 million after-tax or
$1.07 per diluted common share in the first quarter of 1999, based on the amount
by which the carrying amount of the containerboard assets exceeded the fair
value of those assets, less cost to sell. The estimate of fair value of the
containerboard assets was based on the fair value of the consideration received
by Tenneco from the joint venture.
As a result of the decision to sell the remaining interest in the
containerboard joint venture, Tenneco's paperboard packaging business is
presented as a discontinued operation in the accompanying financial statements.
In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operations, to Caraustar
Industries. This transaction closed in June 1999.
Net assets as of December 31, 1998, 1997, and 1996, and results of
operations for the years then ended for the paperboard packaging business were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Net assets at December 31................................... $ 366 $ 423 $ 459
====== ====== ======
Net sales and operating revenues............................ $1,570 $1,431 $1,605
====== ====== ======
Income before income taxes and interest allocation.......... $ 131 $ 63 $ 152
Income tax (expense) benefit................................ (48) (19) (60)
------ ------ ------
Income before interest allocation........................... 83 44 92
Allocated interest expense, net of income tax (Note)........ (26) (23) (21)
------ ------ ------
Income from discontinued operations......................... $ 57 $ 21 $ 71
====== ====== ======
</TABLE>
- -------------------------
Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation
of Corporate Debt and Interest Expense," for a discussion of the
allocation of corporate debt and interest expense to discontinued
operations.
The Energy Business and Shipbuilding Business
Tenneco Inc. was spun-off from Old Tenneco on December 11, 1996, following
a series of transactions undertaken to realign the assets, liabilities, and
operations of Old Tenneco such that Automotive, Specialty Packaging, Paperboard
Packaging, and Tenneco Business Services were owned by New Tenneco and the
shipbuilding business was owned by Newport News Shipbuilding Inc. ("Newport
News"). On December 11, 1996, Old Tenneco distributed the shares of New Tenneco
and Newport News to its shareowners. On December 12, 1996, Old Tenneco, which
then consisted primarily of the energy business and certain previously
discontinued operations of Old Tenneco, merged with a subsidiary of El Paso.
Although the separation of Tenneco Inc. from Old Tenneco was structured as
a spin-off for legal, tax, and other reasons, Tenneco Inc. kept certain
important aspects of Old Tenneco, including its executive management, Board of
Directors, and headquarters. Most importantly, the combined assets, revenues,
and operating income of Automotive, Specialty Packaging and Paperboard Packaging
represented more than half the assets, revenues, and operating income of Old
Tenneco before the Distributions and Merger. Consequently, Tenneco Inc.'s
financial statements for periods before the Distributions and Merger present the
net assets and results of operations of Old Tenneco's shipbuilding and energy
businesses, as well as its farm and construction equipment business which was
disposed of before the Distributions and Merger, as discontinued operations.
84
<PAGE> 88
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Distributions, one share of New Tenneco common stock
($.01 par value) was issued for each share of Old Tenneco common stock ($5.00
par value) and one share of Newport News common stock was issued for each five
shares of Old Tenneco common stock. Also, in connection with the Merger, Old
Tenneco shareowners received shares of El Paso common stock valued at
approximately $914 million in the aggregate in exchange for their shares of Old
Tenneco common and preferred stock. The treasury shares held by Old Tenneco did
not participate in the Merger and Distributions and were retained by Old Tenneco
in the Merger. Subsequent to the Transaction, the common equity of Tenneco Inc.
relates solely to the shares of New Tenneco common stock issued in the
Distributions. In connection with the Transaction, the retained earnings
(accumulated deficit) of Old Tenneco was eliminated. Retained earnings
(accumulated deficit) shown on the balance sheets represents net earnings
(losses) accumulated after the date of the Transaction. The effects of the
issuance of New Tenneco common stock in the Distributions, the retention of
treasury shares by Old Tenneco, and the elimination of Old Tenneco's retained
earnings (accumulated deficit) have been reflected in the statements of changes
in shareowners' equity as "Recapitalization of New Tenneco."
Results of operations for the year ended December 31, 1996, for the energy
business were as follows:
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Net sales and operating revenues............................ $2,512
======
Income before income taxes and interest allocation.......... $ 291
Income tax expense.......................................... (78)
------
Income before interest allocation........................... 213
Allocated interest expense, net of income tax (Note)........ (86)
------
Income from discontinued operations before transaction
costs..................................................... $ 127
======
</TABLE>
- -------------------------
Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation
of Corporate Debt and Interest Expense," for a discussion of the
allocation of corporate debt and interest expense to discontinued
operations.
On December 11, 1996, one day before the Merger, Old Tenneco completed the
distribution of the common stock of Newport News to the holders of Old Tenneco
common stock. As part of the Distributions, Newport News retained the net assets
of the shipbuilding business, including approximately $600 million of debt that
had been issued during November 1996.
Results of operations for the year ended December 31, 1996, for the
shipbuilding business were as follows:
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Net sales and operating revenues............................ $1,822
======
Income before income taxes and interest allocation.......... $ 133
Income tax expense.......................................... (43)
------
Income before interest allocation........................... 90
Allocated interest expense, net of income tax (Note)........ (20)
------
Income from discontinued operations before transaction
costs..................................................... $ 70
======
</TABLE>
- -------------------------
Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation
of Corporate Debt and Interest Expense," for a discussion of the
allocation of corporate debt and interest expense to discontinued
operations.
The costs incurred to complete the Transaction, consisting primarily of
financial advisory, legal, accounting, printing, and other costs, of
approximately $108 million, net of a $17 million income tax benefit, were
recorded as a component of 1996 income from discontinued operations.
85
<PAGE> 89
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Farm and Construction Equipment Operations
In June 1994, Tenneco completed an initial public offering ("IPO") of
approximately 29% of the common stock of Case Corporation ("Case"), the holder
of Tenneco's farm and construction equipment segment. In November 1994, a
secondary offering of Case common stock reduced Tenneco's ownership interest in
Case to approximately 44%. Combined proceeds from the two transactions was $694
million, net of commissions and offering expenses. The combined gain on the
transactions was $36 million, including a $7 million tax benefit. In an August
1995 public offering, Tenneco sold an additional 16.1 million shares of Case
common stock for net proceeds of approximately $540 million. The sale resulted
in a gain of $101 million and reduced Tenneco's ownership in Case from 44% to
21%. In December 1995, Tenneco sold to a third party a subordinated note
receivable due from Case, which was received as part of the reorganization
preceding the Case IPO, for net proceeds of $298 million and recognized a gain
of $32 million. In March 1996, Tenneco sold its remaining 15.2 million shares of
common stock of Case in a public offering. Net proceeds of approximately $788
million were received, resulting in a gain of $340 million, net of $83 million
in income tax expense.
Results of operations for the year ended December 31, 1996, for the farm
and construction equipment segment were as follows:
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Net sales and operating revenues............................ $ --
====
Income before income taxes and interest allocation.......... $ 1
Income tax benefit.......................................... --
----
Income before interest allocation........................... 1
Allocated interest expense, net of income tax (Note)........ (2)
----
Loss from operations........................................ (1)
----
Gain on disposition......................................... 423
Income tax expense from disposition......................... (83)
----
Net gain on disposition..................................... 340
----
Income from discontinued operations......................... $339
====
</TABLE>
- -------------------------
Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation
of Corporate Debt and Interest Expense," for a discussion of the
allocation of corporate debt and interest expense to discontinued
operations.
Disposition of Assets
Gains and losses on the sale of businesses and assets have been included in
the caption "Other income, net" in the accompanying statements of income.
Extraordinary Loss
In preparation for the Transaction, Old Tenneco realigned $3.8 billion of
indebtedness (the "1996 Debt Realignment") through various cash tender offers,
debt exchanges, defeasances, and other retirements. The cash funding required to
consummate the 1996 Debt Realignment was financed through internally generated
cash, borrowings under new credit facilities of both Old Tenneco and New
Tenneco, borrowings under a new credit facility and other financings at Newport
News, and proceeds from the issuance of 8 1/4% cumulative junior preferred stock
("NPS Preferred Stock"), which was retained by Old Tenneco in the Merger. As a
result of the Merger, El Paso indirectly acquired approximately $2.8 billion of
debt and preferred stock obligations as well as certain liabilities related to
operations previously discontinued by Old Tenneco.
As a result of the 1996 Debt Realignment, Tenneco recognized an
extraordinary loss of approximately $236 million, net of a tax benefit of
approximately $126 million. This extraordinary loss consists principally of the
fair value paid in the cash tender offers and the fair value of debt exchanged
in the debt exchange offers in excess of the historical net carrying value for
the debt tendered and exchanged.
86
<PAGE> 90
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. RESTRUCTURING AND OTHER CHARGES
On July 21, 1998, Tenneco announced its intention to initiate a
restructuring plan designed to reduce administrative and operational overhead
costs in every part of Tenneco's business. In the fourth quarter of 1998,
Tenneco's Board of Directors approved an extensive restructuring plan to
accomplish the overhead reduction goals as well as to consolidate the
manufacturing and distribution operations of Automotive's North American
aftermarket business. Tenneco recorded a pre-tax charge to income from
continuing operations of $53 million, $34 million after-tax or $.20 per share,
in the fourth quarter of 1998 related to this restructuring plan. Of the pre-tax
charge, for operational restructuring plans, $36 million is related to the
Automotive aftermarket restructuring. A staff and related cost reduction plan,
which covers staff reductions at the Automotive operating unit and corporate
operations, is expected to cost $17 million.
