<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-12387
---------------------------
TENNECO INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 76-0515284
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1275 KING STREET, GREENWICH, CT 06831
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 863-1000
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, par value $.01 per share: 170,065,620 shares as of March 31,
1999.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Tenneco Inc. and Consolidated Subsidiaries--
Statements of Income.............................. 2
Statements of Cash Flows.......................... 3
Balance Sheets.................................... 4
Statements of Changes in Shareowners' Equity...... 5
Statements of Comprehensive Income................ 6
Notes to Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................... *
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.............................. *
Item 2. Changes in Securities.......................... *
Item 3. Defaults Upon Senior Securities................ *
Item 4. Submission of Matters to a Vote of Security
Holders............................................... *
Item 5. Other Information.............................. *
Item 6. Exhibits and Reports on Form 8-K............... 20
</TABLE>
- ------------
* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
CAUTIONARY STATEMENT AND "SAFE HARBOR" OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements
regarding: (i) strategic alternatives, including the expected timing and
tax-free nature of the spin-off and the packaging and automotive companies after
the spin-off; (ii) the restructuring plan; (iii) the outlook of the automotive
and specialty packaging businesses; (iv) capital resources; and (v) the Year
2000 issue (relating to potential equipment and computer failures by or at the
change in the century). See "Strategic Alternatives Analysis," "Restructuring
and Other Charges," "Outlook," "Liquidity and Capital
Resources -- Capitalization," and "Year 2000" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These
forward-looking statements are based on the current expectations of Tenneco (as
defined below). Because forward-looking statements involve risks and
uncertainties, the 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 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.
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(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--
Automotive......................................... $ 789 $ 800
Specialty Packaging................................ 666 630
Paperboard Packaging............................... 414 402
Intergroup sales and other......................... (22) (23)
----------- -----------
1,847 1,809
Other income--
Gain (loss) on sale of businesses and assets,
net.............................................. (312) (6)
Other income, net.................................. 5 15
----------- -----------
1,540 1,818
----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation shown below)... 1,326 1,268
Engineering, research, and development.................. 19 19
Selling, general, and administrative.................... 257 235
Depreciation, depletion, and amortization............... 113 110
----------- -----------
1,715 1,632
----------- -----------
INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES, AND
MINORITY INTEREST......................................... (175) 186
Interest expense (net of interest capitalized).......... 63 56
Income tax expense (benefit)............................ (94) 47
Minority interest....................................... 6 8
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS.................... (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................................... $ (.90) $ .44
Extraordinary loss...................................... (.04) --
Cumulative effect of change in accounting principle..... (.80) --
----------- -----------
$ (1.74) $ .44
=========== ===========
Diluted earnings (loss) per share of common stock--
Continuing operations................................... $ (.90) $ .44
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.
2
<PAGE> 4
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 (loss) from continuing operations.................... $(150) $ 75
Adjustments to reconcile income (loss) from continuing
operations to cash provided (used) by operating
activities--
Depreciation, depletion, and amortization.............. 113 110
Deferred income taxes.................................. (105) 30
(Gain) loss on sale of businesses and assets, net...... 312 6
Changes in components of working capital--
(Increase) decrease in receivables................ (118) (87)
(Increase) decrease in inventories................ (65) (51)
(Increase) decrease in prepayments and other
current assets................................... 6 (12)
Increase (decrease) in payables................... 42 (36)
Increase (decrease) in taxes accrued.............. 2 3
Increase (decrease) in interest accrued........... 31 30
Increase (decrease) in other current
liabilities...................................... (58) (40)
Other.................................................. (61) (62)
----- -----
Net cash provided (used) by operating activities............ (51) (34)
----- -----
INVESTING ACTIVITIES
Net proceeds from sale of assets............................ 8 1
Expenditures for plant, property, and equipment............. (84) (102)
Acquisition of businesses................................... (5) --
Investments and other....................................... 4 (5)
----- -----
Net cash provided (used) by investing activities............ (77) (106)
----- -----
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 (12)
Cash and temporary cash investments, January 1.............. 36 41
----- -----
Cash and temporary cash investments, March 31 (Note)........ $ 38 $ 29
===== =====
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.
3
<PAGE> 5
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..................... $ 38 $ 36 $ 29
Receivables--
Customer notes and accounts, net................... 838 773 799
Income taxes....................................... 18 18 60
Other.............................................. 110 73 24
Inventories--
Finished goods..................................... 538 484 494
Work in process.................................... 141 139 116
Raw materials...................................... 214 226 252
Materials and supplies............................. 136 139 135
Deferred income taxes................................... 59 59 70
Prepayments and other................................... 125 210 294
------ ------ ------
2,217 2,157 2,273
------ ------ ------
Other assets:
Long-term notes receivable, net......................... 47 46 47
Goodwill and intangibles, net........................... 1,521 1,613 1,593
Deferred income taxes................................... 46 37 53
Pension assets.......................................... 871 843 771
Other................................................... 228 467 338
------ ------ ------
2,713 3,006 2,802
------ ------ ------
Plant, property, and equipment, at cost..................... 5,718 5,737 5,368
Less--Reserves for depreciation, depletion, and
amortization.......................................... 2,327 2,109 1,896
------ ------ ------
3,391 3,628 3,472
------ ------ ------
$8,321 $8,791 $8,547
====== ====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt (including current maturities on
long-term debt)....................................... $1,263 $1,071 $ 476
Trade payables.......................................... 713 701 682
Taxes accrued........................................... 59 57 97
Accrued liabilities..................................... 386 368 323
Other................................................... 190 190 272
------ ------ ------
2,611 2,387 1,850
------ ------ ------
Long-term debt.............................................. 2,330 2,360 2,640
------ ------ ------
Deferred income taxes....................................... 475 649 651
------ ------ ------
Postretirement benefits..................................... 294 310 233
------ ------ ------
Deferred credits and other liabilities...................... 93 160 223
------ ------ ------
Commitments and contingencies
Minority interest........................................... 422 421 422
------ ------ ------
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.................. (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
------ ------ ------
$8,321 $8,791 $8,547
====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
4
<PAGE> 6
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
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.
