TENNECO AUTOMOTIVE INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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, 2005

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12387

TENNECO AUTOMOTIVE INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0515284
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)

500 NORTH FIELD DRIVE, LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-5000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.

Common Stock, par value $.01 per share: 43,604,444 shares as of April 29,
2005.

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TABLE OF CONTENTS

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* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q contains forward-looking statements
regarding, among other things, our prospects and business strategies. The words
"may," "will," "believes," "should," "could," "plans," "expects," "anticipate,"
"intends," "estimates," and similar expressions (and variations thereof),
identify these forward-looking statements. Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, these expectations may not prove to be correct. Because
these forward-looking statements are also subject to risks and uncertainties,
actual results may differ materially from the expectations expressed in the
forward-looking statements. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-looking
statements include:

- changes in automotive manufacturers' production rates and their actual
and forecasted requirements for our products, including the overall
highly competitive nature of the automotive parts industry, and our
resultant inability to realize the sales represented by our awarded book
of business which is based on anticipated pricing for the applicable
program over its life, and is subject to increases or decreases due to
changes in customer requirements, customer and consumer preferences, and
the number of vehicles actually produced by customers;

- increases in the costs of raw materials, including our ability to
successfully reduce the impact of any such cost increases through
materials substitutions, cost reduction initiatives and other methods;

2

- the cyclical nature of the global vehicular industry, including the
performance of the global aftermarket sector, and changes in consumer
demand and prices, including longer product lives of automobile parts and
the cyclicality of automotive production and sales of automobiles which
include our products, and the potential negative impact on our revenues
and margins from such products;

- our continued success in cost reduction and cash management programs and
our ability to execute restructuring and other cost reduction plans and
to realize anticipated benefits from these plans;

- general economic, business and market conditions;

- the impact of consolidation among automotive parts suppliers and
customers on our ability to compete;

- operating hazards associated with our business;

- changes in distribution channels or competitive conditions in the markets
and countries where we operate, including the impact of changes in
distribution channels for aftermarket products on our ability to increase
or maintain aftermarket sales;

- the cost and outcome of existing and any future legal proceedings, and
compliance with changes in regulations, including environmental
regulations;

- labor disruptions at our facilities or at any of our significant
customers or suppliers;

- economic, exchange rate and political conditions in the foreign countries
where we operate or sell our products;

- customer acceptance of new products;

- new technologies that reduce the demand for certain of our products or
otherwise render them obsolete;

- our ability to realize our business strategy of improving operating
performance;

- capital availability or costs, including changes in interest rates,
market perceptions of the industries in which we operate or ratings of
securities;

- changes by the Financial Accounting Standards Board or the Securities and
Exchange Commission of authoritative generally accepted accounting
principles or policies;

- the impact of changes in and compliance with laws and regulations,
including environmental laws and regulations, and environmental
liabilities in excess of the amount reserved;

- terrorism, acts of war and similar events, and their resultant impact on
economic and political conditions; and

- the occurrence or non-occurrence of other circumstances beyond our
control.

3

PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TENNECO AUTOMOTIVE INC.

We have reviewed the accompanying consolidated balance sheet of Tenneco
Automotive Inc. and consolidated subsidiaries as of March 31, 2005, and the
related consolidated statements of income (loss), comprehensive loss, cash flows
and changes in shareholders' equity for the three-month periods ended March 31,
2005 and 2004. These interim financial statements are the responsibility of
Tenneco Automotive Inc.'s management.

We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to such consolidated interim financial statements for them to be
in conformity with accounting principles generally accepted in the United States
of America.

We previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Tenneco Automotive Inc. and consolidated subsidiaries as of December 31, 2004,
and the related consolidated statements of income (loss), cash flows, changes in
shareholders' equity and comprehensive income (loss) for the year then ended
prior to the restatement for the change in method of accounting for certain
inventory from the last-in, first-out ("LIFO") method to the lower of cost,
determined on a first-in, first-out ("FIFO") basis, or market method, (not
presented herein); and in our report dated March 8, 2005, we expressed an
unqualified opinion on those consolidated financial statements (such report
includes an explanatory paragraph relating to a change in accounting for
goodwill and intangible assets upon the adoption of Statement of Financial
Accounting Standards No. 142). We also audited the adjustments described in Note
3 that were applied to restate the December 31, 2004 consolidated balance sheet
of Tenneco Automotive Inc. and consolidated subsidiaries (not presented herein).
In our opinion, such adjustments are appropriate and have been properly applied
and the information set forth in the accompanying consolidated balance sheet as
of December 31, 2004 is fairly stated, in all material respects, in relation to
the restated consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP

Chicago, Illinois
May 10, 2005

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF INCOME (LOSS)
(UNAUDITED)

The accompanying notes to financial statements are an integral part of these
statements of income (loss).
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

BALANCE SHEETS
(UNAUDITED)

The accompanying notes to financial statements are an integral part of these
balance sheets.
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CASH FLOWS
(UNAUDITED)

NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.

The accompanying notes to financial statements are an integral part of these
statements of cash flows.
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)

The accompanying notes to financial statements are an integral part
of these statements of changes in shareholders' equity.
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)

The accompanying notes to financial statements are an integral part
of these statements of comprehensive loss.
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) As you read the accompanying financial statements and Management's
Discussion and Analysis you should also read our Annual Report on Form 10-K for
the year ended December 31, 2004 which we plan to amend to restate prior years'
financial statements in connection with our accounting change described in Note
3 below.

In our opinion, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly Tenneco Automotive Inc.'s financial position, results of operations, cash
flows, changes in shareholders' equity, and comprehensive loss for the periods
indicated. We have prepared the unaudited interim consolidated financial
statements pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America ("GAAP") for annual financial statements.

Our consolidated financial statements include all majority-owned
subsidiaries. We carry investments in 20 percent to 50 percent owned companies
at cost plus equity in undistributed earnings and cumulative translation
adjustments from the date of acquisition since we have the ability to exert
significant influence over operating and financial policies.

We have reclassified prior year's financial statements where appropriate to
conform to 2005 presentations.

(2) In February 2005, we announced the acquisition of substantially all the
exhaust assets of Gabilan Manufacturing, Inc., a privately held company that has
developed and manufactured motorcycle exhaust systems for Harley-Davidson
motorcycles since 1978. The company also produces aftermarket muffler kits for
Harley-Davidson. We purchased Gabilan's assets for $11 million in cash and
expect the acquisition to be accretive within the first year. Gabilan generated
approximately $38 million in revenue in 2004.

(3) Prior to the first quarter of 2005, inventories in the U.S. based
operations (17 percent and 19 percent of our total consolidated inventories at
December 31, 2004 and 2003, respectively) were valued using the last-in,
first-out ("LIFO") method and all other inventories were valued using the
first-in, first-out ("FIFO") or average cost methods at the lower of cost or
market value. Effective January 1, 2005, we changed our accounting method for
valuing inventory for our U.S. based operations from the LIFO method to the FIFO
method. As a result, all U.S. inventories are now stated at the lower of cost,
determined on a FIFO basis, or market. We elected to change to the FIFO method
as we believe it is preferable for the following reasons: 1) the change will
provide better matching of revenue and expenditures and 2) the change will
achieve greater consistency in valuing our global inventory. Additionally, we
initially adopted LIFO as it provided certain U.S. tax benefits which we no
longer realize due to our U.S. net operating losses (when applied for tax
purposes, tax laws require that LIFO be applied for GAAP as well). As a result
of the change, we also expect to realize administrative efficiencies.

In accordance with GAAP, the change in inventory accounting has been
applied by adjusting prior year's financial statements. The effect of the change
in accounting principle as of December 31, 2004, was to increase inventories by
$14 million, reduce deferred tax assets by $5 million, and increase retained
earnings by $9 million. Previously reported results of operations presented
herein have not been restated because there was no impact on consolidated net
income (loss) for the three-month periods ended March 31, 2005 and 2004.

(4) In April 2004, we entered into three separate fixed-to-floating
interest rate swaps with two separate financial institutions. These agreements
swapped an aggregate of $150 million of fixed interest rate debt at a per annum
rate of 10 1/4 percent to floating interest rate debt at a per annum rate of
LIBOR plus a spread of 5.68 percent. Each agreement requires semi-annual
settlements through July 15, 2013. The LIBOR rate as of December 31, 2004 as
determined under these agreements is 1.86 percent. This rate remained in effect
until January 15, 2005 when it increased to 2.89 percent. Based upon the LIBOR
of 2.89 percent, which was in effect as of January 15, 2005 under these
agreements (and remains in effect until July 15, 2005), these swaps

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

would reduce our 2005 annual interest expense by approximately $2 million. These
swaps qualify as fair value hedges in accordance with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," and as such are recorded on
the balance sheet at market value with an offset to the underlying hedged item,
which is long term debt. As of March 31, 2005, the fair value of the interest
rate swaps was a liability of approximately $5 million, which has been recorded
as a decrease to long-term debt and an increase to other long-term liabilities.

In February 2005 we amended our senior credit facility to reduce by 75
basis points the interest rate on the term loan B facility and the tranche B-1
letter of credit/revolving loan facility. In connection with the amendment, we
voluntarily prepaid $40 million in principal on the term loan B, reducing the
term loan B facility from $396 million to $356 million.

Additional provisions of the amendment to the senior credit facility
agreement were as follows: (i) amend the definition of EBITDA to exclude up to
$60 million in restructuring-related expenses announced and taken after February
2005, (ii) increase permitted investments to $50 million, (iii) exclude expenses
related to the issuance of stock options from the definition of consolidated net
income, (iv) permit us to redeem up to $125 million of senior secured notes
after January 1, 2008 (subject to certain conditions), (v) increase our ability
to add commitments under the revolving credit facility by $25 million, and (vi)
make other minor modifications. We incurred approximately $1 million in fees and
expenses associated with this amendment, which will be capitalized and amortized
over the remaining term of the agreement.