The Automotive aftermarket restructuring involves closing two plant
locations and five distribution centers and the elimination of 302 positions at
those locations. The staff and related cost reduction plan involves the
elimination of 454 administrative positions in Tenneco's business units and its
corporate operations.
The fixed assets at the locations to be closed were written down to their
fair value, less costs to sell, in the fourth quarter of 1998. As a result of
the single-purpose nature of the assets, fair value was estimated at scrap value
less cost to dispose. No significant net cash proceeds are expected to be
received from the ultimate disposal of these assets, which should be complete by
the fourth quarter of 2000. The effect of suspending depreciation for these
impaired assets is a reduction in depreciation and amortization of approximately
$2 million on an annual basis.
As of December 31, 1998, approximately 350 employees had been terminated.
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
FOURTH
1998 QUARTER CHARGED BALANCE AT
RESTRUCTURING 1998 TO ASSET DECEMBER 31,
CHARGE PAYMENTS ACCOUNTS 1998
------------- -------- -------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
Severance.................................. $19 $ 4 $-- $15
Asset impairments.......................... 33 -- 33 --
Facility exit costs........................ 1 -- -- 1
--- --- --- ---
$53 $ 4 $33 $16
=== === === ===
</TABLE>
4. ACQUISITIONS
In 1998, Tenneco made one acquisition in the Automotive business for
approximately $3 million. During 1997, Tenneco completed acquisitions or
investments in the Automotive business for total consideration of approximately
$29 million.
In June 1996, Tenneco entered into agreements to acquire Clevite for $328
million. Clevite makes suspension bushings and other elastomeric parts for cars
and trucks. Upon completion of the Clevite acquisition in July 1996, Clevite's
operations became part of Automotive. Also during 1996, Tenneco completed the
acquisitions of or investments in various other businesses and joint ventures in
the automotive parts industry for total consideration of approximately $96
million.
The acquisitions discussed above have been accounted for as purchases;
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based on their fair values. The excess of the purchase
price over the fair value of the net assets acquired is included in the balance
sheet caption "Goodwill and intangibles, net."
87
<PAGE> 91
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS
Long-Term Debt
A summary of long-term debt obligations of Tenneco at December 31, 1998 and
1997, is set forth in the following table:
<TABLE>
<CAPTION>
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Tenneco Inc. --
Debentures due 2008 through 2027, average effective
interest rate 7.5% in 1998 and in 1997 (net of $64
million in 1998 and $68 million in 1997 of unamortized
premium)............................................... $1,213 $1,217
Notes due 1999 through 2007, average effective interest
rate 6.7% in 1998 and in 1997 (net of $33 million in
1998 and $47 million in 1997 of unamortized premium)... 1,344 1,358
Other subsidiaries --
Notes due 1999 through 2016, average effective interest
rate 10.7% in 1998 and 11.2% in 1997 (net of $22
million in 1998 and $24 million in 1997 of unamortized
discount).............................................. 53 64
------ ------
2,610 2,639
Less -- current maturities.................................. 250 6
------ ------
Total long-term debt........................................ 2,360 2,633
Less -- long-term corporate debt allocated to net assets of
discontinued operations................................... 1,689 1,920
------ ------
Total long-term debt, net of allocation to net assets of
discontinued operations................................... $ 671 $ 713
====== ======
</TABLE>
The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 1998, are $250 million, $10 million, $187
million, $498 million, and $7 million for 1999, 2000, 2001, 2002, and 2003,
respectively.
Short-Term Debt
Tenneco uses commercial paper, lines of credit, and overnight borrowings to
finance its short-term capital requirements. Information regarding short-term
debt as of and for the years ended December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
COMMERCIAL CREDIT COMMERCIAL CREDIT
PAPER AGREEMENTS* PAPER AGREEMENTS*
---------- ----------- ---------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Outstanding borrowings at end of year........... $576 $245 $203 $ 69
Weighted average interest rate on outstanding
borrowings at end of year..................... 5.8% 6.3% 5.9% 6.7%
Approximate maximum month-end outstanding
borrowings during year........................ $576 $245 $613 $123
Approximate average month-end outstanding
borrowings during year........................ $447 $157 $372 $ 52
Weighted average interest rate on approximate
average month-end outstanding borrowings
during year................................... 5.8% 6.9% 5.7% 8.4%
</TABLE>
- -------------------------
* Includes borrowings under both committed credit facilities and uncommitted
lines of credit and similar arrangements.
88
<PAGE> 92
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Short-Term Corporate Debt Allocation
<TABLE>
<CAPTION>
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Current maturities on long-term debt........................ $ 250 $ 6
Commercial paper............................................ 576 203
Credit agreements........................................... 245 69
------ ------
Total short-term debt....................................... 1,071 278
Less -- short-term corporate debt allocated to net assets of
discontinued operations................................... 767 203
------ ------
Total short-term debt, net of allocation to discontinued
operations................................................ $ 304 $ 75
====== ======
</TABLE>
Financing Arrangements
<TABLE>
<CAPTION>
COMMITTED CREDIT FACILITIES(A)
-------------------------------------------------
TERM COMMITMENTS UTILIZED AVAILABLE
------- ----------- -------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
Tenneco Inc. credit agreements....................... 2001 $1,750 $576(b) $1,174
Subsidiaries' credit agreements...................... Various 131 123 8
------ ---- ------
$1,881 $699 $1,182
====== ==== ======
</TABLE>
- -------------------------
Notes: (a) Tenneco and its subsidiaries generally are required to pay commitment
fees on the unused portion of the total commitment and facility fees
on the total commitment.
(b) Tenneco's committed long-term credit facilities support its
commercial paper borrowings; consequently, the amount available under
the committed long-term credit facilities is reduced by outstanding
commercial paper borrowings.
At December 31, 1998, Tenneco's principal credit facility, which expires in
2001, was a $1.75 billion committed financing arrangement with a syndicate of
banks and other financial institutions. Committed borrowings under this credit
facility bear interest at an annual rate equal to, at the borrower's option,
either (i) a rate consisting of the higher of Morgan Guaranty Trust Company of
New York's prime rate or the federal funds rate plus 50 basis points; (ii) a
rate of LIBOR plus a margin determined based on the credit rating of Tenneco's
long-term debt; or (iii) a rate based on money market rates pursuant to
competitive bids by the syndicate banks.
The credit facility requires that the Company's consolidated ratio of debt
to total capitalization, as defined in the credit facility, not exceed 70%.
Compliance with this requirement is a condition for any incremental borrowings
under the credit facility and failure to meet the requirement enables the
syndicate banks to require repayment of any outstanding loans after a 30-day
cure period. At December 31, 1998, Tenneco's ratio of debt to total
capitalization as defined in the credit facility was 57.9%. In addition, the
credit facility imposes certain other restrictions, none of which are expected
to limit the Company's ability to operate its business in the ordinary course.
Before the Spin-off, Tenneco will realign substantially all of its debt and
enter into a new credit facility. See Note 2, "Discontinued Operations,
Dispositions of Assets, and Extraordinary Loss," for further discussion.
89
<PAGE> 93
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. FINANCIAL INSTRUMENTS
The carrying and estimated fair values of Tenneco's financial instruments
by class at December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(MILLIONS)
ASSETS (LIABILITIES)
<S> <C> <C> <C> <C>
Long-term debt (including current maturities) (Note).... $(2,610) $(2,606) $(2,639) $(2,606)
Instruments With Off-Balance-Sheet Risk
Foreign currency contracts............................ 1 1 2 2
Financial guarantees.................................. -- (13) -- (15)
</TABLE>
- -------------------------
Note: The carrying amounts and estimated fair value of long-term debt are before
allocation of corporate debt to discontinued operations. Reference is made
to Note 1 for information concerning corporate debt allocated to
discontinued operations.
Asset and Liability Instruments
The fair value of cash and temporary cash investments, short and long-term
receivables, accounts payable, and short-term debt was considered to be the same
as or was not determined to be materially different from the carrying amount.
Long-term debt -- The fair value of fixed-rate long-term debt was based on
the market value of debt with similar maturities and interest rates.
Instruments With Off-Balance-Sheet Risk
Foreign Currency Contracts -- Note 1, "Summary of Accounting Policies --
Risk Management Activities" describes Tenneco's use of and accounting for
foreign currency exchange contracts. The following table summarizes by major
currency the contractual amounts of foreign currency contracts utilized by
Tenneco:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
------------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
---------------- ----------------
PURCHASE SELL PURCHASE SELL
-------- ---- -------- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Foreign currency contracts (in US$):
Belgian Francs............................................ $ 17 $ 19 $ 24 $ 6
British Pounds............................................ 163 252 156 257
Canadian Dollars.......................................... 73 115 58 16
French Francs............................................. 89 17 52 1
German Marks.............................................. 2 33 4 121
Spanish Pesetas........................................... 32 2 12 1
U.S. Dollars.............................................. 105 33 92 --
Other..................................................... 40 49 61 55
---- ---- ---- ----
$521 $520 $459 $457
==== ==== ==== ====
</TABLE>
Based on exchange rates at December 31, 1998 and 1997, the cost of
replacing these contracts in the event of non-performance by the counterparties
would not have been material.