5
<PAGE> 7
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME
(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
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.
6
<PAGE> 8
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.
Prior year's financial statements have been reclassified where appropriate
to conform to 1999 presentations.
(2) On July 21, 1998, Tenneco announced that its Board of Directors had
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 alternatives analysis,
on January 26, 1999, Tenneco announced that it had reached an agreement to
contribute the containerboard assets of its Paperboard Packaging business to a
new joint venture with an affiliate of Madison Dearborn Partners, Inc. Then, on
April 29, 1999, Tenneco announced that its Board of Directors had approved the
separation of the automotive and specialty packaging businesses into two
separate, independent companies.
The contribution of the containerboard assets to the joint venture was
completed on April 12, 1999. Tenneco received cash and debt assumption totaling
approximately $2 billion and a 45 percent interest in the joint venture valued
at approximately $200 million. These assets represent substantially all of the
assets of the Paperboard Packaging segment and include four mills, 67 corrugated
products plants, and an ownership or controlling interest in approximately
950,000 acres of timberland. Paperboard Packaging's folding carton business was
not included in the transaction. Prior to the transaction, Tenneco Packaging
Inc. ("TPI") borrowed approximately $1.8 billion and used approximately $1.2
billion to acquire assets used by the containerboard business pursuant to
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 for debt reduction.
TPI 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 common equity 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. Tenneco will account for its remaining
interest in the containerboard business on the equity method of accounting.
Tenneco's carrying amount of the containerboard assets to be contributed to the
joint venture was approximately $1.1 billion at March 31, 1999.
On April 20, 1999, Tenneco announced that it had reached an agreement to
sell its folding carton business to Caraustar Industries. This transaction is
expected to close in the second quarter of 1999.
The separation of the automotive and packaging businesses will be completed
by the distribution of the common stock of Tenneco Packaging, which will be
composed of the Specialty Packaging segment and the 45 percent common equity
interest in the containerboard joint venture, to the holders of Tenneco common
stock. Upon the completion of the distribution of Tenneco Packaging, current
owners of Tenneco common stock will own common equity securities of Tenneco
Packaging and of Tenneco, which will then own the assets and liabilities of
Tenneco's automotive business. Tenneco is currently analyzing the alternatives
regarding its shared administrative services operations as well as other details
regarding the structure of the new companies.
7
<PAGE> 9
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Prior to the distribution of Tenneco Packaging, Tenneco intends to realign
its existing debt. As part of the debt realignment, debt in the new Packaging
company may be offered in exchange for certain issues of Tenneco debt. Tenneco
will initiate tender offers for Tenneco debt for which an offer of exchange has
not been made by the new Packaging company. While the details of the debt
realignment continue to be developed, Tenneco currently expects that, subject to
discussions with debt rating agencies, the debt of the new Packaging company
will be rated investment grade and the debt of the automotive company will be
rated non-investment grade.
Tenneco has requested a favorable ruling from the Internal Revenue Service
on the tax-free nature of the spin-off. The distribution of the Packaging
company to Tenneco shareowners is subject to certain conditions, including a
favorable determination that the distribution will be tax-free for federal
income tax purposes and the successful completion of the realignment of
Tenneco's debt.
(3) 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. The Company recorded a
pre-tax charge of $100 million, $64 million after-tax or $.38 per diluted common
share. Of the pre-tax charge, for operational restructuring actions, $36 million
related to the consolidation of the manufacturing and distribution operations of
Automotive's North American aftermarket business and $10 million each was
recorded in the Specialty Packaging and Paperboard Packaging businesses. The
staff and related cost reduction plan, which covers employees in both the
operating units and at corporate, is expected to cost $44 million.
The Automotive aftermarket restructuring involves closing two plant
locations and five distribution centers, with the elimination of 302 positions
at those locations. The Paperboard Packaging restructuring plan involves closing
four box plants and the elimination of 78 positions at those plants. The
Specialty Packaging restructuring plan involves the elimination of production
lines at two plants and the closure of one plant. Additionally, Specialty
Packaging will exit four joint ventures. These actions involve the elimination
of 104 positions. The staff and related cost reduction plan involves the
elimination of 834 administrative positions in Tenneco's three business units
and its corporate operations.
The fixed assets at the locations to be closed and for the production lines
to be eliminated, as well as the joint venture investments, were written down to
their estimated fair value. No significant cash proceeds are expected to be
received from the ultimate disposal of these assets.
As of March 31, 1999, approximately 930 employees have been terminated
pursuant to the restructuring plan. The restructuring is 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. The Paperboard Packaging business closed three box plants
and the Specialty Packaging business has closed one plant.
In the first quarter of 1999, in connection with the sale of the
containerboard assets, Tenneco adopted 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. The charge was
recorded in Tenneco's "Other" segment in the amount of $29 million pre-tax, $17
million after-tax or $.10 per diluted common share. Assets were written down to
net realizable value. Tenneco collected approximately $30 million in the second
quarter of 1999 related to the sale of these assets.
8
<PAGE> 10
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
1ST QUARTER 1999
-----------------------------------
DECEMBER 31, 1998 CHARGED BALANCE AT
RESTRUCTURING RESTRUCTURING CASH TO ASSET MARCH 31,
CHARGE BALANCE CHARGE PAYMENTS ACCOUNTS 1999
----------------- ------------- -------- -------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Severance............................. $34 $16 $10 $-- $40
Asset impairments..................... -- 13 -- 13 --
Facility exit costs................... 7 -- 2 -- 5
--- --- --- --- ---
$41 $29 $12 $13 $45
=== === === === ===
</TABLE>
(4) 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.
(5) 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.
(6) 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.