Following the February 2005 voluntary prepayment of $40 million, the term
loan B facility is payable as follows: $74 million due March 31, 2010, and $94
million due each of June 30, September 30 and December 12, 2010. The revolving
credit facility requires that if any amounts are drawn, they be repaid by
December 2008. Prior to that date, funds may be borrowed, repaid and reborrowed
under the revolving credit facility without premium or penalty. Letters of
credit may be issued under the revolving credit facility.

The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by December 2010. We can borrow revolving loans from the tranche B-1
letter of credit/revolving loan facility and use that facility to support
letters of credit. The tranche B-1 letter of credit/revolving loan facility
lenders have deposited funds in an amount equal to the size of the facility with
the administrative agent, who has invested that amount in time deposits. We do
not have an interest in any of the funds on deposit. When we draw revolving
loans under this facility, the loans are funded from the funds on deposit with
the administrative agent. When we make repayments, the repayments are
redeposited with the administrative agent.

Under current accounting rules, the tranche B-1 letter of credit/revolving
loan facility will be reflected as debt on our balance sheet only if we have
outstanding thereunder revolving loans or payments by the facility in respect of
letters of credit. We will not be liable for any losses to or misappropriation
of any (i) return due to the administrative agent's failure to achieve the
return described above or to pay all or any portion of such return to any lender
under such facility or (ii) funds on deposit in such account by such lender
(other than the obligation to repay funds released from such accounts and
provided to us as revolving loans under such facility).

In March 2005, we increased the amount of commitments under our revolving
credit facility from $220 million to $285 million and reduced the amount of
commitments under our tranche B-1 letter of credit/revolving loan facility from
$180 million to $170 million. This reduction of our tranche B-1 letter of
credit/revolving loan facility was required under the terms of the senior credit
facility, as we had increased the amount of our revolving credit facility
commitments by more than $55 million.

In April 2005, we further increased the amount of commitments under our
revolving credit facility from $285 million to $300 million and, as required
under the terms of our senior credit facility, reduced the amount

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

of commitments under our tranche B-1 letter of credit/revolving loan facility
from $170 million to $155 million.

(5) Over the past several years we have adopted plans to restructure
portions of our operations. These plans were approved by the Board of Directors
and were designed to reduce operational and administrative overhead costs
throughout the business. Prior to the change in accounting required for exit or
disposal activities, we recorded charges to income related to these plans for
costs that do not benefit future activities in the period in which the plans
were finalized and approved, while actions necessary to affect these
restructuring plans occurred over future periods in accordance with established
plans.

In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. Project Genesis involved closing eight facilities, improving the
process flow and efficiency through value mapping and plant arrangement at 20
facilities, relocating production among facilities, and centralizing some
functional areas. The total of all these restructuring and other costs recorded
in the fourth quarter of 2001 was $32 million before tax, $31 million after tax,
or $0.81 per diluted common share. We eliminated 974 positions in connection
with Project Genesis. Additionally, we executed this plan more efficiently than
originally anticipated and as a result in the fourth quarter of 2002 reduced our
reserves related to this restructuring activity by $6 million, which was
recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2
million of severance reserve to the asset impairment reserve. This
reclassification became necessary, as actual asset impairments along with the
sale of our closed facilities were different than the original estimates. We
completed the remaining restructuring activities under Project Genesis as of the
end of 2004. Since Project Genesis was announced, we have undertaken a number of
related projects designed to restructure our operations, described below.

In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. This charge was primarily recorded in cost
of sales.

In October of 2003, we announced the closing of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees were
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $3 million in costs related to
this action in 2004. This action is in addition to the plant closings announced
in Project Genesis in the fourth quarter of 2001.

In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of layoffs were at middle and senior management levels. We expect to incur total
charges of approximately $24 to $26 million related to these reductions. As of
March 31, 2005, we have incurred $23 million in severance costs. Of this total,
$7 million was recorded in cost of sales and $16 million was recorded in
selling, general and administrative expense. We anticipate incurring the
remaining costs during the second quarter of 2005. Of the total $23 million in
severance costs incurred to date, $17 million were cash payments with the
remainder accrued in other short-term liabilities.

Including the above costs, we incurred $3 million in restructuring and
restructuring-related costs in the first quarter of 2005. Including the costs
incurred in 2002 through 2004 of $59 million, we have incurred a total of $62
million for activities related to our restructuring actions initiated in prior
periods that could not be accrued as part of the restructuring charges for these
actions.

Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we were allowed to exclude up to $60 million
of cash charges and expenses, before taxes, related to cost reduction
initiatives over the 2002 to 2006 time period from the calculation of the
financial covenant ratios we
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

are required to maintain under our senior credit agreement. In February of 2005,
our senior credit facility was amended to exclude all remaining cash charges and
expenses related to restructuring initiatives started before February of 2005.
As of March 31, 2005, we have excluded $62 million in allowable charges relating
to restructuring initiatives previously started.

Under our amended facility, we are allowed to exclude up to an additional
$60 million of cash charges and expenses, before taxes, related to restructuring
activities initiated after February 2005 from the calculation of the financial
covenant ratios required under our senior credit facility. As of March 31, 2005,
we have no exclusions against the $60 million available under the terms of the
February 2005 amendment to the senior credit facility.

(6) We are subject to a variety of environmental and pollution control laws
and regulations in all jurisdictions in which we operate. We expense or
capitalize, as appropriate, expenditures for ongoing compliance with
environmental regulations that relate to current operations. We expense
expenditures that relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation. We record
liabilities when environmental assessments indicate that remedial efforts are
probable and the costs can be reasonably estimated. Estimates of the liability
are based upon currently available facts, existing technology, and presently
enacted laws and regulations taking into consideration the likely effects of
inflation and other societal and economic factors. We consider all available
evidence including prior experience in remediation of contaminated sites, other
companies' cleanup experiences and data released by the United States
Environmental Protection Agency or other organizations. These estimated
liabilities are subject to revision in future periods based on actual costs or
new information. Where future cash flows are fixed or reliably determinable, we
have discounted the liabilities. All other environmental liabilities are
recorded at their undiscounted amounts. We evaluate recoveries separately from
the liability and, when they are assured, recoveries are recorded and reported
separately from the associated liability in our financial statements.

As of March 31, 2005, we are designated as a potentially responsible party
in one Superfund site. We have estimated our share of the remediation costs for
this site to be less than $1 million in the aggregate. In addition to the
Superfund site, we may have the obligation to remediate current or former
facilities, and we estimate our share of remediation costs at these facilities
to be approximately $10 million. For the Superfund site and the current and
former facilities, we have established reserves that we believe are adequate for
these costs. Although we believe our estimates of remediation costs are
reasonable and are based on the latest available information, the cleanup costs
are estimates and are subject to revision as more information becomes available
about the extent of remediation required. At some sites, we expect that other
parties will contribute to the remediation costs. In addition, at the Superfund
site, the Comprehensive Environmental Response, Compensation and Liability Act
provides that our liability could be joint and several, meaning that we could be
required to pay in excess of our share of remediation costs. Our understanding
of the financial strength of other potentially responsible parties at the
Superfund site, and of other liable parties at our current and former
facilities, has been considered, where appropriate, in our determination of our
estimated liability.

We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund site, or as a liable party at our
current or former facilities, will not be material to our results of operations
or consolidated financial position.

We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, and other product liability related matters), taxes,
employment matters, and commercial or contractual disputes, sometimes related to
acquisitions or divesti-
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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

tures. We vigorously defend ourselves against all of these claims. In future
periods, we could be subjected to cash costs or non-cash charges to earnings if
any of these matters is resolved on unfavorable terms. However, although the
ultimate outcome of any legal matter cannot be predicted with certainty, based
on present information, including our assessment of the merits of the particular
claim, we do not expect that these legal proceedings or claims will have any
material adverse impact on our future consolidated financial position or results
of operations. In addition, we are subject to a number of lawsuits initiated by
a significant number of claimants alleging health problems as a result of
exposure to asbestos. Many of these cases involve significant numbers of
individual claimants. However, only a small percentage of these claimants allege
that they were automobile mechanics who were allegedly exposed to our former
muffler products and a significant number appear to involve workers in other
industries or otherwise do not include sufficient information to determine
whether there is any basis for a claim against us. We believe, based on
scientific and other evidence, it is unlikely that mechanics were exposed to
asbestos by our former muffler products and that, in any event, they would not
be at increased risk of asbestos-related disease based on their work with these
products. Further, many of these cases involve numerous defendants, with the
number of each in some cases exceeding 200 defendants from a variety of
industries. Additionally, the plaintiffs either do not specify any, or specify
the jurisdictional minimum, dollar amount for damages. As major asbestos
manufacturers continue to go out of business, we may experience an increased
number of these claims. We vigorously defend ourselves against these claims as
part of our ordinary course of business. In future periods, we could be subject
to cash costs or non-cash charges to earnings if any of these matters is
resolved unfavorably to us. To date, with respect to claims that have proceeded
sufficiently through the judicial process, we have regularly achieved favorable
resolution in the form of a dismissal of the claim or a judgment in our favor.
Accordingly, we presently believe that these asbestos-related claims will not
have a material adverse impact on our future financial condition or results of
operations.

We provide warranties on some of our products. The warranty terms vary but
range from one year up to limited lifetime warranties on some of our premium
aftermarket products. Provisions for estimated expenses related to product
warranty are made at the time products are sold or when specific warranty issues
are identified on OE products. These estimates are established using historical
information about the nature, frequency, and average cost of warranty claims. We
actively study trends of warranty claims and take action to improve product
quality and minimize warranty claims. We believe that the warranty reserve is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve. The reserve is included in both
long-term and short-term liabilities on the balance sheet.