90
<PAGE> 94
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Guarantees -- Tenneco had guaranteed payment and performance of
approximately $13 million and $15 million at December 31, 1998 and 1997,
respectively, primarily with respect to letters of credit and other guarantees
supporting various financing and operating activities.
7. INCOME TAXES
The domestic and foreign components of income from continuing operations
before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
U.S. income before income taxes............................. $(65) $ 91 $ 21
Foreign income before income taxes.......................... 223 246 161
---- ---- ----
Income before income taxes.................................. $158 $337 $182
==== ==== ====
</TABLE>
Following is a comparative analysis of the components of income tax expense
applicable to continuing operations:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1998 1997 1996
----- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Current --
U.S. ..................................................... $ 72 $(5) $14
State and local........................................... (21) -- 2
Foreign................................................... 38 54 53
----- --- ---
89 49 69
----- --- ---
Deferred --
U.S. ..................................................... (109) 13 3
Foreign, state and other.................................. 33 18 7
----- --- ---
(76) 31 10
----- --- ---
Income tax expense.......................................... $ 13 $80 $79
===== === ===
</TABLE>
Following is a reconciliation of income taxes computed at the statutory
U.S. federal income tax rate (35% for all years presented) to the income tax
expense reflected in the statements of income:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal income
tax rate.................................................. $ 55 $118 $64
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates and foreign losses
with no tax benefit.................................... (12) (25) 8
State and local taxes on income, net of U.S. federal
income tax benefit..................................... (8) 4 (1)
Recognition of previously unbenefited loss
carryforwards.......................................... (5) (11) --
Amortization of nondeductible goodwill.................... 3 2 3
Other..................................................... (20) (8) 5
---- ---- ---
Income tax expense.......................................... $ 13 $ 80 $79
==== ==== ===
</TABLE>
91
<PAGE> 95
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of Tenneco's net deferred tax liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Deferred tax assets --
Tax loss carryforwards:
U.S. .................................................. $104 $ 55
State.................................................. 7 --
Foreign................................................ 58 77
Postretirement benefits other than pensions............... 32 26
Other..................................................... 26 7
Valuation allowance....................................... (30) (25)
---- ----
Net deferred tax asset............................... 197 140
---- ----
Deferred tax liabilities --
Tax over book depreciation................................ 113 91
Pensions.................................................. 27 23
Other..................................................... 77 115
---- ----
Total deferred tax liability......................... 217 229
---- ----
Net deferred tax liability................................ $ 20 $ 89
==== ====
</TABLE>
As reflected by the valuation allowance in the table above, Tenneco had
potential tax benefits of $30 million and $25 million at December 31, 1998 and
1997, respectively, which were not recognized in the statements of income when
generated. These unrecognized tax benefits resulted primarily from foreign tax
loss carryforwards which are available to reduce future foreign tax liabilities.
Of the $298 million of U.S. tax loss carryforwards which exist at December
31, 1998, $139 million expire in 2012 and $159 million expire in 2018. The $82
million of state tax loss carryforwards which exist at December 31, 1998, will
expire in varying amounts over the period from 2000 to 2012. Of the $142 million
of foreign tax loss carryforwards which exist at December 31, 1998, $118 million
do not expire and the remainder expires in varying amounts over the period from
1999 to 2008.
In connection with the 1996 corporate reorganization transactions discussed
in Note 2, "Discontinued Operations, Disposition of Assets, and Extraordinary
Loss," Tenneco entered into a tax sharing agreement with Newport News, Old
Tenneco, and El Paso. The tax sharing agreement provides, among other things,
for the allocation among the parties of tax liabilities arising before, as a
result of, and after the Distributions. For periods after the Distributions,
Tenneco will be liable for taxes imposed on its businesses, Old Tenneco will be
liable for taxes imposed on the energy business, and Newport News will be liable
for taxes imposed on the shipbuilding business. In the case of federal income
taxes imposed on the activities of the Old Tenneco consolidated group before the
Distributions, Tenneco and Newport News are generally liable to Old Tenneco for
federal income taxes attributable to their respective businesses, and those
entities have been allocated an agreed-upon share of estimated tax payments made
by Old Tenneco.
8. COMMON STOCK
Tenneco Inc. has authorized 350 million shares ($.01 par value) of common
stock, of which 173,670,197 shares and 172,569,889 shares were issued at
December 31, 1998 and 1997, respectively. Tenneco Inc. held 6,757,678 shares and
2,928,189 shares of treasury stock at December 31, 1998 and 1997, respectively.
92
<PAGE> 96
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Repurchase Plans
During 1997, Tenneco initiated a common stock repurchase program to acquire
up to 8.5 million shares. Approximately 7.5 million shares have been acquired
under this program at a total cost of approximately $289 million. All purchases
executed through this program were in the open market or negotiated purchases.
Reserved
The total number of shares of Tenneco Inc. common stock reserved at
December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
ORIGINAL ISSUE SHARES 1998 1997
--------------------- ---------- ----------
<S> <C> <C>
Thrift Plan............................................ 74,576 167,223
Restricted Stock Plans................................. -- 33,796
Stock Ownership Plan................................... 16,199,114 16,556,126
Employee Stock Purchase Plan........................... 1,642,037 2,255,232
---------- ----------
17,915,727 19,012,377
========== ==========
TREASURY STOCK
--------------
Thrift Plan............................................ 201,541 42,434
========== ==========
</TABLE>
Stock Plans
Tenneco Inc. Stock Ownership Plan -- In December 1996, Tenneco adopted the
1996 Stock Ownership Plan, which permits the granting of a variety of awards,
including common stock, restricted stock, performance shares, stock appreciation
rights ("SARs"), and stock options to directors, officers, and employees of
Tenneco. Tenneco can issue up to 17,000,000 shares of common stock under the
1996 Stock Ownership Plan, which will terminate December 31, 2001. All Old
Tenneco stock options granted to New Tenneco employees before the Distributions
were, in connection with the Distributions, cancelled and replaced with options
to purchase New Tenneco common stock according to the provisions of the 1996
Stock Ownership Plan. The options were replaced with the appropriate number of
New Tenneco options so that the aggregate option value immediately after the
Distributions equaled the aggregate value immediately before the Distributions.
The 1994 Stock Ownership Plan was terminated effective as of December 11, 1996.
Restricted Stock and Performance Shares -- Tenneco has granted restricted
stock and restricted units under the 1996 Stock Ownership Plan to certain key
employees. These awards generally require, among other things, that the employee
remain an employee of Tenneco during the restriction period. Tenneco has also
granted performance shares to certain key employees which will vest based upon
the attainment of specified performance goals within four years from the date of
grant. During 1998, 1997, and 1996, Tenneco granted 640,810, 494,350, and
465,075 shares and units, respectively, with a weighted average fair value based
on the price of Tenneco's stock on the grant date of $38.03, $43.08, and $48.54
per share, respectively. Any restricted stock and performance shares awarded
after the Distributions are issued under the 1996 Stock Ownership Plan. At
December 31, 1998, 351,220 restricted shares at an average price of $37.76 per
share, 562,145 performance shares at an average price of $41.35 per share, and
31,000 restricted units at an average price of $37.72 per unit were outstanding
under this plan.
Under another arrangement, restricted stock or restricted units are issued
annually to each member of the Board of Directors who is not also an officer of
Tenneco. From January 1, 1996, through October 31, 1996, 3,300 restricted shares
were issued with a weighted average fair value based on the price of Tenneco's
stock on the grant date of $48.25 per share. On November 1, 1996, all
outstanding restricted shares were vested. In
93
<PAGE> 97
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 1996, Tenneco adopted a new restricted stock and unit plan for each
member of the Board of Directors who is not also an officer of Tenneco. During
1998, 1997, and 1996, 1,700, 5,040, and 23,464 restricted shares and units,
respectively, were issued under the new plan at a weighted average fair value of
Tenneco Inc.'s stock on the grant date of $37.31, $45.19, and $45.31 per share,
respectively. At December 31, 1998, 27,696 restricted shares at an average price
of $44.80 per share and 300 restricted units at an average price of $45.19 per
unit were outstanding under the new plan.
In conjunction with the Transaction, all outstanding restricted shares and
performance shares as of November 1, 1996, were vested and Tenneco recognized an
after-tax compensation expense of $18 million, of which approximately $7 million
related to restricted stock and performance shares awarded to employees of the
energy business and shipbuilding business.
Employee Stock Purchase Plan -- In June 1992, Tenneco initiated an Employee
Stock Purchase Plan (the "1992 ESPP"). The 1992 ESPP was terminated as of the
date of the Distributions. Effective April 1, 1997, Tenneco adopted a new ESPP
with provisions similar to the 1992 ESPP. The ESPP allows U.S. and Canadian
Tenneco employees to purchase Tenneco Inc. common stock at a 15% discount. Each
year employees participating in the ESPP may purchase shares with a discounted
value not to exceed $21,250. Under the respective ESPPs, Tenneco sold 613,195,
244,768, and 657,936 shares to employees in 1998, 1997, and 1996, respectively.
The weighted average fair value of the employee purchase right, which was
estimated using the Black-Scholes option pricing model and the assumptions
described below except that the average life of each purchase right was assumed
to be 90 days, was $6.31, $11.16, and $10.84 in 1998, 1997, and 1996,
respectively.