(7) 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 treatment. This
statement cannot be applied retroactively and is effective for all fiscal years
beginning after June 15, 1999. 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 (loss) before cumulative effect of change
in accounting principle by $2 million (net of a $1 million tax benefit) or
9
<PAGE> 11
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
$.01 per diluted common share for the three months ended March 31, 1999. If the
new accounting method had been applied retroactively, net income for the three
months ended March 31, 1998, would have been lower by $7 million (net of a $4
million tax benefit) or $.04 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 a
decrease in net income for the three months ended March 31, 1999. The change in
accounting principle increased income before cumulative effect of change in
accounting principle 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, net income 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.
(8) 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 (Loss) Per Share--
Income (loss) from continuing operations..... $ (150) $ 75
=========== ===========
Average shares of common stock outstanding... 166,743,506 169,542,371
=========== ===========
Earnings (Loss) from continuing operations
per average share of common stock.......... $ (.90) $ .44
=========== ===========
Diluted Earnings (Loss) Per Share--
Income (loss) from continuing operations..... $ (150) $ 75
=========== ===========
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 (loss) from continuing operations
per average share of common stock.......... $ (.90) $ .44
=========== ===========
</TABLE>
10
<PAGE> 12
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(9) Tenneco is a global manufacturer with the following major operating
segments:
Automotive -- Manufacture and sale of exhaust and ride control systems
for both the original equipment and replacement markets.
Specialty Packaging -- Manufacture and sale of specialty and
protective packaging products for consumer, institutional, and industrial
markets.
Paperboard Packaging -- Manufacture and sale of packaging materials,
cartons, and containers for industrial markets. See Note 2 for information
regarding the sale of certain assets of the Paperboard Packaging segment.
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 these reportable segments.
Products are transferred between segments on a basis intended to reflect as
nearly as possible the "market value" of the products.
The following table summarizes certain segment information of Tenneco's
businesses:
<TABLE>
<CAPTION>
SEGMENT
-------------------------------------------- RECLASS
SPECIALTY PAPERBOARD &
AUTOMOTIVE PACKAGING PACKAGING OTHER ELIMS CONSOLIDATED
---------- --------- ---------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
(MILLIONS)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
AT MARCH 31, 1999, AND FOR THE THREE
MONTHS THEN ENDED
Revenues from external customers.... $ 789 $ 666 $ 392 $ -- $ -- $1,847
Intersegment revenues............... -- -- 22 -- (22) --
Income before interest, income
taxes, and minority interest...... 57 83 (275) (40) -- (175)
Extraordinary loss.................. -- -- (7) -- -- (7)
Cumulative effect of change in
accounting principle.............. (101) (17) -- (16) -- (134)
Total assets (Note)................. 2,641 3,022 1,440 1,388 (170) 8,321
AT MARCH 31, 1998, AND FOR THE THREE
MONTHS THEN ENDED
Revenues from external customers.... $ 800 $ 630 $ 379 $ -- $ -- $1,809
Intersegment revenues............... -- -- 23 -- (23) --
Income before interest, income
taxes, and minority interest...... 89 74 34 (11) -- 186
Extraordinary loss.................. -- -- -- -- -- --
Cumulative effect of change in
accounting principle.............. -- -- -- -- -- --
Total assets (Note)................. 2,846 3,245 1,432 1,247 (223) 8,547
</TABLE>
- ------------------
Note: The Other segment's total assets includes pension assets retained by
Tenneco related to certain employees of Tenneco's discontinued operations.
The above notes are an integral part of the foregoing financial
statements.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STRATEGIC ALTERNATIVES ANALYSIS
On July 21, 1998, Tenneco announced that its Board of Directors had
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 alternatives analysis,
on January 26, 1999, Tenneco announced that it had reached an agreement to
contribute the containerboard assets of its Paperboard Packaging business to a
new joint venture with an affiliate of Madison Dearborn Partners, Inc. Then, on
April 29, 1999, Tenneco announced that its Board of Directors had approved the
separation of the automotive and specialty packaging businesses into two
separate, independent companies.
The contribution of the containerboard assets to the joint venture was
completed on April 12, 1999. Tenneco received cash and debt assumption totaling
approximately $2 billion and a 45 percent interest in the joint venture valued
at approximately $200 million. These assets represent substantially all of the
assets of the Paperboard Packaging segment and include four mills, 67 corrugated
products plants, and an ownership or controlling interest in approximately
950,000 acres of timberland. Paperboard Packaging's folding carton business was
not included in the transaction. Prior to the transaction, Tenneco Packaging
Inc. ("TPI") borrowed approximately $1.8 billion and used approximately $1.2
billion to acquire assets used by the containerboard business pursuant to
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 for debt reduction.
TPI 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 common equity 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. Tenneco will account for its remaining
interest in the containerboard business on the equity method of accounting.
Tenneco's carrying amount of the containerboard assets to be contributed to the
joint venture was approximately $1.1 billion at March 31, 1999.
On April 20, 1999, Tenneco announced that it had reached an agreement to
sell its folding carton business to Caraustar Industries. This transaction is
expected to close in the second quarter of 1999.
The separation of the automotive and packaging businesses will be completed
by the distribution of the common stock of Tenneco Packaging, which will be
composed of the Specialty Packaging segment and the 45 percent common equity
interest in the containerboard joint venture, to the holders of Tenneco common
stock. Upon the completion of the distribution of Tenneco Packaging, current
owners of Tenneco common stock will own common equity securities of Tenneco
Packaging and of Tenneco, which will then own the assets and liabilities of
Tenneco's automotive business. Tenneco is currently analyzing the alternatives
regarding its shared administrative services operations as well as other details
regarding the structure of the new companies.
Prior to the distribution of Tenneco Packaging, Tenneco intends to realign
its existing debt. As part of the debt realignment, debt in the new Packaging
company may be offered in exchange for certain issues of Tenneco debt. Tenneco
will initiate tender offers for Tenneco debt for which an offer of exchange has
not been made by the new Packaging company. While the details of the debt
realignment continue to be developed, Tenneco currently expects that, subject to
discussions with debt rating agencies, the debt of the new Packaging company
will be rated investment grade and the debt of the automotive company will be
rated non-investment grade.