Below is a table that shows the activity in the warranty accrual accounts:

(7) In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs an amendment of Accounting Research
Bulletin No. 43, Chapter 4." This statement requires idle facility expenses,
excessive spoilage, double freight and rehandling costs to be recognized as
current period charges regardless of whether they meet the criterion of "so
abnormal." SFAS No. 151 is

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

effective for fiscal years beginning after June 15, 2005. The adoption of SFAS
No. 151 is not expected to have a material impact on our financial position or
results of operations.

In December 2004, the FASB revised SFAS No. 123, "Share-Based Payment"
which supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." This revised statement establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. The revised SFAS No. 123 is effective for
interim reporting periods that begin at the beginning of the next fiscal year
January 1, 2006. We estimate that the impact on our net income for the full year
2004 would not exceed approximately $2 million or $0.05 per diluted share had we
adopted SFAS No. 123.

In December 2004, the FASB issued FSP No. 109-1. FSP No. 109-1 provides
guidance on the application of FASB Statement No. 109, "Accounting for Income
Taxes," to the provision within The American Jobs Creation Act of 2004 (The Act)
that provides a tax deduction on qualified production activities. The purpose
behind this special deduction is to provide a tax incentive to companies that
maintain or expand U.S. manufacturing activities. FSP No. 109-1 was effective
upon issuance. The adoption of FSP 109-1 did not have any impact on our
consolidated financial statements.

In December 2004, the FASB issued FSP No. 109-2. FSP No. 109-2 addresses
the question on the impact of a company's APB No. 23 Accounting for Income
Taxes--Special Areas representation under The Act, which provides for a special
one-time 85 percent dividend deduction on dividends from foreign subsidiaries.
FSP No. 109-2 was effective upon issuance. The issuance of FSP No. 109-2 does
not change how we apply APB No. 23, and therefore, did not have any impact on
our consolidated financial statements.

In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. 46 (revised December
2003). The statement addresses whether a reporting enterprise should consider
whether it holds an implicit variable interest in a variable interest entity
("VIE") or potential VIE when specific conditions exist. The guidance should be
applied in the first reporting period beginning after March 3, 2005. The
adoption of FSP No. FIN 46(R)-5 does not have an impact on our consolidated
financial statements.

In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations." This interpretation clarifies that the term
conditional asset retirement obligation as used in FASB No. 143, "Accounting for
Assets Retirement Obligation," refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. This interpretation is effective no later than the end of fiscal years
ending after December 15, 2005. The adoption of FIN No. 47 is not expected to
have a material impact on our financial position or results of operation.

(8) We sell an interest in some of our U.S. trade accounts receivable to a
third party. Receivables become eligible for the program on a daily basis, at
which time the receivables are sold to the third party, net of a factoring
discount, through a wholly-owned subsidiary. Under this agreement, as well as
individual agreements with third parties in Europe, we have sold accounts
receivable of $147 million and $144 million at March 31, 2005 and 2004,
respectively. We recognized a loss of less than $1 million for each of the
quarters ended March 31, 2005 and 2004, respectively, on these sales of trade
accounts, representing the discount from book values at which these receivables
were sold to the third party. The discount rate varies based on funding cost
incurred by the third party, and it averaged six percent during the time period
in 2005 when we sold receivables. We retained ownership of the remaining
interest in the pool of receivables not sold to the third

15

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

party. The retained interest represents a credit enhancement for the program. We
value the retained interest based upon the amount we expect to collect from our
customers, which approximates book value.

(9) We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees." As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," and amended by SFAS No. 148, "Accounting for
Stock-based Compensation--Transition and Disclosure, an amendment of FASB
Statement No. 123," we follow the disclosure only requirements of SFAS No. 123.
The following table illustrates the effect on net income (loss) and earnings
(loss) per share if we had applied the fair value recognition provisions of SFAS
No. 123:

The fair value of each option granted during the first three months of 2005
and 2004 is estimated on the date of grant using the Black-Scholes option
pricing model using the following weighted-average assumptions for grants in the
first three months of 2005 and 2004, respectively: (i) risk-free interest rates
of 4.2 percent and 4.1 percent; (ii) expected lives of 7 years and 10 years;
(iii) expected volatility of 43.0 percent and 43.6 percent; and (iv) no dividend
yield.

16

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

(10) Earnings (loss) per share of common stock outstanding were computed as
follows:

Options to purchase 1,249,391 and 738,652 shares of common stock were
outstanding at March 31, 2005 and 2004, respectively, but were not included in
the computation of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares on such dates.

(11) Net periodic pension costs (income) and postretirement benefit costs
(income) consist of the following components:

For the three months ended March 31, 2005, we made pension contributions of
approximately $3 million for our domestic pension plans and $2 million for our
foreign pension plans. Based on current actuarial estimates, we believe we will
be required to make approximately $44 million to $49 million in contributions
for the remainder of 2005.

We made postretirement contributions of approximately $2 million during the
first three months of 2005. Based on current actuarial estimates, we believe we
will be required to make approximately $7 million in contributions for the
remainder of 2005.

17

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

(12) We occasionally provide guarantees that could require us to make
future payments in the event that the third party primary obligor does not make
its required payments. We have not recorded a liability for any of these
guarantees. The only third party guarantee we have made is the performance of
lease obligations by a former affiliate. Our maximum liability under this
guarantee was approximately $4 million at both March 31, 2005 and 2004,
respectively. We have no recourse in the event of default by the former
affiliate. However, we have not been required to make any payments under this
guarantee.

Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our then existing and future
material domestic wholly-owned subsidiaries fully and unconditionally guarantee
our senior credit facility, our senior secured notes and our senior subordinated
notes on a joint and several basis. The arrangement for the senior credit
facility is also secured by first-priority liens on substantially all our
domestic assets and pledges of 66 percent of the stock of certain first-tier
foreign subsidiaries. The arrangement for the $475 million senior secured notes
is also secured by second-priority liens on substantially all our domestic
assets, excluding some of the stock of our domestic subsidiaries. No assets or
capital stock of our direct or indirect foreign subsidiaries secure these notes.
You should also read Note 14 where we present the Supplemental Guarantor
Condensed Consolidating Financial Statements.

We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities, travel and procurement card programs, and
cash management requirements for some of our subsidiaries totaling $26 million.
We have also issued $19 million in letters of credit to support some of our
subsidiaries' insurance arrangements. In addition, we have issued $3 million in
guarantees through letters of credit to guarantee other obligations of
subsidiaries primarily related to environmental remediation activities.

(13) In October 2004, we announced a change in the structure of our
organization which changed our reportable segments. The European segment now
includes South American operations. While this has no impact on our consolidated
results, it changes our segment results.

We are a global manufacturer with three geographic reportable segments:
North America, Europe and South America, and Asia Pacific. Each segment
manufactures and distributes ride control and emission control products
primarily for the automotive industry. We have not aggregated individual
operating segments within these reportable segments. We evaluate segment
performance based primarily on income before interest expense, income taxes, and
minority interest. Products are transferred between segments and geographic
areas on a basis intended to reflect as nearly as possible the "market value" of
the products.

18

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

The following table summarizes certain Tenneco segment information:

(14) Supplemental guarantor condensed financial statements are presented
below:

Basis of Presentation

Subject to limited exceptions, all of our existing and future material
domestic wholly owned subsidiaries (which are referred to as the Guarantor
Subsidiaries) fully and unconditionally guarantee our senior subordinated notes
due 2014 and our senior secured notes due 2013 on a joint and several basis. We
have not presented separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries because management has determined
that such information is not material to the holders of the notes. Therefore,
the Guarantor Subsidiaries are combined in the presentation below.

These condensed consolidating financial statements are presented on the
equity method. Under this method, our investments are recorded at cost and
adjusted for our ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
You should read the condensed consolidating financial statements of the
Guarantor Subsidiaries in connection with our consolidated financial statements
and related notes of which this note is an integral part.

Distributions

There are no significant restrictions on the ability of the Guarantor
Subsidiaries to make distributions to us.

19

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

STATEMENT OF INCOME (LOSS)

20

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

STATEMENT OF INCOME (LOSS)

21

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

BALANCE SHEET

22

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

BALANCE SHEET

23

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

STATEMENT OF CASH FLOWS

NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.

24

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

STATEMENT OF CASH FLOWS

NOTE: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.

(The preceding notes are an integral part of the foregoing financial
statements.)
25

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

EXECUTIVE SUMMARY

We are one of the world's leading manufacturers of automotive emission
control and ride control products and systems. We serve both original equipment
(OE) vehicle manufacturers and the repair and replacement markets, or
aftermarket, globally through leading brands, including Monroe(R), Rancho(R),
Clevite(R) Elastomers and Fric Rot(TM) ride control products and Walker(R),
Fonos(TM), and Gillet(TM) emission control products. Worldwide we serve more
than 30 different original equipment manufacturers, and our products or systems
are included on six of the top 10 passenger car models produced in North
American and Western Europe and all of the top 10 light truck models produced in
North America for 2004. During 2004, our aftermarket customers were comprised of
full-line and specialty warehouse distributors, retailers, jobbers, installer
chains and car dealers. We operate more than 70 manufacturing facilities
worldwide and employ approximately 18,400 people to service our customer's
demands.

Factors that are critical to our success include new business awards,
managing our overall global manufacturing footprint to ensure proper placement
and workforce levels in line with business needs, maintaining competitive wages
and benefits, maximizing efficiencies in manufacturing processes, fixing or
eliminating unprofitable businesses and reducing overall costs. In addition, our
ability to adapt to key industry trends, such as the consolidation of OE
customers, increasing technologically sophisticated content, changing
aftermarket distribution channels, increasing environmental standards and
extended product life of automotive parts, also plays a critical role in our
success. Other factors that are critical to our success include adjusting to
environmental and economic challenges such as increases in the cost of raw
materials and our ability to successfully reduce the impact of any such cost
increases through material substitutions, cost reduction initiatives and other
methods.

We have a substantial amount of indebtedness, with total debt, net of cash
balances, of $1.34 billion as of March 31, 2005. Our ability to generate
cash--both to fund operations and service our debt--is also a significant area
of focus for our company. See "Liquidity and Capital Resources" below for
further discussion of cash flows.