Stock Options -- The following table reflects the status and activity for
all stock options issued by Tenneco Inc., including those outside the option
plans discussed above, for the periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVG. SHARES AVG. SHARES AVG.
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
STOCK OPTIONS OPTION PRICES OPTION PRICES OPTION PRICES
------------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.... 11,924,072 $43.42 10,877,758 $43.41 3,019,116 $46.99
Granted -- Options.............. 1,745,480 37.30 2,928,669 42.91 8,178,600 46.17
Exercised -- Options............ (122,609) 38.58 (312,979) 39.64 (817,212) 45.29
-- SARs.............. -- -- -- -- (25,741) 36.23
Issuance of New Tenneco
options...................... -- -- -- -- 5,015,258 41.19
Cancelled....................... (1,123,639) 43.53 (1,569,376) 43.19 (4,492,263) 46.01
---------- ---------- ----------
Outstanding, end of year.......... 12,423,304 $42.58 11,924,072 $43.42 10,877,758 $43.41
========== ========== ==========
Options exercisable at end of
year............................ 7,522,654 $42.84 2,703,948 $40.84 1,809,596 $41.67
Weighted average fair value of
options granted during the
year............................ $ 10.82 $ 12.62 $ 11.37
</TABLE>
The fair value of each option granted during 1998, 1997, and 1996 is
estimated on the date of grant using the Black-Scholes option pricing model
using the following weighted-average assumptions for grants in 1998, 1997, and
1996, respectively: (i) risk-free interest rates of 5.7%, 6.6%, and 5.9%; (ii)
expected lives of 9.9, 7.5, and 5.0 years; (iii) expected volatility 25.6%,
25.6%, and 25.1%; and (iv) dividend yield of 3.2%, 2.8%, and 3.4%.
94
<PAGE> 98
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table reflects summarized information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
NUMBER REMAINING AVG. NUMBER AVG.
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICE AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
----------------------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$31 to $38............................... 2,525,490 13.8 years $36.40 1,323,014 $35.82
$38 to $44............................... 2,771,004 11.7 40.91 1,638,084 41.10
$44 to $51............................... 7,126,810 11.9 45.42 4,561,556 45.51
---------- ---------
12,423,304 7,522,654
========== =========
</TABLE>
Tenneco applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," to account for its stock-based compensation plans.
Tenneco recognized after-tax stock-based compensation expense in 1998 of $3
million, in 1997 of $5 million, and in 1996 of $27 million, of which $3 million,
$4 million, and $24 million, respectively, related to restricted stock and
performance shares awarded to employees of its discontinued operations. Had
compensation costs for Tenneco's stock-based compensation plans been determined
in accordance with FAS No. 123, "Accounting for Stock-Based Compensation," based
on the fair value at the grant dates for the awards under those plans, Tenneco's
pro forma net income to common stock and earnings per share of common stock for
the years ended December 31, 1998, 1997, and 1996, would have been lower by $33
million or $.19 per both basic and diluted common share, $34 million or $.20 per
both basic and diluted common share, and $14 million or $.08 per both basic and
diluted common share, respectively. The increase in compensation expense for
1997 versus 1996 was primarily the result of stock options issued subsequent to
the Transaction.
Stock Employee Compensation Trust (SECT)
In November 1992, Tenneco established the SECT to fund a portion of its
obligations arising from its various employee compensation and benefit plans.
Tenneco issued 12 million shares of treasury stock to the SECT in exchange for a
promissory note of $432 million that accrued interest at the rate of 7.8% per
annum. At December 31, 1996, all shares had been utilized.
Grantor Trust
In August 1998, Tenneco established a grantor trust and issued 1.9 million
shares of common stock to the trust. This grantor trust is a so-called "rabbi
trust" designed to assure the payment of deferred compensation and supplemental
pension benefits. The trust is consolidated in Tenneco's financial statements
and the shares are reflected in the financial statements as treasury stock.
Consequently, the shares of common stock issued to the trust are not considered
to be outstanding in the computation of earnings per share.
Qualified Offer Rights Plan
On September 9, 1998, Tenneco adopted a Qualified Offer Rights Plan and
established an independent Board committee to review it every three years. The
Qualified Offer Rights Plan was adopted to deter coercive takeover tactics and
to prevent a potential acquiror from gaining control of Tenneco in a transaction
which is not in the best interests of Tenneco shareholders. Generally, under the
Qualified Offer Rights Plan, if a person becomes the beneficial owner of 20
percent or more of Tenneco's outstanding common stock, other than pursuant to a
"qualified offer", each right will entitle its holder to purchase, at the
right's exercise price, a number of shares of common stock of Tenneco or, under
certain circumstances, of the acquiring person having
95
<PAGE> 99
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
a market value of twice the right's exercise price. Rights held by the 20
percent or more holder will become void and will not be exercisable.
The rights will not become exercisable in connection with a "qualified
offer," which is an all-cash tender offer for all outstanding common stock that
is fully financed, remains open for a period of at least 60 business days,
results in the offeror owning at least 85% of the common stock after
consummation of the offer, assures a prompt second-step acquisition of shares
not purchased in the initial offer, at the same price as the initial offer, and
meets certain other requirements.
In connection with the adoption of the Qualified Offer Rights Plan, the
Board of Directors also adopted a three-year independent director evaluation
("TIDE") mechanism. Under the TIDE mechanism, an independent Board committee
will review, on an ongoing basis, the Qualified Offer Rights Plan and
developments in rights plans generally, and, if it deems appropriate, recommend
modification or termination of the Qualified Offer Rights Plan. The independent
committee will report to Tenneco's Board at least every three years as to
whether the Qualified Offer Rights Plan continues to be in the best interests of
Tenneco's shareholders.
Dividend Reinvestment and Stock Purchase Plan
Under the Tenneco Inc. Dividend Reinvestment and Stock Purchase Plan,
holders of Tenneco Inc. common stock may apply their cash dividends and optional
cash investments to the purchase of additional shares of Tenneco Inc. common
stock.
Earnings Per Share
Earnings per share of common stock outstanding were computed as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic Earnings Per Share --
Income from continuing operations(a)................ $ 116 $ 234 $ 82
=========== =========== ===========
Average shares of common stock outstanding(b)....... 168,505,573 170,264,731 169,609,373
=========== =========== ===========
Earnings from continuing operations per average
share of common stock............................ $ .69 $ 1.37 $ .49
=========== =========== ===========
Diluted Earnings Per Share --
Income from continuing operations(a)................ $ 116 $ 234 $ 82
=========== =========== ===========
Average shares of common stock outstanding(b)....... 168,505,573 170,264,731 169,609,373
Effect of dilutive securities:
Restricted stock............................... 52,930 -- 516,336
Stock options.................................. 88,236 452,867 400,403
Performance shares............................. 187,792 84,038 --
----------- ----------- -----------
Average shares of common stock outstanding including
dilutive securities.............................. 168,834,531 170,801,636 170,526,112
=========== =========== ===========
Earnings from continuing operations per average
share of common stock............................ $ .68 $ 1.36 $ .49
=========== =========== ===========
</TABLE>
- -------------------------
Notes: (a) All preferred stock outstanding before the Merger was acquired by El
Paso. Therefore, preferred stock dividends were included in the
computation of earnings per share from discontinued operations for
1996. There was no preferred stock outstanding in 1998 or 1997.
(b) In 1992, 12 million shares of common stock were issued to the SECT.
Shares of common stock issued to a related trust are not considered
to be outstanding in the computation of average shares
96
<PAGE> 100
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
until the shares are used to fund the obligations of the trust. During
the year ended December 31, 1996, the SECT used 4,358,084 shares. At
December 31, 1996, all shares were used. Stock repurchase plans also
affect common stock outstanding. Refer to "Stock Employee Compensation
Trust (SECT)" and "Stock Repurchase Plans" discussed previously in
this footnote.
9. PREFERRED STOCK
Tenneco had 50 million shares of preferred stock ($.01 par value)
authorized at December 31, 1998 and 1997. No shares of preferred stock were
outstanding at the respective dates. Tenneco has designated and reserved 2.0
million shares of the preferred stock as junior preferred stock for the
Qualified Offer Rights Plan.
As part of the Merger, Tenneco's $7.40 and $4.50 preferred stock (the
"Preferred Stock") was acquired by El Paso in exchange for El Paso common stock.
Consequently, Preferred Stock dividends have been subtracted from discontinued
operations to compute basic and diluted earnings per share. Before the Merger,
Tenneco made periodic accretions of the excess of the redemption value over the
fair value of the Preferred Stock at the date of issue. Such accretions have
been included in the statements of income caption, "Preferred stock dividends"
as a reduction of net income to arrive at net income to common stock.
In connection with the Transaction and as part of the 1996 Debt
Realignment, Old Tenneco issued the NPS Preferred Stock in November 1996 for
proceeds of approximately $296 million. The proceeds from the issuance were used
to fund a portion of the cash tender offers made in connection with the 1996
Debt Realignment and other cash requirements preceding the Merger. As a result
of the Merger, the obligations relating to the NPS Preferred Stock remained with
Old Tenneco.