Tenneco has requested a favorable ruling from the Internal Revenue Service
on the tax-free nature of the spin-off. The distribution of the Packaging
company to Tenneco shareowners is subject to certain conditions, including a
favorable determination that the distribution will be tax-free for federal
income tax purposes and the successful completion of the realignment of
Tenneco's debt.
12
<PAGE> 14
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)%
Specialty Packaging................................. 666 630 6
Paperboard Packaging................................ 414 402 3
Intergroup sales and other.......................... (22) (23) NM
------ ------
$1,847 $1,809 2%
====== ======
</TABLE>
Tenneco 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 revenue increased 8 percent 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 Tenneco 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 by $50 million compared to the
previous year's first 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 customer
incentive programs. 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.
Specialty Packaging experienced a 6 percent increase in revenue over last
year's first quarter. Of the increase, approximately three-fourths was
attributable to acquisitions including Richter Manufacturing, in May 1998. Other
factors driving the revenue increase were an 11 percent increase in foodservice
packaging volume, a 12 percent increase in unit volume of Hefty(R) products, and
a 15 percent increase in protective packaging sales.
Paperboard Packaging revenue increased by $12 million or 3 percent as a 9
percent increase in volume of corrugated product shipments offset a 2 percent
decline in mill volume, and 9 percent and 17 percent declines in linerboard and
medium pricing, respectively.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
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. The Company recorded a
pre-tax charge of $100 million, $64 million after-tax or $.38 per diluted common
share. Of the pre-tax charge, for operational restructuring actions, $36 million
related to the consolidation of the manufacturing and distribution operations of
Automotive's North American aftermarket business and $10 million each was
recorded in the Specialty Packaging and Paperboard Packaging businesses. The
staff and related costs reduction plan, which covers employees in both the
operating units and at corporate, is expected to cost $44 million.
The Automotive aftermarket restructuring involves closing two plant
locations and five distribution centers, with the elimination of 302 positions
at those locations. The Paperboard Packaging restructuring plan involves closing
four box plants and the elimination of 78 positions at those plants. The
Specialty Packaging restructuring plan involves the elimination of production
lines at two plants and the closure of one plant. Additionally, Specialty
Packaging will exit four joint ventures. These actions involve the elimination
of
13
<PAGE> 15
104 positions. The staff and related cost reduction plan involves the
elimination of 834 administrative positions in Tenneco's three business units
and its corporate operations.
The fixed assets at the locations to be closed and for the production lines
to be eliminated, as well as the joint venture investments, were written down to
their estimated fair value. No significant cash proceeds are expected to be
received from the ultimate disposal of these assets.
As of March 31, 1999, approximately 930 employees have been terminated
pursuant to the restructuring plan. The restructuring is 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. The Paperboard Packaging business closed three box plants
and the Specialty Packaging business has closed one plant.
In the first quarter of 1999, in connection with the sale of the
containerboard assets, Tenneco adopted 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. The charge was
recorded in Tenneco's "Other" segment in the amount of $29 million pre-tax, $17
million after-tax or $.10 per diluted common share. Assets were written down to
net realizable value. Tenneco collected approximately $30 million in the second
quarter of 1999 related to the sale of these assets.
Amounts related to the restructuring plan are shown in the following table:
<TABLE>
<CAPTION>
1ST QUARTER 1999
-------------------------------------
DECEMBER 31, 1998 CHARGED BALANCE AT
RESTRUCTURING RESTRUCTURING CASH TO ASSET MARCH 31,
CHARGE BALANCE CHARGE PAYMENTS ACCOUNTS 1999
----------------- ------------- -------- -------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Severance................................ $34 $16 $10 $-- $40
Asset impairments........................ -- 13 -- 13 --
Facility exit costs...................... 7 -- 2 -- 5
--- --- --- --- ---
$41 $29 $12 $13 $45
=== === === === ===
</TABLE>
OPERATING INCOME
As noted in Strategic Alternatives Analysis and Restructuring and Other
Charges above, Tenneco recorded a charge of $293 million in this year's quarter
attributable to a loss on the sale of the Containerboard business. In addition,
Tenneco recorded a $29 million charge for the cost of realigning Tenneco's
headquarters function. Excluding these charges, Tenneco's operating income was,
as follows:
<TABLE>
<CAPTION>
FIRST QUARTER
------------------------
1999 1998 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Automotive............................................. $ 57 $ 89 (36)%
Specialty Packaging.................................... 83 74 12
Paperboard Packaging................................... 18 34 (47)
Other.................................................. (11) (11) --
---- ----
$147 $186 (21)%
==== ====
</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 was down 24 percent from last year's quarter. 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 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 by 53 percent compared to 1998's
first quarter. The reduction in income was attributable to the lower level of
revenue as discussed above.
14
<PAGE> 16
Specialty Packaging's operating income increased by $9 million versus the
prior year quarter due to favorable volume of foodservice packaging, Hefty(R)
products and protective packaging sales as discussed above. The 1998
acquisitions of Richter Manufacturing and Sentinel which were completed in May
and December, respectively, contributed $3 million, which was offset by Year
2000 and systems implementation costs.
Operating income for Paperboard Packaging decreased by $16 million versus
last year's quarter. Favorable corrugated volume contributed $7 million while
the pricing declines which impacted revenues lowered operating income by $25
million. The balance of the variance was attributable to favorable lease expense
due to a lower cost of money, and reduced levels of other overhead charges.
Tenneco's "Other" operating loss for both periods reflects unallocated
corporate overhead and unabsorbed costs at Tenneco's data center and
administrative service center operations.
OUTLOOK
Tenneco Automotive's original equipment book of business has continued to
grow as a result of technology leadership and strong North American and European
vehicle production volumes. The original equipment business may be hampered by
adverse economic conditions in South America leading to reduced vehicle
production. Profitability may be negatively impacted by Tenneco Automotive's
change in accounting for costs of start-up activities, which occurred during the
first quarter of 1999. The impending acquisition of Kinetic Limited, and its
unique anti-roll control technology, will expand Tenneco Automotive's
capabilities to provide modular and systems solutions and should lead to
increased original equipment revenues. Since the beginning of the 1999 model
year, Tenneco Automotive has obtained more than $220 million of incremental
original equipment business.