Total revenues for the first three months of 2005 were $1.1 billion, a
seven percent increase over the first three months of 2004. Higher global OE
volumes, strengthening currencies and improved aftermarket revenues drove this
increase. Gross margin for the first quarter of 2005 was 19.3 percent compared
with 19.7 percent a year ago. Restructuring and restructuring related costs
impacted gross margin by one-tenth of a percentage point in the current quarter
compared to three-tenths of a percentage point in the first quarter of 2004. In
the first quarter of this year, higher steel costs reduced gross margin by $9
million, or eight-tenths of a percentage point, more than accounting for the
year-over-year decline. We reported selling, general, administrative and
engineering expenses for the first quarter of 2005 of 11.0 percent of revenues
versus 12.2 percent a year ago. First quarter 2005 selling, general,
administrative and engineering expenses included one-tenth of a percentage point
for restructuring and restructuring related costs, as compared with the first
quarter of 2004 that included seven-tenths of a percentage point for
restructuring and restructuring related costs, expenses related to a new
aftermarket customer and consulting fees indexed to the stock price. Earnings
before interest expense, income taxes and minority interest ("EBIT") was $44
million for the first quarter of 2005, up $11 million from the $33 million
reported in the first quarter of 2004. Stronger operational performances in our
North American and European and South American segments were partially offset by
lower results from Asia Pacific and steel cost increases, net of other expected
material cost savings and recovery from customers of $9 million.

In October 2004, we announced a change in the structure of our organization
that impacts our reportable segments. The European segment now includes South
American operations. In addition, Asia Pacific is a new reportable segment that
includes Asian and Australian operations. The change in segment reporting has
been reflected in this management discussion and analysis for quarters ended
March 31, 2005 and prior.

26

In February 2005, we announced the acquisition of substantially all the
exhaust assets of Gabilan Manufacturing, Inc., a privately held company that has
developed and manufactured motorcycle exhaust systems for Harley-Davidson
motorcycles since 1978. The company also produces aftermarket muffler kits for
Harley-Davidson. We purchased Gabilan's assets, including working capital
adjustments, for $11 million in cash and expect the acquisition to be accretive
within the first year. Gabilan generated approximately $38 million in revenue in
2004.

RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

NET SALES AND OPERATING REVENUES

The following tables reflect our revenues for the first quarter of 2005 and
2004. We present these reconciliations of revenues in order to reflect the trend
in our sales in various product lines and geographic regions separately from the
effects of doing business in currencies other than the U.S. dollar.
Additionally, "pass-through" catalytic converter sales include precious metals
pricing, which may be volatile. These "pass-through" catalytic converter sales
occur when, at the direction of our OE customers, we purchase catalytic
converters or components from suppliers, use them in our manufacturing process,
and sell them as part of the completed system. While our original equipment
customers assume the risk of this volatility, it impacts our reported revenue.
Excluding "pass-through" catalytic converter sales removes this impact. We have
not reflected any currency impact in the 2004 table since this is the base
period for measuring the effects of currency during 2005 on our operations. We
use this information to analyze the trend in our revenues before these factors.
We believe investors find this information useful in understanding
period-to-period comparisons in our revenues.

Revenues from our North American operations increased $2 million in the
first quarter of 2005 compared to the same period last year. Higher sales from
the aftermarket business were partially offset by lower OE volumes. Total North
American OE revenues fell two percent to $375 million in the first quarter of
2005, as compared to $381 million for the first quarter of 2004. OE emission
control revenues dropped six percent to $248 million in the first quarter of
2005, primarily as a result of substantially lower pass-through sales. Pass-
through catalytic converter sales were down 24 percent to $67 million, mostly
driven by the expiration of the prior Ford Mustang platform. Adjusted for
pass-through sales and currency, OE emission control sales were up two percent
compared to last year. OE ride control revenues for the first quarter of 2005
increased seven percent from the prior year, supported by an increase in
heavy-duty volumes and incremental new business. Total North American OE
revenues, excluding pass-through sales and currency, increased four percent in
the first quarter of 2005, while North American light vehicle production
decreased approximately four percent from one year ago. Favorable platform mix,
new platform launches, strong heavy-duty ride control volumes and $6 million in
revenues from our recent acquisition of the exhaust business for Harley Davidson
helped offset production declines on key vehicle platforms. Aftermarket revenues
for North America were $130 million in the first quarter of 2005, representing
an increase of seven percent compared to the prior year. New business, stronger
unit sales and higher pricing drove this increase. Aftermarket ride control
revenues grew to $91 million in the first quarter of 2005, up seven percent from
the same period last year. Aftermarket emission control revenues increased seven
percent in the first quarter of 2005 to $39 million, as compared to $37 million
in 2004.

Our European and South American segment's revenues increased $65 million,
or 15 percent, in the first quarter of 2005 compared to last year. Total Europe
OE revenues were $381 million in the first quarter of

28

2005, up 16 percent from the same period last year. OE emission control revenues
increased 12 percent to $272 million in the first quarter of 2004, as compared
to $243 million in the first quarter of 2004. Excluding a $2 million decrease in
pass-through sales and a $16 million increase due to strengthening currency, OE
emission control revenues increased nine percent over 2004, while European light
vehicle production levels decreased approximately one percent from one year ago.
Our increase of nine percent outperformed the market decline of one percent, as
a result of higher sales from the launch and ramp up of successful platforms
with BMW, Volvo, General Motors, Ford, PSA and Porsche. OE ride control revenues
increased to $109 million in the first quarter of 2005, up 28 percent from $85
million a year ago. Excluding an $11 million benefit from currency appreciation,
OE ride control revenues increased 15 percent. We experienced this revenue
increase, despite the decline in the European build rate, due to our position on
top selling platforms with Volkswagen, Ford, Volvo and Mazda, and incremental
new business from sales of our electronic controlled shock on several Volvo
platforms and the Audi A6. European aftermarket sales were $82 million in the
first quarter of 2005 compared to $80 million in the prior year. Excluding $4
million attributable to currency appreciation, European aftermarket revenues
declined three percent in the first quarter of 2005 compared to last year. Ride
control aftermarket revenues, excluding the impact of currency, were down eight
percent compared to the prior year with most of the decline being driven by
heightened competition, a soft market in Southern Europe and weaker exports due
to the current strength of the euro. Aftermarket emission control revenues were
up six percent, benefiting from new customers and gains in market share despite
continued market declines relating to the introduction of stainless steel by the
OE manufacturers some 10 years ago. Excluding the benefits of currency,
aftermarket emission control revenues were up two percent. South American
revenues were $44 million during the first quarter of 2005, compared with $34
million a year earlier. Higher OE revenues explain most of this 31 percent
increase. Currency appreciation in Brazil and Argentina also added $3 million to
South America's revenues.

Revenues from our Asia Pacific segment, which includes Australia and Asia,
increased $1 million to $89 million in the first quarter of 2005 compared to the
same period last year. First quarter revenues for Australia fell four percent to
$47 million. Favorable currency appreciation benefited Australian revenue by $1
million. Weaker OE volumes resulting from a major customer's startup issues
primarily drove Australia's revenue decline. Australian aftermarket sales were
also weaker due to lower export sales. Asia revenues for the first quarter of
2005 were $42 million, up eight percent from last year. Stronger sales in India
and Thailand more than offset the revenue decline in China caused by weakened
market conditions.

EBIT

29

The EBIT results shown in the preceding table include the following items,
discussed below under "Restructuring and Other Charges" which have an effect on
the comparability of EBIT results between periods:

EBIT for North American operations increased to $37 million in the first
quarter of 2005, from $30 million one year ago. Higher OE volumes excluding
pass-through sales increased EBIT by $1 million and lower selling, general,
administrative and engineering costs added $4 to EBIT in the first quarter of
2005 compared to the prior year. Higher North American aftermarket revenues
increased EBIT by $4 million and lower selling, general, administrative and
engineering costs improved EBIT by $6 million. These increases to North American
EBIT were partially offset by steel cost increases, net of other expected
material cost savings and recovery from customers. Included in North America's
first quarter 2005 EBIT were $2 million in restructuring and
restructuring-related expenses. Included in North America's first quarter 2004
EBIT were $2 million in restructuring and restructuring-related expenses, $6
million of changeover costs for a major new aftermarket customer and $1 million
in consulting fees indexed to stock price. The customer changeover costs include
the cost of acquiring and disposing of competitor inventory when we supply
aftermarket parts to a new customer. These costs were substantial in the first
quarter of 2004 as we replaced a competitor at a significant customer. The 2004
consulting fees relate to a 1999 agreement that provided that a portion of the
consultant's compensation would be in stock appreciation rights that were priced
above the market price of our stock at the grant date. These rights expired in
November 2004.

Our European and South American segment's EBIT was $5 million for the first
quarter of 2005 compared to breakeven during the same period last year. Higher
European OE volumes from both emission and ride control product lines
contributed $4 million to EBIT. Currency appreciation added $1 million to EBIT.
These increases were offset by higher selling, general, administrative and
engineering costs and steel cost increases, net of other expected material cost
savings and recovery from customers. First quarter 2005 European aftermarket
manufacturing efficiencies of $3 million and lower selling, general,
administrative and selling expenses helped improve EBIT compared to the prior
year. Lower aftermarket ride control volumes reduced EBIT by $1 million. South
American pricing offset higher steel and manufacturing costs. South America also
benefited from lower selling, general, administrative and engineering costs
compared to the same period last year. Included in 2005's first quarter EBIT was
$1 million in restructuring related expenses. Included in 2004's first quarter
EBIT were $3 million in restructuring related expenses and $1 million in
consulting fees indexed to stock price.