Changes in Preferred Stock with Mandatory Redemption Provisions
<TABLE>
<CAPTION>
1996
-----------------------
SHARES AMOUNT
---------- ------
(MILLIONS EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Balance January 1........................................... 1,390,993 $ 130
Shares redeemed........................................... (195,751) (20)
Merger of energy business................................. (1,195,242) (113)
Accretion of excess of redemption value over fair value at
date of issue.......................................... -- 3
---------- -----
Balance December 31......................................... -- $ --
========== =====
</TABLE>
10. MINORITY INTEREST
At December 31, 1998 and 1997, Tenneco reported minority interest in the
balance sheet of $407 million and $408 million, respectively. At December 31,
1998, $394 million of minority interest resulted from the December 1994 and
December 1997 sales of preferred stock ($300 million and $100 million,
respectively) of Tenneco International Holding Corp. ("TIHC") to a financial
investor. Subsequent to each sale, the investor had approximately a 25% interest
in TIHC, consisting of 100% of the issued and outstanding variable rate voting
preferred stock of TIHC. Tenneco and certain of its subsidiaries hold 100% of
the issued and outstanding $8.00 junior preferred stock and common stock of
TIHC. TIHC holds certain assets including the capital stock of Tenneco Canada
Inc., S.A. Monroe Europe N.V., Monroe Australia Proprietary Limited, Walker
France S.A., and other subsidiaries. For financial reporting purposes, the
assets, liabilities, and earnings of TIHC and its subsidiaries are consolidated
in Tenneco's financial statements, and the investor's preferred stock interest
has been recorded as "Minority interest" in the balance sheet.
97
<PAGE> 101
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, dividends on the TIHC preferred stock are based on
the aggregate issue price of $400 million times a rate per annum equal to .92%
over LIBOR and are payable quarterly in arrears on the last business day of each
quarter. The weighted average rate paid on TIHC preferred stock was 6.66%,
6.92%, and 6.83% for 1998, 1997, and 1996, respectively. Additionally, the
holder of the preferred stock is entitled to receive, when and if declared by
the Board of Directors of TIHC, participating dividends based on the operating
income growth rate of TIHC and its subsidiaries. For financial reporting
purposes, dividends paid by TIHC to its financial investor have been recorded in
Tenneco's statements of income as "Minority interest."
11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Tenneco has various defined benefit pension plans that cover substantially
all of its employees. Benefits are based on years of service and, for most
salaried employees, on final average compensation. Tenneco's funding policies
are to contribute to the plans amounts necessary to satisfy the funding
requirement of federal laws and regulations. Plan assets consist principally of
listed equity and fixed income securities. Certain employees of Tenneco
participate in the Tenneco Retirement Plan.
Tenneco has postretirement health care and life insurance plans that cover
a majority of its domestic employees. For salaried employees, the plans cover
employees retiring from Tenneco on or after attaining age 55 who have had at
least 10 years service with Tenneco after attaining age 45. For hourly
employees, the postretirement benefit plans generally cover employees who retire
according to one of Tenneco's hourly employee retirement plans. All of these
benefits may be subject to deductibles, copayment provisions, and other
limitations, and Tenneco has reserved the right to change these benefits.
Tenneco's postretirement benefit plans are not funded.
98
<PAGE> 102
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO 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
statement of financial position for the pension plans and postretirement benefit
plans follows:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
----------- ---------------
1998 1997 1998 1997
---- ---- ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at September 30 of the previous year... $491 $444 $ 105 $ 100
Service cost.............................................. 13 12 3 4
Interest cost............................................. 36 33 8 7
Plan amendments........................................... 1 -- -- --
Actuarial loss (gain)..................................... 41 29 7 --
Benefits paid............................................. (30) (27) (8) (6)
---- ---- ----- -----
Benefit obligation at September 30........................ $552 $491 $ 115 $ 105
==== ==== ===== =====
Change in plan assets:
Fair value at September 30 of the previous year........... $593 $493 $ -- $ --
Currency rate conversion.................................. (1) -- -- --
Actual return on plan assets.............................. 13 121 -- --
Employer contributions.................................... 7 6 8 6
Participants' contributions............................... 1 -- -- --
Benefits paid............................................. (30) (27) (8) (6)
---- ---- ----- -----
Fair value at September 30................................ $583 $593 $ -- $ --
==== ==== ===== =====
Development of net amount recognized:
Funded status at September 30............................. $ 31 $102 $(115) $(105)
Contributions during the fourth quarter................... 1 1 2 2
Unrecognized cost:
Actuarial loss (gain).................................. 20 (55) 27 22
Prior service cost..................................... 12 14 (1) (3)
Transition liability (asset)........................... (7) (11) -- --
---- ---- ----- -----
Net amount recognized at December 31...................... $ 57 $ 51 $ (87) $ (84)
==== ==== ===== =====
Amounts recognized in the statement of financial position:
Prepaid benefit cost...................................... $ 81 $ 80 $ -- $ --
Accrued benefit cost...................................... (39) (33) (87) (84)
Intangible asset.......................................... 4 4 -- --
Accumulated other comprehensive income.................... 11 -- -- --
---- ---- ----- -----
Net amount recognized..................................... $ 57 $ 51 $ (87) $ (84)
==== ==== ===== =====
</TABLE>
- -------------------------
Notes: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid (accrued) benefit 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.
Amounts included in the above table reflect the participation of
Automotive employees in the Tenneco Retirement Plan ("TRP"), however,
Automotive employees will not accrue additional benefits under the TRP
following the Spin-off. The prepaid pension costs related to the TRP will
be transferred to Packaging in connection with the corporate
restructuring transactions. Packaging will become the sponsor of the TRP.
99
<PAGE> 103
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amounts in the table are for continuing operations only. Amounts
recognized in the statement of financial position for discontinued
operations include the following:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
----------- ---------------
1998 1997 1998 1997
---- ---- ------ ------
<S> <C> <C> <C> <C>
Net assets of discontinued operations....................... $630 $585 $(61) $(63)
Accumulated other comprehensive income...................... 4 -- -- --
---- ---- ---- ----
$634 $585 $(61) $(63)
==== ==== ==== ====
</TABLE>
Net periodic pension costs (income) from continuing operations for the
years 1998, 1997, and 1996, consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 13 $ 12 $ 11
Interest on prior year's projected benefit obligation....... 36 33 22
Expected return on plan assets.............................. (48) (45) (30)
Net amortization:
Actuarial loss (gain)..................................... 1 -- --
Prior service cost........................................ 1 1 1
Transition liability (asset).............................. (2) (2) (2)
---- ---- ----
Net pension costs (income).................................. $ 1 $ (1) $ 2
==== ==== ====
</TABLE>
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 were $114 million, $108 million, and $68 million,
respectively, as of September 30, 1998, and $40 million, $39 million, and $9
million, respectively, as of September 30, 1997.
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1998, 1997, and 1996 actuarial present value of
the benefit obligations were 6.9%, 7.6%, and 7.7%, respectively. The rate of
increase in future compensation was 4.7%, 5.0%, and 5.2%, for 1998, 1997, and
1996, respectively. The weighted average expected long-term rate of return on
plan assets for 1998, 1997, and 1996 was 9.8%, 9.9%, and 9.9%, respectively.
Net periodic postretirement benefit cost from continuing operations for the
years 1998, 1997, and 1996 consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 2 $ 4 $ 3
Interest on accumulated postretirement benefit obligation... 8 7 6
Net amortization of actuarial loss (gain)................... 1 -- 1
--- --- ---
Net periodic postretirement benefit cost.................... $11 $11 $10
=== === ===
</TABLE>
The initial weighted average assumed health care cost trend rate used in
determining the 1998, 1997, and 1996 accumulated postretirement benefit
obligation was 5%, 5%, and 6%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage point
in each year would increase the 1998, 1997, and 1996 accumulated postretirement
benefit obligations by approximately $13 million, $12 million, and $11 million,
respectively, and would increase the aggregate of the service cost and interest
100
<PAGE> 104
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
cost components of the net periodic postretirement benefit cost by approximately
$2 million each year for 1998, 1997, and 1996.
Decreasing the assumed health care cost trend rate by one percentage point
in each year would decrease the 1998 accumulated postretirement benefit
obligation by approximately $12 million and would decrease the aggregate of
service cost and interest cost components of the net periodic postretirement
benefit cost by $2 million.
The discount rates (which are based on long-term market rates) used in
determining the 1998, 1997, and 1996 accumulated postretirement benefit
obligations were 7.00%, 7.75%, and 7.75%, respectively.
12. SEGMENT AND GEOGRAPHIC AREA INFORMATION
Tenneco is a global manufacturer with a single operating segment:
Automotive -- Manufacture and sale of exhaust and ride control systems
for both the original equipment and replacement markets.
The accounting policies of the segments are the same as those described in
Note 1, "Summary of Accounting Policies." Tenneco evaluates operating
performance based primarily on income before interest expense, income taxes, and
minority interest. Individual operating segments have not been aggregated within
this reportable segment.
Products are transferred between geographic areas on a basis intended to
reflect as nearly as possible the "market value" of the products.