Tenneco Automotive's aftermarket business anticipates continued softness in
North America and Europe, customer consolidation and private label presence in
Europe, and an unfavorable economy in South America. Focus on its premiere brand
names and introduction of new products should help Tenneco Automotive offset the
impact of the above market conditions. Rationalization of manufacturing and
distribution operations should lower the breakeven point and, combined with
elimination of promotional programs and reduction of excess customer inventory
levels in North America, should lead to improving profitability as the business
enters its prime selling season.
Specialty Packaging's outlook reflects continued participation in high
growth market segments such as foodservice and protective and flexible
packaging. Leading market positions in consumer brand names like Hefty(R),
Baggies(R), OneZip(R), and E-Z Foil(R) combined with continued integration of
strategic acquisitions and roll-out of implementation of customer linked
manufacturing information systems is expected to maintain or expand the margins
in this business.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Interest expense increased by $7 million or 13 percent 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 40 percent
compared to 36 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 Tenneco
Automotive's joint venture.
15
<PAGE> 17
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 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 upon adoption of $102
million (net of a $50 million tax benefit) or $.61 per diluted common share. The
change in accounting principle decreased income (loss) before cumulative effect
of change in accounting principle by $2 million (net of a $1 million tax
benefit) or $.01 per diluted common share for the three months ended March 31,
1999. If the new accounting method had been applied retroactively, net income
for the three months ended March 31, 1998, would have been lower by $7 million
(net of a $4 million tax benefit), or $.04 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 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 treatment. This
statement cannot be applied retroactively and is effective for all fiscal years
beginning after June 15, 1999. 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 the fourth quarter of 1998, Tenneco adopted the provisions of SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." As a
result, Tenneco began reporting Automotive, Specialty Packaging and Paperboard
Packaging segments in its financial statements. Segment data for all prior
periods has been restated to reflect the new segment reporting requirements.
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 a
decrease in net income for the three months ended March 31, 1999. The change in
accounting method increased income (loss) before cumulative effect of change in
accounting principle 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, net income 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.
16
<PAGE> 18
EARNINGS PER SHARE
The loss from continuing operations was $.90 per share on a diluted basis
for the first quarter of 1999, compared to income from continuing operations of
$.44 per 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.) The current year's quarter also included a $.04 per share
extraordinary loss on early retirement of debt in connection with the sale of
the containerboard assets, and $.80 per share of charges related to the
cumulative effect of change in accounting principle noted above.
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......... $1,263 $1,071 18%
Long-term debt................................. 2,330 2,360 (1)
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 $11 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 certain lease obligations 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) (106)
Financing activities...................................... 132 128
</TABLE>
17
<PAGE> 19
OPERATING ACTIVITIES
Cash used by operating activities was $17 million greater in the first
quarter of 1999 than in the comparable quarter of 1998. Income from continuing
operations adjusted for gains and losses on the sale of businesses and assets
and the change in deferred taxes was $54 million lower than in last year's
quarter. Components of working capital used $34 million less cash in the current
year's quarter, primarily as a result of favorable accounts payable activity
offset in part by higher receivables due to higher revenue levels in Specialty
Packaging and Paperboard Packaging.
INVESTING ACTIVITIES
Cash used by investing activities was $29 million lower in 1999's first
quarter compared to 1998's first quarter. Lower capital expenditures in all
segments contributed $18 million to the favorable variance. Net proceeds from
sale of assets generated an additional $7 million of the variance. The remainder
of the improvement was attributable to lower investment in Specialty Packaging's
foreign operations.
FINANCING ACTIVITIES
Financing activities generated $4 million more cash flow in 1999's first
quarter than in 1998 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. 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.
18
<PAGE> 20
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.
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.
19
<PAGE> 21
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The exhibits filed herewith are listed in the exhibit index which
follows the signature page and immediately precedes the exhibits filed.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 1999.
20
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TENNECO INC.
By: /s/ ROBERT T. BLAKELY
------------------------------------
Robert T. Blakely
Executive Vice President and
Chief Financial Officer
Date: May 17, 1999
21
<PAGE> 23
EXHIBITS
The following exhibits are filed with Tenneco Inc.'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, or incorporated therein by
reference (exhibits designated by an asterisk are filed with the Report; all
other exhibits are incorporated by reference):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <C> <S>
2 -- None.
3.1(a) -- Restated Certificate of Incorporation of Tenneco Inc. dated
December 11, 1996 (incorporated herein by reference from
Exhibit 3.1(a) of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1997, File No. 1-12387).
3.1(b) -- Certificate of Amendment, dated December 11, 1996
(incorporated herein by reference from Exhibit 3.1(c) of
Tenneco Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 1-12387).
3.1(c) -- Certificate of Ownership and Merger, dated July 8, 1997
(incorporated herein by reference from Exhibit 3.1(d) of
Tenneco Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 1-12387).
3.1(d) -- Certificate of Designation of Series B Junior Participating
Preferred Stock dated September 9, 1998 (incorporated herein
by reference from Exhibit 3.1(d) of Tenneco Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998, File No. 1-12387).
3.1(e) -- Certificate of Elimination of the Series A Participating
Junior Preferred Stock of Tenneco Inc. dated September 11,
1998 (incorporated herein by reference from Exhibit 3.1(e)
of Tenneco Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, File No. 1-12387).
3.2 -- Amended By-laws of Tenneco Inc. (incorporated herein by
reference from Exhibit 3.2 of Tenneco Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1998, File No.
1-12387).
4.1 -- Form of Specimen Stock Certificate of Tenneco Inc. Common
Stock (incorporated herein by reference from Exhibit 4.1 of
Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, File No. 1-12387).