EBIT for our Asia Pacific segment was $2 million, down $1 million in the
first quarter of 2005 compared to $3 million in the first quarter of 2004. Lower
OE volumes in Australia and unfavorable platform mix in Asia reduced EBIT by $1
million. Higher selling, general, administrative and engineering costs and steel
cost increases, net of other expected material cost savings and recovery from
customers, also unfavorably impacted Asia Pacific's EBIT. Partially offsetting
these decreases to Asia Pacific's EBIT were manufacturing cost reductions and
efficiencies of $5 million. Included in the first quarter of 2004's EBIT was $1
million in consulting fees indexed to stock price.

30

EBIT AS A PERCENTAGE OF REVENUE

In North America, EBIT as a percentage of revenue for the first quarter of
2005 was up one percent compared to last year. Higher volumes, favorable
platform mix, customer price recovery and lower selling, general, administrative
and engineering expenses, were partially offset by higher steel costs. In
addition, during the first quarter of 2005, North American results included
higher restructuring and other charges. In Europe and South America, EBIT
margins for the first quarter of 2005 were one percent higher compared to the
prior year. Strong OE volumes, customer price recovery and manufacturing
efficiencies more than offset the impact of higher steel costs and selling,
general, administrative and engineering expenses. EBIT as a percentage of
revenue for our Asia Pacific segment decreased one percent in the first quarter
of 2005 versus the prior year. Partially offset by manufacturing cost reductions
and efficiencies, lower OE volumes on key platforms combined with higher steel
costs and selling, general, administrative and engineering expenses mostly drove
this decrease in EBIT margins.

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

We reported interest expense of $32 million in the first quarter of 2005
compared to $35 million in the prior year. This decrease is primarily due to the
November 2004 refinancing of $500 million 11 5/8 percent senior subordinated
notes for $500 million of 8 5/8 percent senior subordinated notes due in 2014.
Interest expense was also reduced due to a $40 million prepayment of our senior
term loan B facility and an amendment to our senior credit facility to reduce by
75 basis points the interest rate on the term loan B facility and the tranche
B-1 letter of credit/revolving loan facility. These decreases were partially
offset by higher interest expense on the variable portion of our debt. See more
detailed explanations on our debt structure, including our issuance of $500
million of 8 5/8 percent senior subordinated notes due 2014 in November 2004,
prepayments and amendments to our senior credit facility in February of 2005,
and their anticipated impact on our interest expense, in "Liquidity and Capital
Resources--Capitalization" later in this Management's Discussion and Analysis.

In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at a per annum rate of
10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus
a spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2004 resulted in lower interest expense of approximately $3 million for the
year. The LIBOR rate as of December 31, 2004 as determined under these
agreements is 1.86 percent. This rate remained in effect until January 15, 2005
when it increased to 2.89 percent. Based upon the LIBOR of 2.89 percent, which
was in effect as of January 15, 2005 under these agreements (and remains in
effect until July 15, 2005), these swaps would reduce our 2005 annual interest
expense by approximately $2 million. These swaps qualify as fair value hedges in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and as such are recorded on the balance sheet at market value with
an offset to the underlying hedged item, which is long term debt. As of March
31, 2005, the fair value of the interest rate swaps was a liability of
approximately $5 million, which has been recorded as a decrease to long-term
debt and an increase to other long-term liabilities.

31

INCOME TAXES

Income tax expense was $4 million in the first quarter of 2005 compared to
a benefit of $1 million in the first quarter of 2004. The effective tax rate for
the first quarter of 2005 was 35 percent. The effective tax rate for the first
three months of 2004 was 40 percent.

EARNINGS PER SHARE

We reported net income of $7 million or $0.16 per diluted common share for
the first quarter of 2005, as compared to a loss of $2 million or $0.05 per
diluted common share for the first quarter of 2004. Included in the results for
the first quarter of 2005 were negative impacts from expenses related to our
restructuring activities. The net impact of these items decreased earnings per
diluted share by $0.04. Included in the results for the first three months of
2004 were negative impacts from expenses related to our restructuring
activities, customer changeover costs for a major new aftermarket customer and
consulting fees indexed to the stock price. The net impact of these items
decreased earnings per diluted share by $0.20. Please read the Notes to the
consolidated financial statements for more detailed information on earnings per
share.

RESTRUCTURING AND OTHER CHARGES

Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by the Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. Prior to the change in accounting required for exit or disposal
activities, we recorded charges to income related to these plans for costs that
do not benefit future activities in the period in which the plans were finalized
and approved, while actions necessary to affect these restructuring plans
occurred over future periods in accordance with established plans.

In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. Project Genesis involved closing eight facilities, improving the
process flow and efficiency through value mapping and plant arrangement at 20
facilities, relocating production among facilities, and centralizing some
functional areas. The total of all these restructuring and other costs recorded
in the fourth quarter of 2001 was $32 million before tax, $31 million after tax,
or $0.81 per diluted common share. We eliminated 974 positions in connection
with Project Genesis. Additionally, we executed this plan more efficiently than
originally anticipated and as a result in the fourth quarter of 2002 reduced our
reserves related to this restructuring activity by $6 million, which was
recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2
million of severance reserve to the asset impairment reserve. This
reclassification became necessary, as actual asset impairments along with the
sale of our closed facilities were different than the original estimates. We
completed the remaining restructuring activities under Project Genesis as of the
end of 2004. Since Project Genesis was announced, we have undertaken a number of
related projects designed to restructure our operations, described below.

In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. This charge was primarily recorded in cost
of sales.

In October of 2003, we announced the closing of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees were
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $3 million in costs related to
this action in 2004. This action is in addition to the plant closings announced
in Project Genesis in the fourth quarter of 2001.

In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of layoffs were at middle and senior management levels. We expect to incur total
charges of approximately $24 to $26 million related to these reductions. As of
March 31, 2005, we have incurred $23 million in severance costs. Of this total,
$7 million was recorded in cost of sales

32

and $16 million was recorded in selling, general and administrative expense. We
anticipate incurring the remaining costs during the second quarter of 2005. Of
the total $23 million in severance costs incurred to date, $17 million were cash
payments with the remainder accrued in other short-term liabilities. We expect
to generate savings of approximately $20 million annually from this initiative.

Including the above costs, we incurred $3 million in restructuring and
restructuring-related costs in the first quarter of 2005. Including the costs
incurred in 2002 through 2004 of $59 million, we have incurred a total of $62
million for activities related to our restructuring actions initiated in prior
periods that could not be accrued as part of the restructuring charges for these
actions.

We have generated about $31 million of annual savings from Project Genesis.
Approximately $7 million of savings was related to closing the eight facilities,
approximately $16 million of savings was related to value mapping and plant
arrangement and approximately $8 million of savings was related to relocating
production among facilities and centralizing some functional areas. There have
been no significant deviations from planned savings. All actions for Project
Genesis have been completed.

Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we were allowed to exclude up to $60 million
of cash charges and expenses, before taxes, related to cost reduction
initiatives over the 2002 to 2006 time period from the calculation of the
financial covenant ratios we are required to maintain under our senior credit
agreement. In February of 2005, our senior credit facility was amended to
exclude all remaining cash charges and expenses related to restructuring
initiatives started before February of 2005. As of March 31, 2005, we have
excluded $62 million in allowable charges relating to restructuring initiatives
previously started.

Under our amended facility, we are allowed to exclude up to an additional
$60 million of cash charges and expenses, before taxes, related to restructuring
activities initiated after February 2005 from the calculation of the financial
covenant ratios required under our senior credit facility. As of March 31, 2005,
we have no exclusions against the $60 million available under the terms of the
February 2005 amendment to the senior credit facility.

In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will initiate actions that will
reduce our costs through implementing the most appropriate and efficient
logistics, distribution and manufacturing footprint for the future. There can be
no assurances, however, that we will undertake additional restructuring actions.
Actions that we take, if any, will require the approval of our Board of
Directors, or its authorized committee. We plan to conduct any workforce
reductions that result in compliance with all legal and contractual requirements
including obligations to consult with workers' councils, union representatives
and others.

CRITICAL ACCOUNTING POLICES

We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing our
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required.

Revenue Recognition

We recognize revenue for sales to our original equipment and aftermarket
customers under the terms of our arrangements with those customers, generally at
the time of shipment from our plants or distribution centers. For our
aftermarket customers, we provide for promotional incentives and returns at the
time of sale. Estimates are based upon the terms of the incentives and
historical experience with returns. Where we have offered product warranty, we
also provide for warranty costs. Those estimates are based upon historical
experience and upon specific warranty issues as they arise. While we have not
experienced any material

33

differences between these estimates and our actual costs, it is reasonably
possible that future warranty issues could arise that could have a significant
impact on our financial statements.

Long-Term Receivables

We expense pre-production design and development costs incurred for our
original equipment customers unless we have a contractual guarantee for
reimbursement of those costs from the customer. At March 31, 2005, we had $15
million recorded as a long-term receivable from original equipment customers for
guaranteed pre-production design and development arrangements. While we believe
that the vehicle programs behind these arrangements will enter production, these
arrangements allow us to recover our pre-production design and development costs
in the event that the programs are cancelled or do not reach expected production
levels. We have not experienced any material losses on arrangements where we
have a contractual guarantee of reimbursement from our customers.

Income Taxes

We have a U.S. Federal tax net operating loss ("NOL") carryforward at March
31, 2005, of $566 million, which will expire in varying amounts from 2018 to
2025. The federal tax effect of that NOL is $198 million, and is recorded as an
asset on our balance sheet at March 31, 2005. We estimate, based on available
evidence both positive and negative, that it is more likely than not that we
will utilize the NOL within the prescribed carryforward period. That estimate is
based upon our expectations regarding future taxable income of our U.S.
operations and upon strategies available to accelerate usage of the NOL.
Circumstances that could change that estimate include future U.S. earnings at
lower than expected levels or a majority ownership change as defined in the
rules of the U.S. tax law. If that estimate changed, we would be required to
cease recognizing an income tax benefit for any new NOL and could be required to
record a reserve for some or all of the asset currently recorded on our balance
sheet. As of March 31, 2005, we believe that there has been a significant change
in our ownership, but not a majority change, in the last three years.