The following table sets forth information relating to Tenneco's external
customer and intersegment revenues for each product or each group of similar
products:
<TABLE>
<CAPTION>
NET SALES AND
OPERATING REVENUES
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
AUTOMOTIVE
Exhaust systems products.................................. $1,814 $1,753 $1,699
Ride control products..................................... 1,423 1,473 1,281
------ ------ ------
Consolidated........................................... $3,237 $3,226 $2,980
====== ====== ======
</TABLE>
During 1998, sales to two major customers comprised approximately 12.8% and
10.9% of consolidated net sales and operating revenues. During 1997, sales to
one major customer comprised 13.2% of consolidated net sales and operating
revenues. During 1996, sales to two major customers comprised approximately
11.5% and 9.6% of consolidated net sales and operating revenues.
101
<PAGE> 105
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize certain Tenneco segment and geographic
information:
<TABLE>
<CAPTION>
SEGMENT RECLASS
------------------- &
AUTOMOTIVE OTHER ELIMS CONSOLIDATED
---------- ------ ------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED
Revenues from external customers............................ $3,237 $ -- $ -- $3,237
Interest income............................................. 5 -- -- 5
Depreciation and amortization............................... 150 -- -- 150
Income before interest, income taxes, and minority
interest.................................................. 248 (21) -- 227
Extraordinary loss.......................................... -- -- -- --
Cumulative effect of change in accounting principle......... -- -- -- --
Total assets (Note)......................................... 2,827 1,976 (44) 4,759
Net assets of discontinued operations....................... -- 1,739 -- 1,739
Investment in affiliated companies.......................... 1 -- -- 1
Capital expenditures for continuing operations.............. 195 -- -- 195
Noncash items other than depreciation, depletion, and
amortization.............................................. (13) 20 -- 7
AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED
Revenues from external customers............................ $3,226 $ -- $ -- $3,226
Interest income............................................. 3 -- -- 3
Depreciation and amortization............................... 110 -- -- 110
Income before interest, income taxes, and minority
interest.................................................. 407 (12) -- 395
Extraordinary loss.......................................... -- -- -- --
Cumulative effect of change in accounting principle......... (7) (39) -- (46)
Total assets (Note)......................................... 2,754 1,997 (69) 4,682
Net assets of discontinued operations....................... -- 1,771 -- 1,771
Investment in affiliated companies.......................... 2 -- -- 2
Capital expenditures for continuing operations.............. 211 10 -- 221
Noncash items other than depreciation, depletion, and
amortization.............................................. (23) 17 -- (6)
AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED
Revenues from external customers............................ $2,980 $ -- $ -- $2,980
Interest income............................................. 3 4 -- 7
Depreciation and amortization............................... 94 -- -- 94
Income before interest, income taxes, and minority
interest.................................................. 249 (7) -- 242
Extraordinary loss.......................................... -- (236) -- (236)
Cumulative effect of change in accounting principle......... -- -- -- --
Total assets (Note)......................................... 2,557 2,098 (2) 4,653
Net assets of discontinued operations....................... -- 1,883 -- 1,883
Investment in affiliated companies.......................... 2 -- -- 2
Capital expenditures for continuing operations.............. 177 11 -- 188
Noncash items other than depreciation, depletion, and
amortization.............................................. (3) (5) -- (8)
</TABLE>
- -------------------------
Note: The Other segment's total assets include the net assets of discontinued
operations.
102
<PAGE> 106
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GEOGRAPHIC AREA
-------------------
UNITED RECLASS &
STATES FOREIGN(A) ELIMS CONSOLIDATED
------ ---------- --------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED
Revenues from external customers(b)................... $1,432 $1,805 $ -- $3,237
Long-lived assets(c).................................. 648 770 -- 1,418
Total assets.......................................... 2,733 2,070 (44) 4,759
AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED
Revenues from external customers(b)................... $1,502 $1,724 $ -- $3,226
Long-lived assets(c).................................. 634 667 -- 1,301
Total assets.......................................... 2,982 1,740 (40) 4,682
AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED
Revenues from external customers(b)................... $1,344 $1,636 $ -- $2,980
Long-lived assets(c).................................. 545 658 -- 1,203
Total assets.......................................... 3,103 1,617 (67) 4,653
</TABLE>
- -------------------------
Notes: (a) Revenues from external customers and long-lived assets for individual
foreign countries are not material.
(b) Revenues are attributed to countries based on location of the seller.
(c) Long-lived assets include all long-term assets except net assets from
discontinued operations, goodwill, intangibles, and deferred tax
assets.
13. COMMITMENTS AND CONTINGENCIES
Capital Commitments
Tenneco estimates that expenditures aggregating approximately $231 million
will be required after December 31, 1998, to complete facilities and projects
authorized at such date, and substantial commitments have been made in
connection therewith. Of this amount, $121 million is in support of continuing
operations and $110 million is in support of discontinued operations.
Lease Commitments
Tenneco holds certain of its facilities, equipment, and other assets under
long-term leases. The minimum lease payments under non-cancelable operating
leases with lease terms in excess of one year are $15 million, $17 million, $16
million, $14 million, and $12 million for the years 1999, 2000, 2001, 2002, and
2003, respectively, and $58 million for subsequent years.
Commitments under capital leases were not significant to the accompanying
financial statements. Total rental expense for continuing operations for the
years 1998, 1997, and 1996, was $31 million, $30 million, and $35 million,
respectively, including minimum rentals under non-cancelable operating leases of
$16 million, $29 million, and $11 million for the corresponding periods.
Litigation
Tenneco Inc. and Newport News have received letters from the Defense
Contract Audit Agency (the "DCAA"), inquiring about certain aspects of the
Distributions, including the disposition of the Tenneco Inc. Retirement Plan
("TRP"), which covers salaried employees of Newport News and other Tenneco
divisions and the 1986 asset valuation for the TRP and its cost accounting
treatment. On January 15, 1999, Newport News entered into a settlement agreement
with the Federal Government regarding the TRP. Tenneco agreed
103
<PAGE> 107
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to pay Newport News $14.5 million with respect to this and other matters. This
payment had no material impact on Tenneco's financial position or results of
operations.
Tenneco Inc. and its subsidiaries are parties to various other legal
proceedings arising from their operations. Tenneco believes that the outcome of
these proceedings, individually and in the aggregate, will have no material
effect on the financial position or results of operations of Tenneco Inc. and
its subsidiaries.
Environmental Matters
Tenneco Inc. and its subsidiaries are subject to a variety of environmental
and pollution control laws and regulations in all jurisdictions in which they
operate. Tenneco has provided reserves for compliance with these laws and
regulations where it is probable that a liability exists and where Tenneco can
make a reasonable estimate of the liability. The estimated liabilities recorded
are subject to change as more information becomes available regarding the
magnitude of possible clean-up costs and the timing, varying costs, and
effectiveness of alternative clean-up technologies. However, Tenneco believes
that any additional costs which arise as more information becomes available will
not have a material effect on the financial condition or results of operations
of Tenneco.
104
<PAGE> 108
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
INCOME (LOSS)
INCOME BEFORE BEFORE CUMULATIVE
NET SALES INTEREST EXPENSE, CUMULATIVE EFFECT OF
AND INCOME TAXES, INCOME FROM INCOME FROM EFFECT OF CHANGE CHANGE IN
OPERATING AND MINORITY CONTINUING DISCONTINUED IN ACCOUNTING ACCOUNTING NET INCOME
QUARTER REVENUES INTEREST OPERATIONS OPERATIONS PRINCIPLE PRINCIPLE (LOSS)
- ------- --------- ----------------- ----------- ------------ ---------------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
1998
1st................ $ 800 $ 83 $ 43 $ 32 $ 75 $ -- $ 75
2nd................ 864 124 63 74 137 -- 137
3rd................ 804 81 63 40 103 -- 103
4th................ 769 (61) (53) (7) (60) -- (60)
------ ---- ---- ---- ---- ---- ----
$3,237 $227 $116 $139 $255 $ -- $255
====== ==== ==== ==== ==== ==== ====
1997
1st................ $ 778 $ 80 $ 54 $ 22 $ 76 $ -- $ 76
2nd................ 873 134 84 20 104 -- 104
3rd................ 785 114 62 43 105 -- 105
4th................ 790 67 34 42 76 (46) 30
------ ---- ---- ---- ---- ---- ----
$3,226 $395 $234 $127 $361 $(46) $315
====== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
----------------------------------------------------------------------
BEFORE CUMULATIVE
CUMULATIVE EFFECT OF
FROM FROM EFFECT OF CHANGE CHANGE IN
CONTINUING DISCONTINUED IN ACCOUNTING ACCOUNTING NET INCOME
QUARTER OPERATIONS OPERATIONS PRINCIPLE PRINCIPLE (LOSS)
- ------- ---------- ------------ ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1998
1st............................... $ .25 $ .19 $ .44 $ -- $ .44
2nd............................... .38 .43 .81 -- .81
3rd............................... .37 .25 .62 -- .62
4th............................... (.31) (.05) (.36) -- (.36)
----- ----- ----- ----- -----
$ .69 $ .83 $1.52 $ -- $1.52
===== ===== ===== ===== =====
1997
1st............................... $ .31 $ .13 $ .44 $ -- $ .44
2nd............................... .49 .12 .61 -- .61
3rd............................... .37 .25 .62 -- .62
4th............................... .20 .25 .45 (.27) .18
----- ----- ----- ----- -----
$1.37 $ .75 $2.12 $(.27) $1.85
===== ===== ===== ===== =====
</TABLE>
105
<PAGE> 109
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
---------------------------------------------------------------------------
BEFORE CUMULATIVE
CUMULATIVE EFFECT EFFECT OF
FROM FROM OF CHANGE CHANGE IN
CONTINUING DISCONTINUED IN ACCOUNTING ACCOUNTING NET INCOME
QUARTER OPERATIONS OPERATIONS PRINCIPLE PRINCIPLE (LOSS)
------- ---------- ------------ ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1998
1st.............................. $ .25 $ .19 $ .44 $ -- $ .44
2nd.............................. .38 .43 .81 -- .81
3rd.............................. .37 .25 .62 -- .62
4th.............................. (.31) (.05) (.36) -- (.36)
----- ----- ----- ----- -----
$ .68 $ .83 $1.51 $ -- $1.51
===== ===== ===== ===== =====
1997
1st.............................. $ .31 $ .13 $ .44 $ -- $ .44
2nd.............................. .49 .12 .61 -- .61
3rd.............................. .37 .25 .62 -- .62
4th.............................. .19 .25 .44 (.27) .17
----- ----- ----- ----- -----
$1.36 $ .75 $2.11 $(.27) $1.84
===== ===== ===== ===== =====
</TABLE>
- -------------------------
Note: Reference is made to Notes 1, 2, 3, 4 and 8 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for items
affecting quarterly results. 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 financial
statements.)