4.2 -- Qualified Offer Plan Rights Agreement dated as of September
8, 1998, by and between Tenneco Inc. and First Chicago Trust
Company of New York, as Rights Agent (incorporated herein by
reference from Exhibit 4.1 of Tenneco Inc.'s Current Report
on Form 8-K dated September 24, 1998, File No. 1-12387).
4.3(a) -- Indenture, dated as of November 1, 1996, between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.1 of Tenneco Inc.'s Form S-4, Registration No.
333-14003).
4.3(b) -- First Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.3(b) of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-12387).
4.3(c) -- Second Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.3(c) of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-12387).
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <C> <S>
4.3(d) -- Third Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.3(d) of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-12387).
4.3(e) -- Fourth Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.3(e) of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-12387).
4.3(f) -- Fifth Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.3(f) of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-12387).
4.3(g) -- Sixth Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.3(g) of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-12387).
4.3(h) -- Seventh Supplemental Indenture dated as of December 11, 1996
to Indenture dated as of November 1, 1996 between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.3(h) of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-12387).
4.3(i) -- Eighth Supplemental Indenture, dated as of April 28, 1997,
to Indenture, dated as of November 1, 1996 between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.1 of Tenneco Inc.'s Current Report on Form 8-K
dated April 23, 1997, File No. 1-12387).
4.3(j) -- Ninth Supplemental Indenture, dated as of April 28, 1997, to
Indenture, dated as of November 1, 1996, between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.2 of Tenneco Inc.'s Current Report on Form 8-K
dated April 23, 1997, File No. 1-12387).
4.3(k) -- Tenth Supplemental Indenture, dated as of July 16, 1997, to
Indenture, dated as of November 1, 1996, between Tenneco
Inc. (formerly New Tenneco Inc.) and The Chase Manhattan
Bank, as Trustee (incorporated herein by reference from
Exhibit 4.1 of Tenneco Inc.'s Current Report on Form 8-K
dated June 11, 1997, File No. 1-12387).
4.3(l) -- Registration Rights Agreement dated as of August 28, 1998 by
and between Tenneco Inc. and Dana G. Mead, Theodore R.
Tetzlaff, Paul T. Stecko and Robert T. Blakely, not
individually but solely as trustees under that certain
Tenneco Inc. Rabbi Trust dated as of August 28, 1998
(incorporated herein by reference from Exhibit 4.3(l) of
Tenneco Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998, File No. 1-12387).
9 -- None.
10.1 -- Distribution Agreement, dated November 1, 1996, by and among
El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.),
Tenneco Inc. (formerly New Tenneco Inc.), and Newport News
Shipbuilding Inc. (incorporated herein by reference from
Exhibit 2 of Tenneco Inc.'s Form 10, File No. 1-12387).
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <C> <S>
10.2 -- Amendment No. 1 to Distribution Agreement, dated as of
December 11, 1996, by and among El Paso Tennessee Pipeline
Co. (formerly Tenneco Inc.), Tenneco Inc. (formerly New
Tenneco Inc.), and Newport News Shipbuilding Inc.
(incorporated herein by reference from Exhibit 10.2 of
Tenneco Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12387).
10.3 -- Debt and Cash Allocation Agreement, dated December 11, 1996,
by and among El Paso Tennessee Pipeline Co. (formerly
Tenneco Inc.), Tenneco Inc. (formerly New Tenneco Inc.), and
Newport News Shipbuilding Inc. (incorporated herein by
reference from Exhibit 10.3 of Tenneco Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1996, File No.
1-12387).
10.4 -- Benefits Agreement, dated December 11, 1996, by and among El
Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), Tenneco
Inc. (formerly New Tenneco Inc.), and Newport News
Shipbuilding Inc. (incorporated herein by reference from
Exhibit 10.4 of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-12387).
10.5 -- Insurance Agreement, dated December 11, 1996, by and among
El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.),
Tenneco Inc. (formerly New Tenneco Inc.), and Newport News
Shipbuilding Inc. (incorporated herein by reference from
Exhibit 10.5 of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-12387).
10.6 -- Tax Sharing Agreement, dated December 11, 1996, by and among
El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.),
Newport News Shipbuilding Inc., Tenneco Inc. (formerly New
Tenneco Inc.), and El Paso Natural Gas Company (incorporated
herein by reference from Exhibit 10.6 of Tenneco Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1996, File No. 1-12387).
10.7 -- First Amendment to Tax Sharing Agreement, dated as of
December 11, 1996 among El Paso Tennessee Pipeline Co.
(formerly Tenneco Inc.), Tenneco Inc. (formerly New Tenneco
Inc.) and Newport News Shipbuilding Inc. (incorporated
herein by reference from Exhibit 10.7 of Tenneco Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1996, File No. 1-12387).
10.8 -- Transition Services Agreement, dated June 19, 1996, by and
among, Tenneco Business Services, Inc., El Paso Tennessee
Pipeline Co. (formerly Tenneco Inc.) and El Paso Natural Gas
Company (incorporated herein by reference from Exhibit 10.8
of Tenneco Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996, File No. 1-12387).
10.9 -- Trademark Transition License Agreement, dated December 11,
1996, by and between Newport News Shipbuilding Inc. and
Tenneco Inc. (formerly New Tenneco Inc.) (incorporated
herein by reference from Exhibit 10.9 of Tenneco Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1996, File No. 1-12387).
10.10 -- Trademark Transition License Agreement, dated December 11,
1996, by and between Tenneco Inc. (formerly New Tenneco
Inc.) and El Paso Tennessee Pipeline Co. (formerly Tenneco
Inc.) (incorporated herein by reference from Exhibit 10.10
of Tenneco Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996, File No. 1-12387).
10.11 -- 1997 Tenneco Inc. Board of Directors Deferred Compensation
Plan (incorporated herein by reference from Exhibit 10.11 of
Tenneco Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 1-12387).
10.12 -- Executive Incentive Compensation Plan (incorporated herein
by reference from Exhibit 10.12 of Tenneco Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997,
File No. 1-12387).
10.13 -- Tenneco Inc. Deferred Compensation Plan (incorporated herein
by reference from Exhibit 10.13 of Tenneco Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997,
File No. 1-12387).