Stock-Based Compensation

We utilize the intrinsic value method to account for our stock-based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." If our compensation costs for
our stock-based compensation plans were determined using the fair value method
of accounting as provided in Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," we estimate that
our pro-forma net income (loss) and earnings (loss) per share would be lower by
by less than $1 million or $0.01 per diluted share for both the first quarter of
2004 and 2005.

Goodwill and Other Intangible Assets

We utilize an impairment-only approach to value our purchased goodwill in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year
in the fourth quarter, we perform an impairment analysis on the balance of
goodwill. Inherent in this calculation is the use of estimates as the fair value
of our designated reporting units is based upon the present value of our
expected future cash flows. In addition, our calculation includes our best
estimate of our weighted average cost of capital and growth rate. If the
calculation results in a fair value of goodwill which is less than the book
value of goodwill, an impairment charge would be recorded in the operating
results of the impaired reporting unit.

Pension and Other Postretirement Benefits

We have various defined benefit pension plans that cover substantially all
of our employees. We also have postretirement health care and life insurance
plans that cover a majority of our domestic employees. Our pension and
postretirement health care and life insurance expenses and valuations are
dependent on management's assumptions used by our actuaries in calculating such
amounts. These assumptions include discount rates, health care cost trend rates,
long-term return on plan assets, retirement rates, mortality rates and other
factors. Health care cost trend rate assumptions are developed based on
historical cost data and an

34

assessment of likely long-term trends. Retirement and mortality rates are based
primarily on actual plan experience.

Our approach to establishing the discount rate assumption for both our
domestic and foreign plans starts with high-quality investment-grade bonds
adjusted for an incremental yield based on actual historical performance. This
incremental yield adjustment is the result of selecting securities whose yields
are higher than the "normal" bonds that comprise the index. Based on this
approach, at September 30, 2004 we lowered the weighted average discount rate
for pension plans to 6.0 percent, from 6.1 percent. The discount rate for
postretirement benefits was lowered from 6.5 percent at September 30, 2003 to
6.25 percent at September 30, 2004.

Our approach to determining expected return on plan asset assumptions
evaluates both historical returns as well as estimates of future returns, and is
adjusted for any expected changes in the long-term outlook for the equity and
fixed income markets. As a result, our estimate of the weighted average
long-term rate of return on plan assets for our pension plans was 8.4 percent
for both 2004 and 2005.

Generally, our pension plans are non-contributory. Our policy is to fund
our pension plans in accordance with applicable U.S. and foreign government
regulations and to make additional payments as funds are available to achieve
full funding of the accumulated benefit obligation. At March 31, 2005, all legal
funding requirements had been met. Other postretirement benefit obligations,
such as retiree medical, are not funded.

Inventory Valuation

Prior to the first quarter of 2005, inventories in the U.S. based
operations (17 percent and 19 percent of our total consolidated inventories at
December 31, 2004 and 2003, respectively) were valued using the last-in,
first-out ("LIFO") method and all other inventories were valued using the
first-in, first-out ("FIFO") or average cost methods at the lower of cost or
market value. Effective January 1, 2005, we changed our accounting method for
valuing inventory for our U.S. based operations from the LIFO method to the FIFO
method. As a result, all U.S. inventories are now stated at the lower of cost,
determined on a FIFO basis, or market. We elected to change to the FIFO method
as we believe it is preferable for the following reasons: 1) the change will
provide better matching of revenue and expenditures and 2) the change will
achieve greater consistency in valuing our global inventory. Additionally, we
initially adopted LIFO as it provided certain U.S. tax benefits which we no
longer realize due to our U.S. net operating losses (when applied for tax
purposes, tax laws require that LIFO be applied for accounting principles
generally accepted in the United States of America ("GAAP") as well). As a
result of the change, we also expect to realize administrative efficiencies.

In accordance with GAAP, the change in inventory accounting has been
applied by adjusting prior year's financial statements. The effect of the change
in accounting principle as of December 31, 2004, was to increase inventories by
$14 million, reduce deferred tax assets by $5 million, and increase retained
earnings by $9 million. Previously reported results of operations presented
herein have not been restated because there was no impact on consolidated net
income (loss) for the three-month periods ended March 31, 2005 and 2004.

CHANGES IN ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs an amendment of Accounting Research Bulletin No.
43, Chapter 4." This statement requires idle facility expenses, excessive
spoilage, double freight and rehandling costs to be recognized as current period
charges regardless of whether they meet the criterion of "so abnormal." SFAS No.
151 is effective for fiscal years beginning after June 15, 2005. The adoption of
SFAS No. 151 is not expected to have a material impact on our financial position
or results of operations.

In December 2004, the FASB revised SFAS No. 123, "Share-Based Payment"
which supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." This revised statement establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in

35

exchange for goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of those equity
instruments. The revised SFAS No. 123 is effective for interim reporting periods
that begin at the beginning of the next fiscal year January 1, 2006. We estimate
that the impact on our net income for the full year 2004 would not exceed
approximately $2 million or $0.05 per diluted share had we adopted SFAS No. 123.

In December 2004, the FASB issued FSP No. 109-1. FSP No. 109-1 provides
guidance on the application of FASB Statement No. 109, "Accounting for Income
Taxes," to the provision within The American Jobs Creation Act of 2004 (The Act)
that provides a tax deduction on qualified production activities. The purpose
behind this special deduction is to provide a tax incentive to companies that
maintain or expand U.S. manufacturing activities. FSP No. 109-1 was effective
upon issuance. The adoption of FSP 109-1 did not have any impact on our
consolidated financial statements.

In December 2004, the FASB issued FSP No. 109-2. FSP No. 109-2 addresses
the question on the impact of a company's APB No. 23 Accounting for Income
Taxes--Special Areas representation under The Act, which provides for a special
one-time 85 percent dividend deduction on dividends from foreign subsidiaries.
FSP No. 109-2 was effective upon issuance. The issuance of FSP No. 109-2 does
not change how we apply APB No. 23, and therefore, did not have any impact on
our consolidated financial statements.

In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. 46 (revised December
2003). The statement addresses whether a reporting enterprise should consider
whether it holds an implicit variable interest in a variable interest entity
("VIE") or potential VIE when specific conditions exist. The guidance should be
applied in the first reporting period beginning after March 3, 2005. The
adoption of FSP No. FIN 46(R)-5 does not have an impact on our consolidated
financial statements.

In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations." This interpretation clarifies that the term
conditional asset retirement obligation as used in FASB No. 143, "Accounting for
Assets Retirement Obligation," refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. This interpretation is effective no later than the end of fiscal years
ending after December 15, 2005. The adoption of FIN No. 47 is not expected to
have a material impact on our financial position or results of operation.

LIQUIDITY AND CAPITAL RESOURCES

CAPITALIZATION

General. The year-to-date decrease in shareholders' equity primarily
results from $35 million related to the translation of foreign balances into
U.S. dollars. This amount was partially offset by our net income, premium on
common stock issued pursuant to benefit plans and other transactions which
contributed $11 million shareholders' equity. Although our book equity balance
was small at March 31, 2005, it should not affect our business operations. We
have no debt covenants that are based upon our book equity, and there are

36

no other agreements that are adversely impacted by our relatively low book
equity. You should also read Note 3 to our consolidated financial statements.

Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries, as well as our revolving
credit facility, increased approximately $29 million primarily related to
borrowings outstanding under our revolving credit facility. The current portion
of long-term debt decreased by approximately $4 million and was offset by a $4
million increase in foreign subsidiaries' obligations. Borrowings under our
revolving credit facility were $29 million as of March 31, 2005. There were no
borrowings outstanding under our revolving credit facility as of March 31, 2004.
The overall decrease in long-term debt resulted from payments made on our
outstanding long-term debt and capital leases in addition to our position on
interest rate swaps entered into in April 2004. See below for further
information on the interest rate swaps.

Senior Credit Facility--Overview and Recent Transactions. Our financing
arrangements are primarily provided by a committed senior secured financing
arrangement with a syndicate of banks and other financial institutions. The
arrangement is secured by substantially all our domestic assets and pledges of
66 percent of the stock of certain first-tier foreign subsidiaries, as well as
guarantees by our material domestic subsidiaries. We originally entered into
this facility in 1999 and since that time have periodically requested and
received amendments to the facility for various purposes. In December of 2003,
we engaged in a series of transactions that resulted in the full refinancing of
the facility, through an amendment and restatement. In February 2005, we amended
the facility, which resulted in reduced interest rates on the term loan B and
tranche B-1 letter of credit/revolving loan portions of the facility. We also
made a voluntary prepayment of $40 million on the term loan B facility, reducing
borrowings to $356 million. In March 2005, we increased the amount of
commitments under our revolving loan facility from $220 million to $285 million
and reduced the amount of commitments under our tranche B-1 letter of
credit/revolving loan facility from $180 million to $170 million. As of March
31, 2005, the senior credit facility consisted of a seven-year, $356 million
term loan B facility maturing in December 2010; a five-year, $285 million
revolving credit facility maturing in December 2008; and a seven-year, $170
million tranche B-1 letter of credit/revolving loan facility maturing in
December 2010. These transactions are described in more detail below.

In June 2003, we issued $350 million of 10 1/4 percent senior secured
notes. The notes have a final maturity date of July 15, 2013. We received net
proceeds in the second quarter of 2003 from the offering of the notes, after
deducting underwriting discounts, commissions and expenses, of $338 million. We
used the net proceeds of the offering to repay outstanding amounts under our
senior credit facility as follows: (i) to prepay $199 million on the term loan A
that was due November 4, 2005, (ii) to prepay $52 million on the term loans B
and C that was due November 4, 2007 and May 4, 2008, respectively, and (iii) to
prepay outstanding borrowings of $87 million under the revolving credit portion
of our senior credit facility. These notes are described in more detail below
under "Senior Secured and Subordinated Notes."