106
<PAGE> 110
SCHEDULE II
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
<TABLE>
<CAPTION>
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
- --------------------------------------------- --------- --------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts and Notes
Deducted from Assets to Which it Applies:
Year Ended December 31, 1998............ $20 $20 $ 5 $ 6 $39
=== === === === ===
Year Ended December 31, 1997............ $10 $ 6 $ 4 $-- $20
=== === === === ===
Year Ended December 31, 1996............ $10 $ 1 $-- $ 1 $10
=== === === === ===
</TABLE>
107
<PAGE> 111
SECTION D.
THIRD QUARTER 1999 OUTLOOK
GENERAL
Upon the Spin-off, Tenneco Automotive and Tenneco Packaging will operate as
two separate, independent public companies. In August 1999, Tenneco received a
letter ruling from the Internal Revenue Service that the Spin-off will be
tax-free for U.S. federal income tax purposes. Tenneco would not have proceeded
with the Spin-off absent the receipt of a determination that the Spin-off would
be tax-free to Tenneco and its shareowners. As a result of receiving the letter
ruling: (i) Tenneco has restated its financial statements to reflect its
Specialty Packaging segment as a discontinued operation; and (ii) income from
continuing operations reflects the income of Tenneco's remaining segment,
Tenneco Automotive. Tenneco also believes it is more appropriate to describe the
outlook of these two businesses separately. Accordingly, the third quarter
outlook for each of Tenneco Automotive and Specialty Packaging, respectively, is
set forth below.
THE AUTOMOTIVE BUSINESS
Tenneco currently expects that operating income from the Automotive
business for the third quarter of 1999 will be $20 to $25 million below
operating income from this business for the third quarter of 1998. Also,
Tenneco's third quarter income from continuing operations is expected to include
additional tax costs of $15 to $20 million related to repatriation of overseas
earnings in connection with the Spin-off. This repatriation allows Tenneco to
leverage its overseas operations, creating interest deductions in foreign tax
jurisdictions.
Tenneco Automotive's management expects that revenues from its North
American original equipment business will continue to improve in the third
quarter based on a strong OE vehicle build, especially in the light truck
market. In the North American aftermarket, revenues are expected to be lower
than in the third quarter of 1998 due primarily to declining exhaust replacement
rates. The favorable impacts of Tenneco Automotive's earlier restructuring
efforts in its North American aftermarket operations are expected to fully
offset the negative impact on operating income caused by the weakness in
aftermarket exhaust sales.
Tenneco Automotive's European operations are expected to be negatively
impacted by higher costs, primarily relating to a first quarter 1999 change in
accounting for platform start-up costs from a capitalization to an expense
basis, changes in the mix of its OE revenues to lower margin business and
softness in ride control aftermarket sales due primarily to an increase in
private label and non-premium product business. The South American operations
continue to be negatively impacted by the troubled economic conditions in Brazil
and Argentina and currency weakness.
Tenneco Automotive has initiated an action plan which includes management
changes, brand repositioning and new product offerings. For example, Tenneco
Automotive plans to introduce a new premium shock absorber product for the
aftermarket in November 1999, and plans expanded introductions of Mega-Flow(TM)
heavy duty mufflers and its recreational vehicle shock line. Tenneco Automotive
is also evaluating a supplemental restructuring plan which could involve the
closure of additional manufacturing and distribution facilities in North America
and Europe. If the plan is approved, it could result in a third or fourth
quarter pre-tax charge of $45 to $55 million, of which approximately 50-60%
could be cash.
THE SPECIALTY PACKAGING BUSINESS
Tenneco currently expects that operating income from its discontinued
Specialty Packaging business ("Packaging") for the third quarter of 1999 will be
$10 to $15 million below operating income from this business for the third
quarter of 1998. Based on Packaging's forecast of resin costs, and pricing
actions taken, Packaging's management expects the negative impact on margin from
increased resin costs to begin to be offset sometime in the fourth quarter of
1999. During the third quarter of 1999, Packaging also incurred increased
advertising and promotional expenditures to meet competitive market initiatives
in its consumer business.
108
<PAGE> 112
Packaging's management is evaluating Packaging's strategy in light of its
competitive position as a new stand-alone public company and, as part of this
evaluation, is analyzing its business operations and assets. This evaluation and
analysis is ongoing and subject to final review and approval. Packaging
currently believes that its evaluation could result in an aggregate pre-tax
charge of up to approximately $220 million, of which approximately 10% could be
cash. Completion of this analysis and final approval of the ultimate plan could
result in some or all of the charge being taken as early as the third quarter of
1999.
109
<PAGE> 113
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
<TABLE>
<S> <C>
(c) EXHIBITS. The following exhibits are filed with this Report
on Form 8-K:
12.1 Computation of Ratio of Earnings to Fixed Charges for the
three months ended March 31, 1999 and 1998
12.2 Computation of Ratio of Earnings to Fixed Charges for the
six months ended June 30, 1999 and 1998
12.3 Computation of Ratio of Earnings to Fixed Charges for the
five years ended December 31, 1998
23 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule, March 31, 1999
27.2 Financial Data Schedule, March 31, 1998
27.3 Financial Data Schedule, June 30, 1999
27.4 Financial Data Schedule, June 30, 1998
27.5 Financial Data Schedule, December 31, 1998
27.6 Financial Data Schedule, December 31, 1997
27.7 Financial Data Schedule, December 31, 1996
</TABLE>
110
<PAGE> 114
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Tenneco Inc. has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TENNECO INC.
By: /s/ Robert T. Blakely
------------------------------------
Robert T. Blakely
Executive Vice President and
Chief Financial Officer
September 10, 1999
111
<PAGE> 1
EXHIBIT 12.1
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------
1999 1998
----- -----
<S> <C> <C>
Income (loss) from continuing operations.................... $16 $ 43
Add:
Interest............................................... 19 13
Portion of rentals representative of interest factor... 3 2
Preferred stock dividend requirements of majority-owned
subsidiaries.......................................... 6 7
Income tax expense (benefit) and other taxes on
income................................................ 14 19
Amortization of interest capitalized................... -- --
Undistributed (earnings) losses of affiliated companies
in which less than a 50% voting interest is owned..... -- --
----- -----
Earnings (loss) as defined........................ $ 58 $ 84
===== =====
Interest.................................................... $ 19 $ 13
Interest capitalized........................................ -- --
Portion of rentals representative of interest factor........ 3 2
Preferred stock dividend requirements of majority-owned
subsidiaries on a pre-tax basis........................... 10 10
----- -----
Fixed charges as defined.......................... $ 32 $ 25
===== =====
Ratio of earnings to fixed charges.......................... 1.81 3.36
===== =====
</TABLE>
<PAGE> 1
EXHIBIT 12.2
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
Income (loss) from continuing operations.................... $ 53 $106
Add:
Interest............................................... 42 30
Portion of rentals representative of interest factor... 5 5
Preferred stock dividend requirements of majority-owned
subsidiaries.......................................... 13 14
Income tax expense (benefit) and other taxes on
income................................................ 44 55
Amortization of interest capitalized................... -- --
Undistributed (earnings) losses of affiliated companies
in which less than a 50% voting interest is owned..... -- --
---- ----
Earnings (loss) as defined........................ $157 $210
==== ====
Interest.................................................... $ 42 $ 30
Interest capitalized........................................ -- --
Portion of rentals representative of interest factor........ 5 5
Preferred stock dividend requirements of majority-owned
subsidiaries on a pre-tax basis........................... 22 20
---- ----
Fixed charges as defined.......................... $ 69 $ 55
==== ====
Ratio of earnings to fixed charges.......................... 2.28 3.82
==== ====
</TABLE>
<PAGE> 1
EXHIBIT 12.3
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Income from continuing operations........................... $116 $234 $ 82 $ 90 $145
Add:
Interest.................................................. 69 58 60 44 33
Portion of rentals representative of interest factor...... 10 10 12 11 11
Preferred stock dividend requirements of majority-owned
subsidiaries........................................... 27 21 21 23 --
Income tax expense and other taxes on income.............. 13 80 79 91 52
Amortization of interest capitalized...................... -- -- -- -- --
Undistributed (earnings) losses of affiliated companies in
which less than a 50% voting interest is owned......... -- -- -- -- --
---- ---- ---- ---- ----
Earnings as defined.................................. $235 $403 $254 $259 $241
==== ==== ==== ==== ====
Interest.................................................... $ 69 $ 58 $ 60 $ 44 $ 33
Interest capitalized........................................ -- -- -- -- 1
Portion of rentals representative of interest factor........ 10 10 12 11 11
Preferred stock dividend requirements of majority-owned
subsidiaries on a pre-tax basis........................... 30 16 37 44 --
---- ---- ---- ---- ----
Fixed charges as defined............................. $109 $ 84 $109 $ 99 $ 45
==== ==== ==== ==== ====
Ratio of earnings to fixed charges.......................... 2.16 4.80 2.33 2.62 5.36
==== ==== ==== ==== ====
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated February 17, 1999 (except
with respect to the matters discussed in Note 2, as to which the date is
August 20, 1999), included in the Tenneco Inc. Current Report on Form
8-K dated August 20, 1999, into the following Registration Statements
previously filed with the Securities and Exchange Commission:
REGISTRATION NO. FORM SECURITIES REGISTERED
- ---------------- ---- ---------------------
333-24291 S-3 $700,000,000 Tenneco Inc. debt securities of
which $100,000,000 remains available for
issuance.