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <C> <S>
10.14 -- Amended and Restated Tenneco Inc. Supplemental Executive
Retirement Plan (incorporated herein by reference from
Exhibit 10.14 of Tenneco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998, File No. 1-12387).
10.15 -- Amended and Restated Tenneco Inc. Change in Control
Severance Benefit Plan for Key Executives (incorporated
herein by reference from Exhibit 10.16 of Tenneco's Form 10,
File No. 1-12387).
10.16 -- Amended and Restated Tenneco Benefits Protection Trust
(incorporated herein by reference from Exhibit 10.18 of
Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter
ended 3/31/98, File No. 1-12387).
10.17 -- Employment Agreement, dated March 12, 1992 between Dana G.
Mead and Tenneco Inc. (incorporated herein by reference from
Exhibit 10.19 of Tenneco's Form 10, File No. 1-12387).
10.18 -- Employment Agreement, dated December 3, 1993 between Paul T.
Stecko and Tenneco Packaging Inc. (incorporated herein by
reference from Exhibit 10.20 of Tenneco's Form 10, File No.
1-12387).
10.19 -- Agreement, dated September 9, 1992 between Theodore R.
Tetzlaff and Tenneco Inc. (incorporated herein by reference
from Exhibit 10.21 of Tenneco's Form 10, File No. 1-12387).
10.20 -- 1996, Tenneco Inc. Stock Ownership Plan, as amended
(incorporated herein by reference from Exhibit 10.11 of
Tenneco Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 1-12387).
10.21 -- Professional Services Agreement, dated August 22, 1996, by
and between Tenneco Business Services Inc. and Newport News
Shipbuilding Inc. (incorporated herein by reference from
Exhibit 10.28 of Tenneco Inc.'s Form 10, File No. 1-12387).
10.22 -- Tenneco Inc. Rabbi Trust (incorporated herein by reference
from Exhibit 10.22 of Tenneco Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, File No.
1-12387).
10.23 -- Letter Agreement dated September 24, 1998 between Robert T.
Blakely and Tenneco Inc. (incorporated herein by reference
from Exhibit 10.23 of Tenneco Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, File No.
1-12387).
10.24 -- Letter Agreement dated September 24, 1998 between John J.
Castellani and Tenneco Inc. (incorporated herein by
reference from Exhibit 10.28 of Tenneco Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1998, File No.
1-12387).
10.25 -- Tenneco Benefits Protection Trust Appointment of Successor
Trustee dated September 28, 1998 (incorporated herein by
reference from Exhibit 10.24 of Tenneco Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998, File No. 1-12387).
10.26 -- Contribution Agreement, dated as of January 25, 1999, among
Tenneco Packaging Inc., PCA Holdings LLC, and Packaging
Corporation of America (incorporated herein by reference
from Exhibit 10.30 of Tenneco Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998, File No.
1-12387).
10.27 -- Letter Agreement (the "Letter Agreement"), dated as of April
12, 1999, among Tenneco Packaging Inc., PCA Holdings LLC and
Packaging Corporation of America, amending the Contribution
Agreement (incorporated herein by reference from Exhibit
10.31 of Tenneco Inc.'s Current Report on Form 8-K dated
April 12, 1999, File No. 1-12387).
10.28 -- Stockholders Agreement, as amended, dated as of April 12,
1999, among Tenneco Packaging Inc., PCA Holdings LLC and
Packaging Corporation of America (incorporated herein by
reference from Exhibit 10.32 of Tenneco Inc.'s Current
Report on Form 8-K dated April 12, 1999, File No. 1-12387).
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <C> <S>
10.29 -- Registration Rights Agreement, as amended, dated as of April
12, 1999, among Tenneco Packaging Inc., PCA Holdings LLC and
Packaging Corporation of America (incorporated herein by
reference from Exhibit 10.33 of Tenneco Inc.'s Current
Report on Form 8-K dated April 12, 1999, File No. 1-12387).
*10.30 -- Agreement, dated as of April 12, 1999, among Tenneco Inc.,
Tenneco Management Company, Tenneco Packaging Inc., and Paul
T. Stecko.
11 -- None.
*12 -- Computation of Ratio of Earnings to Fixed Charges.
*18 -- Letter re Change in Accounting Principles from Arthur
Andersen LLP, dated May 11, 1999.
22 -- None.
23 -- None.
24 -- None.
*27 -- Financial Data Schedule.
28 -- None.
99 -- None.
</TABLE>
- -------------------------
Note: Exhibits designated by an asterisk are filed with this Report; all others
are incorporated by reference.
26
<PAGE> 28
[Tenneco Logo]
<PAGE> 1
Exhibit 10.30
[TENNECO LOGO]
AGREEMENT
Tenneco Inc., Tenneco Management Company and Tenneco Packaging Inc.
(collectively, the "Company") on the one hand and Paul T. Stecko (the
"Employee") on the other hereby agree to the following terms and conditions
regarding Employee's separation from service with the Company to assume the
position of Chairman of the Board and Chief Executive Officer of Packaging
Corporation of America ("PCA"):
1. Employee's employment with Company shall terminate of the date of the
contribution of the Containerboard Business to PCA. Effective upon such
termination, Employee hereby resigns any and all positions which he held
previously with the Company and its affiliates, including without limitation
employee benefit plans and trusts sponsored by the Company, except his position
as a director of Tenneco Inc.
2. The amounts specified below shall be deemed to be in full satisfaction of
any obligation which the Company has or may have to Employee under the letter
agreement between the Employee and the Company dated December 3, 1993 and any
other rights which the Employee has as an employee of the Company, except: (i)
the Employee's accrued benefits under plans maintained by the Company which are
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended; and (ii) the Employee's account in the Tenneco Inc. Deferred
Compensation Plan which will be transferred to an equivalent plan maintained by
PCA.