In December 2003, we amended and restated our senior credit facility and
issued an additional $125 million of 10 1/4 percent senior secured notes. We
received $136 million of net proceeds from the offering of the additional $125
million of 10 1/4 percent senior secured notes, after deducting underwriting
discounts and other expenses and including a 13 percent price premium over par.
We also received $391 million in net proceeds from new term loan B borrowings
under the amended and restated senior credit facility, after deducting fees and
other expenses. We used the combined net proceeds of $527 million to prepay the
remaining $514 million outstanding under term loans A, B and C under the senior
credit facility immediately prior to the completion of the transaction. The
remaining $13 million of net proceeds were used for general corporate purposes.

We incurred $27 million in fees associated with the issuance of the
aggregate $475 million of 10 1/4 percent senior secured notes and the amendment
and restatement of our senior credit facility. These fees will be amortized over
the term of the senior secured notes and the amended and restated senior credit
facility.

Based on our use of the net proceeds from both the June and December 2003
transactions, these transactions would have increased our annual interest
expense by approximately $9 million. This does not give effect to the
fixed-to-floating interest rate swaps we completed in April 2004, described
below. In addition, we
37

expensed in the second and fourth quarters of 2003 a total of approximately $12
million of existing deferred debt issuance costs as a result of retiring the
term loans under the senior credit facility.

In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at a per annum rate of
10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus
a spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2004 resulted in lower interest expense of approximately $3 million for the
year. Based upon the current LIBOR as determined under these agreements of 2.89
percent (which remains in effect until July 15, 2005), these swaps would reduce
our 2005 annual interest expense by approximately $2 million. These swaps
qualify as fair value hedges in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and as such are recorded on the
balance sheet at market value with an offset to the underlying hedged item,
which is long term debt. As of March 31, 2005, the fair value of the interest
rate swaps was a liability of approximately $5 million, which has been recorded
as a decrease to long term debt and an increase to other long term liabilities.
On March 31, 2005, we had $993 million in long-term debt obligations that have
fixed interest rates. Of that amount, $475 million is fixed through July 2013
and $500 million through November 2014, while the remainder is fixed over
periods of 2005 through 2025. Included in the $993 million is $150 million of
long-term debt obligations subject to variable interest rates as a result of our
swap agreements. There is also $367 million in long-term debt obligations that
have variable interest rates based on a current market rate of interest.

In November 2004, we refinanced our $500 million of 11 5/8 percent senior
subordinated notes maturing in October of 2009 with new senior subordinated
notes. The new notes have an interest rate of 8 5/8 percent, a maturity date of
November 15, 2014 and contain substantially similar terms as the notes
refinanced. Premium payments and other fees in connection with the refinancing
of these notes totaled approximately $40 million, including a $29 million or
5.813% price premium over par on the redeemed notes. The new notes accrue
interest from November 19, 2004 with an initial interest payment date of May 15,
2005. These notes are described in more detail below under "Senior Secured and
Subordinated Notes."

In connection with the refinancing of the $500 million in senior
subordinated notes we amended the senior credit facility effective November 17,
2004. This amendment allowed us to use up to $50 million in cash on hand to pay
redemption premiums and/or other fees and costs in connection with the
redemption and refinancing of the senior subordinated notes. This amendment also
excluded any redemption premium associated with the 11 5/8 percent senior
subordinated notes and any interest incurred on the notes between the call date
of November 19, 2004 and the redemption date of December 20, 2004 from cash
interest expense for purposes of the definition of consolidated interest expense
in the senior credit facility. In exchange for these amendments, we agreed to
pay a small fee to the consenting lenders. We also incurred approximately $13
million in legal, advisory and other costs related to the amendment and the
issuance of the new senior subordinated notes. These amounts were capitalized
and will be amortized over the remaining terms of the senior subordinated notes
and senior credit facility.

Our interest expense increased in 2004 by $42 million due to the fees and
expenses associated with the refinancing of our senior subordinated notes, which
includes an expense of $8 million for existing deferred debt issuance costs
associated with the 11 5/8 percent senior subordinated notes. Beginning in 2005,
annual interest expense savings from this transaction are anticipated to be
about $15 million. This does not give effect to the fixed-to-floating interest
rate swaps we completed in April 2004 described above.

In February 2005 we amended our senior credit facility to reduce by 75
basis points the interest rate on the term loan B facility and the tranche B-1
letter of credit/revolving loan facility. In connection with the amendment, we
voluntarily prepaid $40 million in principal on the term loan B, reducing the
term loan B facility from $396 million to $356 million.

Additional provisions of the amendment to the senior credit facility
agreement were as follows: (i) amend the definition of EBITDA to exclude up to
$60 million in restructuring-related expenses announced and taken after February
2005, (ii) increase permitted investments to $50 million, (iii) exclude expenses
related to the issuance of stock options from the definition of consolidated net
income, (iv) permit us to redeem up to
38

$125 million of senior secured notes after January 1, 2008 (subject to certain
conditions), (v) increase our ability to add commitments under the revolving
credit facility by $25 million, and (vi) make other minor modifications. We
incurred approximately $1 million in fees and expenses associated with this
amendment, which will be capitalized and amortized over the remaining term of
the agreement. As a result of the amendment and the voluntary prepayment of $40
million under the term loan B, our interest expense in 2005 will be
approximately $6 million lower than what it would otherwise have been.

In March 2005, we increased the amount of commitments under our revolving
credit facility from $220 million to $285 million and reduced the amount of
commitments under our tranche B-1 letter of credit/revolving loan facility from
$180 million to $170 million. This reduction of our tranche B-1 letter of
credit/revolving loan facility was required under the terms of the senior credit
facility, as we had increased the amount of our revolving credit facility
commitments by more than $55 million.

In April 2005, we further increased the amount of commitments under our
revolving credit facility from $285 million to $300 million and, as required
under the terms of our senior credit facility, reduced the amount of commitments
under tranche B-1 letter of credit/revolving loan facility from $170 million to
$155 million.

Senior Credit Facility--Forms of Credit Provided. Following the February
2005 voluntary prepayment of $40 million, the term loan B facility is payable as
follows: $74 million due March 31, 2010, and $94 million due each of June 30,
September 30 and December 12, 2010. The revolving credit facility requires that
if any amounts are drawn, they be repaid by December 2008. Prior to that date,
funds may be borrowed, repaid and reborrowed under the revolving credit facility
without premium or penalty. Letters of credit may be issued under the revolving
credit facility.

The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by December 2010. We can borrow revolving loans from the $170 million
tranche B-1 letter of credit/revolving loan facility and use that facility to
support letters of credit. The tranche B-1 letter of credit/revolving loan
facility lenders have deposited $170 million with the administrative agent, who
has invested that amount in time deposits. We do not have an interest in any of
the funds on deposit. When we draw revolving loans under this facility, the
loans are funded from the $170 million on deposit with the administrative agent.
When we make repayments, the repayments are redeposited with the administrative
agent.

Under current accounting rules, the tranche B-1 letter of credit/revolving
loan facility will be reflected as debt on our balance sheet only if we have
outstanding thereunder revolving loans or payments by the facility in respect of
letters of credit. We will not be liable for any losses to or misappropriation
of any (i) return due to the administrative agent's failure to achieve the
return described above or to pay all or any portion of such return to any lender
under such facility or (ii) funds on deposit in such account by such lender
(other than the obligation to repay funds released from such accounts and
provided to us as revolving loans under such facility).

Senior Credit Facility--Interest Rates and Fees. Borrowings under the term
loan B facility and the tranche B-1 letter of credit/revolving loan facility
bear interest at an annual rate equal to, at our option, either (i) the London
Interbank Offering Rate plus a margin of 300 basis points (reduced to 225 basis
points in February 2005); or (ii) a rate consisting of the greater of the JP
Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a
margin of 200 basis points (reduced to 125 basis points in February 2005). There
is no cost to us for issuing letters of credit under the tranche B-1 letter of
credit/revolving loan facility, however outstanding letters of credit reduce our
availability to borrow revolving loans under this portion of the facility. If a
letter of credit issued under this facility is subsequently paid and we do not
reimburse the amount paid in full, then a ratable portion of each lender's
deposit would be used to fund the letter of credit. We pay the tranche B-1
lenders a fee which is equal to LIBOR plus 300 basis points (reduced to 225
basis points in February 2005). This fee is offset by the return on the funds
deposited with the administrative agent which earn interest at a per annum rate
approximately equal to LIBOR. Outstanding revolving loans reduce the funds on
deposit with the administrative agent which in turn reduce the earnings of those
deposits and effectively increases our interest expense at a per annum rate
equal to LIBOR. The interest margins for borrowings under the term loan B
facility and tranche B-1 letter of credit/revolving loan facility will be
further reduced by 25 basis points following: the end of each fiscal quarter for
which the consolidated
39

leverage ratio is less than 3.0 or at the point our credit ratings are improved
to BB- or better by Standard & Poor's (and are rated at least B1 by Moody's) or
to Ba3 or better by Moody's (and are rated at least B+ by Standard & Poor's).

Through the first quarter of 2005, borrowings under the revolving credit
facility bore interest at an annual rate equal to, at our option, either (i) the
London Interbank Offering Rate plus a margin of 325 basis points; or (ii) a rate
consisting of the greater of the JP Morgan Chase prime rate or the Federal Funds
rate plus 50 basis points, plus a margin of 225 basis points. Letters of credit
issued under the revolving credit facility accrue a letter of credit fee at a
per annum rate of 325 basis points for the pro rata account of the lenders under
such facility and a fronting fee for the ratable account of the issuers thereof
at a per annum rate in an amount to be agreed upon payable quarterly in arrears.
The interest margins for borrowings and letters of credit issued under the
revolving credit facility are subject to adjustment based on the consolidated
leverage ratio (consolidated indebtedness divided by consolidated EBITDA as
defined in the senior credit facility agreement) measured at the end of each
quarter. The margin we pay on the revolving credit facility is reduced by 25
basis points following each fiscal quarter for which the consolidated leverage
ratio is less than 4.0 beginning in March 2005. Since our consolidated leverage
ratio was 3.52 as of March 31, 2005, the margin we pay on the revolving credit
facility will be reduced by 25 basis points in the second quarter of 2005. We
also pay a commitment fee of 50 basis points on the unused portion of the
revolving credit facility. This commitment fee will be reduced by 12.5 basis
points following the end of each fiscal quarter for which the consolidated
leverage ratio is less than 3.5.