333-17485 S-8 17,000,000 shares of Common Stock, par value
$.01 per share of Tenneco Inc. (formerly New
Tenneco Inc.) ("Common Stock") issuable under
the 1996 Tenneco Inc. Stock Ownership Plan.
333-30933 S-8 5,000 shares of Common Stock issuable under
the Tenneco Thrift Plan for Hourly Employees
("Hourly Thrift Plan") and the Tenneco Thrift
Plan ("Salaried Thrift Plan").
333-17487 S-8 462,000 shares of Common Stock issuable under
the Hourly Thrift Plan and the Salaried Thrift
Plan.
333-41535 S-8 33,796 shares of Common Stock issuable under
the 1996 Tenneco Inc. Stock Ownership Plan.
333-27279 S-8 64,000 shares of Common Stock issuable under
the Hourly Thrift Plan.
333-23249 S-8 2,500,000 shares of Common Stock issuable
under the 1997 Employee Stock Purchase Plan.
333-27281 S-8 395,000 shares of Common Stock issuable under
the Hourly Thrift Plan and Salaried Thrift Plan.
333-41537 S-8 2,100 shares of Common Stock issuable under the
Hourly Thrift Plan.
333-48777 S-8 710,000 shares of Common Stock issuable under
the Hourly Thrift Plan and Salaried Thrift Plan.
333-76261 S-8 740,000 shares of Common Stock issuable
under the Hourly Thrift Plan and Salaried
Thrift Plan.
ARTHUR ANDERSEN LLP
Houston, Texas
September 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 31
<SECURITIES> 0
<RECEIVABLES> 539
<ALLOWANCES> 0
<INVENTORY> 425
<CURRENT-ASSETS> 1,113
<PP&E> 1,892
<DEPRECIATION> 846
<TOTAL-ASSETS> 4,335
<CURRENT-LIABILITIES> 949
<BONDS> 677
0
0
<COMMON> 2
<OTHER-SE> 2,094
<TOTAL-LIABILITY-AND-EQUITY> 4,335
<SALES> 789
<TOTAL-REVENUES> 789
<CGS> 596
<TOTAL-COSTS> 596
<OTHER-EXPENSES> 140
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 36
<INCOME-TAX> 14
<INCOME-CONTINUING> 16
<DISCONTINUED> (166)
<EXTRAORDINARY> (7)
<CHANGES> (134)
<NET-INCOME> (291)
<EPS-BASIC> (1.74)
<EPS-DILUTED> (1.74)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 20
<SECURITIES> 0
<RECEIVABLES> 498
<ALLOWANCES> 0
<INVENTORY> 383
<CURRENT-ASSETS> 1,158
<PP&E> 1,791
<DEPRECIATION> 756
<TOTAL-ASSETS> 4,797
<CURRENT-LIABILITIES> 763
<BONDS> 727
0
0
<COMMON> 2
<OTHER-SE> 2,526
<TOTAL-LIABILITY-AND-EQUITY> 4,797
<SALES> 800
<TOTAL-REVENUES> 800
<CGS> 585
<TOTAL-COSTS> 585
<OTHER-EXPENSES> 138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 70
<INCOME-TAX> 19
<INCOME-CONTINUING> 43
<DISCONTINUED> 32
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75
<EPS-BASIC> .44
<EPS-DILUTED> .44
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 40
<SECURITIES> 0
<RECEIVABLES> 591
<ALLOWANCES> 0
<INVENTORY> 401
<CURRENT-ASSETS> 1,176
<PP&E> 1,903
<DEPRECIATION> 854
<TOTAL-ASSETS> 4,416
<CURRENT-LIABILITIES> 844
<BONDS> 832
0
0
<COMMON> 2
<OTHER-SE> 2,120
<TOTAL-LIABILITY-AND-EQUITY> 4,416
<SALES> 1,657
<TOTAL-REVENUES> 1,657
<CGS> 1,239
<TOTAL-COSTS> 1,239
<OTHER-EXPENSES> 274
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> 110
<INCOME-TAX> 44
<INCOME-CONTINUING> 53
<DISCONTINUED> (111)
<EXTRAORDINARY> (7)
<CHANGES> (134)
<NET-INCOME> (199)
<EPS-BASIC> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 551
<ALLOWANCES> 0
<INVENTORY> 381
<CURRENT-ASSETS> 1,156
<PP&E> 1,822
<DEPRECIATION> 778
<TOTAL-ASSETS> 4,829
<CURRENT-LIABILITIES> 753
<BONDS> 747
0
0
<COMMON> 2
<OTHER-SE> 2,557
<TOTAL-LIABILITY-AND-EQUITY> 4,829
<SALES> 1,664
<TOTAL-REVENUES> 1,664
<CGS> 1,174
<TOTAL-COSTS> 1,174
<OTHER-EXPENSES> 290
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 177
<INCOME-TAX> 55
<INCOME-CONTINUING> 106
<DISCONTINUED> 106
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212
<EPS-BASIC> 1.25
<EPS-DILUTED> 1.25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tenneco Inc.
and Consolidated Subsidiaries Financial Statements and is qualified in its
entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 29
<SECURITIES> 0
<RECEIVABLES> 430
<ALLOWANCES> 0
<INVENTORY> 414
<CURRENT-ASSETS> 1,064
<PP&E> 1,944
<DEPRECIATION> 851
<TOTAL-ASSETS> 4,759
<CURRENT-LIABILITIES> 909
<BONDS> 671
0
0
<COMMON> 2
<OTHER-SE> 2,502
<TOTAL-LIABILITY-AND-EQUITY> 4,759
<SALES> 3,237
<TOTAL-REVENUES> 3,237
<CGS> 2,363
<TOTAL-COSTS> 2,363
<OTHER-EXPENSES> 622
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> 158
<INCOME-TAX> 13
<INCOME-CONTINUING> 116
<DISCONTINUED> 139
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 255
<EPS-BASIC> 1.52
<EPS-DILUTED> 1.51
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TENNECO
INC. AND CONSOLIDATED SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29
<SECURITIES> 0
<RECEIVABLES> 402
<ALLOWANCES> 0
<INVENTORY> 378
<CURRENT-ASSETS> 1,050
<PP&E> 1,767
<DEPRECIATION> 738
<TOTAL-ASSETS> 4,682
<CURRENT-LIABILITIES> 691
<BONDS> 713
0
0
<COMMON> 2
<OTHER-SE> 2,526
<TOTAL-LIABILITY-AND-EQUITY> 4,682
<SALES> 3,226
<TOTAL-REVENUES> 3,226
<CGS> 2,337
<TOTAL-COSTS> 2,337
<OTHER-EXPENSES> 531
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 337
<INCOME-TAX> 80
<INCOME-CONTINUING> 234
<DISCONTINUED> 127
<EXTRAORDINARY> 0
<CHANGES> (46)
<NET-INCOME> 315
<EPS-BASIC> 1.85
<EPS-DILUTED> 1.84
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Tenneco
Inc. and Consolidated Subsidiaries Financial Statements and is qualified in its
entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 40
<SECURITIES> 0
<RECEIVABLES> 420
<ALLOWANCES> 0
<INVENTORY> 378
<CURRENT-ASSETS> 1,015
<PP&E> 1,622
<DEPRECIATION> 674
<TOTAL-ASSETS> 4,653
<CURRENT-LIABILITIES> 639
<BONDS> 643
0
0
<COMMON> 2
<OTHER-SE> 2,644
<TOTAL-LIABILITY-AND-EQUITY> 4,653
<SALES> 2,980
<TOTAL-REVENUES> 2,980
<CGS> 2,210
<TOTAL-COSTS> 2,210
<OTHER-EXPENSES> 506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> 182
<INCOME-TAX> 79
<INCOME-CONTINUING> 82
<DISCONTINUED> 564
<EXTRAORDINARY> (236)
<CHANGES> 0
<NET-INCOME> 410
<EPS-BASIC> 2.35
<EPS-DILUTED> 2.34
</TABLE>