3. The amount specified in Section 4c is in full and final payment of all
amounts due Employee under the Tenneco Inc. Supplemental Executive Retirement
Plan (the "SERP") and the Stecko Special Appendix thereto, and Employee shall
not accrue any additional benefits thereunder with respect to his service with
PCA.
4. Company shall pay or cause to be paid to Employee, the following amounts:
a. a severance benefit equal to three times his current annual base salary;
and three times target bonus ($1.5 million).
b. a pro rata target bonus for 1999 determined by multiplying $500,000 by a
fraction the numerator of which is the number of days which have elapsed from
January 1, 1999 through the date of termination and the denominator of which is
365;
c. a lump sum benefit from the SERP determined under the revised Stecko
Special Appendix attached hereto as Exhibit A, and
5. All of Employee's Tenneco restricted stock will be vested and all of his
performance shares will be deemed earned.
<PAGE> 2
6. Employee hereby releases and covenants not to sue Tenneco or any of its
affiliates with respect to his employment or the termination thereof.
SIGNATURES
Sincerely,
/s/ Stephen J. Smith
------------------------------------
Stephen J. Smith
Vice President, Human Resources
APPROVED BY:
Date: 4/8/99 /s/ Dana G. Mead
-------------------------- ------------------------------------
Dana G. Mead
Chairman and Chief Executive Officer
AGREED AND ACCEPTED:
/s/ Paul T. Stecko Date: 4/12/99
- ------------------------------- -------------------------------
Paul T. Stecko
-2-
<PAGE> 3
STECKO SPECIAL APPENDIX
TO THE
TENNECO INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("PLAN")
This Special Appendix sets forth certain special provisions of the Plan
with respect to the benefits of Paul T. Stecko ("Stecko").
The aggregate monthly pension benefits to which Stecko shall be entitled
under the TRP, the Plan and this Special Appendix shall be no less than the
amount to which Stecko would have been entitled if Stecko's coverage under
International Paper defined benefit plans in effect as of December 3, 1993 had
continued from his date of hire with International Paper through October 21,
2002; provided, that (i) assumed final three-year average pay shall be
substituted for final five-year average pay; (ii) the Social Security offset
shall be disregarded; (iii) he shall be deemed to have attained age 55 except
that he shall be deemed to have attained age 58 for purposes of determining
early retirement reduction factors; and (iv) adjustment for TRP benefits shall
be determined by subtracting TRP normal retirement benefit from the
International Paper normal retirement benefit prior to applying early
retirement and other factors.
If Stecko dies before commencing to receive the benefits described
hereunder, his beneficiary will receive a death benefit which is the present
value of the benefits which he has accrued hereunder as of the date of his
death.
<PAGE> 1
EXHIBIT 12
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.................... $(150) $ 75
Add:
Interest............................................... 63 56
Portion of rentals representative of interest factor... 14 13
Preferred stock dividend requirements of majority-owned
subsidiaries.......................................... 6 7
Income tax expense (benefit) and other taxes on
income................................................ (93) 47
Amortization of interest capitalized................... -- 1
Undistributed (earnings) losses of affiliated companies
in which less than a 50% voting interest is owned..... -- --
----- ----
Earnings (loss) as defined........................ $(160) $199
===== ====
Interest.................................................... $ 63 $ 56
Interest capitalized........................................ -- --
Portion of rentals representative of interest factor........ 14 13
Preferred stock dividend requirements of majority-owned
subsidiaries on a pre-tax basis........................... 11 11
----- ----
Fixed charges as defined.......................... $ 88 $ 80
===== ====
Ratio of earnings to fixed charges.......................... NM 2.49
===== ====
</TABLE>
NM: Not Meaningful
For the three months ended March 31, 1999, earnings were inadequate to
cover fixed charges by $248 million.
<PAGE> 1
LOGO
Exhibit 18
-----------------------
Arthur Andersen LLP
-----------------------
May 11, 1999 Suite 1300
711 Louisiana Street
Houston TX 77002-2786
713 237 2323
Mr. Robert T. Blakely
Executive Vice President and
Chief Financial Officer
Tenneco Inc.
1275 King Street
Greenwich, Connecticut 06831
Dear Mr. Blakely:
Re: Form 10-Q Report for the quarter ended March 31, 1999
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
We have been informed that, 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 two separate, independent
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 automotive aftermarket industry competitors.
A coordinated set of financial and reporting standards for determining the
preferability of accounting principles among acceptable alternative principles
has not been established by the accounting profession. Thus, we cannot make an
objective determination of whether the change in accounting described in the
preceding paragraph is to a preferable method. However, we have reviewed the
pertinent factors, including those related to financial reporting, in this
particular case on a subjective basis, and our opinion stated below is based on
our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgement and business planning of your management.
<PAGE> 2
LOGO
Mr. Robert T. Blakely
May 11, 1999
Page 2
We have not audited the application of this change to the financial statements
of any period subsequent to December 31, 1998. Further, we have not examined and
do not express any opinion with respect to your financial statements for the
three months ended March 31, 1999.
Very truly yours,
ARTHUR ANDERSEN LLP
<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> 38
<SECURITIES> 0
<RECEIVABLES> 838
<ALLOWANCES> 0
<INVENTORY> 1,029
<CURRENT-ASSETS> 2,217
<PP&E> 5,718
<DEPRECIATION> 2,327
<TOTAL-ASSETS> 8,321
<CURRENT-LIABILITIES> 2,611
<BONDS> 2,330
0
0
<COMMON> 2
<OTHER-SE> 2,713
<TOTAL-LIABILITY-AND-EQUITY> 8,321
<SALES> 1,847
<TOTAL-REVENUES> 1,847
<CGS> 1,345
<TOTAL-COSTS> 1,345
<OTHER-EXPENSES> 370
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> (238)
<INCOME-TAX> (94)
<INCOME-CONTINUING> (150)
<DISCONTINUED> 0
<EXTRAORDINARY> (7)
<CHANGES> (134)
<NET-INCOME> (291)
<EPS-PRIMARY> (1.74)
<EPS-DILUTED> (1.74)
</TABLE>