Senior Credit Facility--Other Terms and Conditions. The amended and
restated senior credit facility requires that we maintain financial ratios equal
to or better than the following consolidated leverage ratio (consolidated
indebtedness divided by consolidated EBITDA), consolidated interest coverage
ratio (consolidated EBITDA divided by consolidated cash interest paid), and
fixed charge coverage ratio (consolidated EBITDA less consolidated capital
expenditures, divided by consolidated cash interest paid) at the end of each
period indicated. The financial ratios required under the amended senior credit
facility and, the actual ratios we achieved for the first quarter of 2005, are
shown in the following tables:

The senior credit facility agreement provides: (i) the ability to refinance
our senior subordinated notes and/or our senior secured notes using the net cash
proceeds from the issuance of similarly structured debt; (ii) the ability to
repurchase our senior subordinated notes and/or our senior secured notes using
the net cash proceeds from issuing shares of our common stock; and (iii) the
prepayment of the term loans by an amount equal to 50 percent of our excess cash
flow as defined by the agreement.

The senior credit facility agreement also contains restrictions on our
operations that are customary for similar facilities, including limitations on:
(i) incurring additional liens; (ii) sale and leaseback transactions (except for
the permitted transactions as described in the amendment); (iii) liquidations
and dissolutions; (iv) incurring additional indebtedness or guarantees; (v)
capital expenditures; (vi) dividends; (vii) mergers

40

and consolidations; and (viii) prepayments and modifications of subordinated and
other debt instruments. Compliance with these requirements and restrictions is a
condition for any incremental borrowings under the senior credit facility
agreement and failure to meet these requirements enables the lenders to require
repayment of any outstanding loans. As of March 31, 2005, we were in compliance
with all the financial covenants (as indicated above) and operational
restrictions of the facility.

Our senior credit facility does not contain any terms that could accelerate
the payment of the facility as a result of a credit rating agency downgrade.

Senior Secured and Subordinated Notes. Our outstanding debt also includes
$475 million of 10 1/4 percent senior secured notes due July 15, 2013, in
addition to the $500 million of 8 5/8 percent senior subordinated notes due
November 15, 2014 described above. We can redeem some or all of the notes at any
time after July 15, 2008, in the case of the senior secured notes, and November
15, 2009, in the case of the senior subordinated notes. If we sell certain of
our assets or experience specified kinds of changes in control, we must offer to
repurchase the notes. We are permitted to redeem up to 35 percent of the senior
secured notes with the proceeds of certain equity offerings completed before
July 15, 2006 and up to 35 percent of the senior subordinated notes with the
proceeds of certain equity offerings completed before November 15, 2007.

Our senior secured and subordinated notes require that, as a condition
precedent to incurring certain types of indebtedness not otherwise permitted,
our consolidated fixed charge coverage ratio, as calculated on a proforma basis,
to be greater than 2.25 and 2.00, respectively. We have not incurred any of the
types of indebtedness not otherwise permitted by the indentures. The indentures
also contain restrictions on our operations, including limitations on: (i)
incurring additional indebtedness or liens; (ii) dividends; (iii) distributions
and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and
consolidations. Subject to limited exceptions, all of our existing and future
material domestic wholly owned subsidiaries fully and unconditionally guarantee
these notes on a joint and several basis. In addition, the senior secured notes
and related guarantees are secured by second priority liens, subject to
specified exceptions, on all of our and our subsidiary guarantors' assets that
secure obligations under our senior credit facility, except that only a portion
of the capital stock of our and our subsidiary guarantor's domestic subsidiaries
is provided as collateral and no assets or capital stock of our direct or
indirect foreign subsidiaries secure the notes or guarantees. There are no
significant restrictions on the ability of the subsidiaries that have guaranteed
these notes to make distributions to us. The senior subordinated notes rank
junior in right of payment to our senior credit facility and any future senior
debt incurred. As of March 31, 2005, we were in compliance with the covenants
and restrictions of these indentures.

Accounts Receivable Securitization. In addition to our senior credit
facility, senior secured notes and senior subordinated notes, we also sell some
of our accounts receivable. In North America, we have an accounts receivable
securitization program with two commercial banks. We sell original equipment and
aftermarket receivables on a daily basis under this program. We sold accounts
receivable under this program of $88 million and $54 million at March 31, 2005
and 2004, respectively. This program is subject to cancellation prior to its
maturity date if we were to (i) fail to pay interest or principal payments on an
amount of indebtedness exceeding $50 million, (ii) default on the financial
covenant ratios under the senior credit facility, or (iii) fail to maintain
certain financial ratios in connection with the accounts receivable
securitization program. In January 2005, this program was renewed for 364 days
to January 30, 2006 at the existing facility size of $75 million. In March 2005,
the program was amended to increase the size to $90 million. We also sell some
receivables in our European operations to regional banks in Europe. At March 31,
2005 we sold $59 million of accounts receivable in Europe down from $90 million
at March 31, 2004. The arrangements to sell receivables in Europe are not
committed and can be cancelled at any time. If we were not able to sell
receivables under either the North American or European securitization programs,
our borrowings under our revolving credit agreements would increase. These
accounts receivable securitization programs provide us with access to cash at
costs that are generally favorable to alternative sources of financing, and
allow us to reduce borrowings under our revolving credit agreements.

Capital Requirements. We believe that cash flows from operations, combined
with available borrowing capacity described above, assuming that we maintain
compliance with the financial covenants and other

41

requirements of our loan agreement, will be sufficient to meet our future
capital requirements for the following year. Our ability to meet the financial
covenants depends upon a number of operational and economic factors, many of
which are beyond our control. Factors that could impact our ability to comply
with the financial covenants include the rate at which consumers continue to buy
new vehicles and the rate at which they continue to repair vehicles already in
service, as well as our ability to successfully implement our restructuring
plans. Lower North American vehicle production levels, weakening in the global
aftermarket, or a reduction in vehicle production levels in Europe, beyond our
expectations, could impact our ability to meet our financial covenant ratios. In
the event that we are unable to meet these financial covenants, we would
consider several options to meet our cash flow needs. These options could
include further renegotiations with our senior credit lenders, additional cost
reduction or restructuring initiatives, sales of assets or common stock, or
other alternatives to enhance our financial and operating position. Should we be
required to implement any of these actions to meet our cash flow needs, we
believe we can do so in a reasonable time frame.

CONTRACTUAL OBLIGATIONS

Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments as of March 31, 2005, are
shown in the following table:

We principally use our revolving credit facilities to finance our
short-term capital requirements. As a result, we classify any outstanding
balances of the revolving credit facilities within our short-term debt even
though the revolving credit facility has a termination date of December 13, 2008
and the tranche B-1 letter of credit facility/revolving loan facility has a
termination date of December 13, 2010.

If we do not maintain compliance with the terms of our senior credit
facility, senior secured notes indenture and senior subordinated debt indenture
described above, all amounts under those arrangements could, automatically or at
the option of the lenders or other debt holders, become due. Additionally, each
of those facilities contains provisions that certain events of default under one
facility will constitute a default under the other facility, allowing the
acceleration of all amounts due. We currently expect to maintain compliance with
terms of all of our various credit agreements for the foreseeable future.

Included in our contractual obligations is the amount of interest to be
paid on our long-term debt. As our debt structure contains both fixed and
variable rate interest debt, we have made assumptions in calculating the amount
of the future interest payments. Interest on our senior secured notes and senior
subordinated notes is calculated using the fixed rates of 10 1/4 percent and
8 5/8 percent, respectively. Interest on our variable rate debt is calculated as
225 basis points plus LIBOR of 2.84 percent which was the rate at March 31,
2005. We have assumed that LIBOR will remain unchanged for the outlying years.
See "--Capitalization." In addition we

42

have included the impact of our interest rate swaps entered into in April 2004.
See "Interest Rate Risk" below.

We have also included an estimate of expenditures required after March 31,
2005 to complete the facilities and projects authorized at December 31, 2004, in
which we have made substantial commitments in connections with facilities.

We have not included purchase obligations as part of our contractual
obligations as we generally do not enter into long-term agreements with our
suppliers. In addition, the agreements we currently have do not specify the
volumes we are required to purchase. If any commitment is provided, in many
cases the agreements state only the minimum percentage of our purchase
requirements we must buy from the supplier. As a result, these purchase
obligations fluctuate from year to year and we are not able to quantify the
amount of our future obligation.

We have not included material cash requirements for taxes as we are a
taxpayer in certain foreign jurisdictions but not in domestic locations.
Additionally, it is difficult to estimate taxes to be paid as changes in where
we generate income can have a significant impact on future tax payments. We have
also not included cash requirements for funding pension and postretirement
benefit costs. Based upon current estimates we believe we will be required to
make contributions between $49 million to $54 million to those plans in 2005, of
which approximately $5 million has been contributed as of March 31, 2005.
Pension and postretirement contributions beyond 2005 will be required but those
amounts will vary based upon many factors, including the performance of our
pension fund investments during 2005. In addition, we have not included cash
requirements for environmental remediation. Based upon current estimates we
believe we will be required to spend approximately $10 million over the next 20
to 30 years. However, due to possible modifications in remediation processes and
other factors, it is difficult to determine the actual timing of the payments.
See "--Environmental and Other Matters".

We occasionally provide guarantees that could require us to make future
payments in the event that the third party primary obligor does not make its
required payments. We have not recorded a liability for any of these guarantees.
The only third party guarantee we have made is the performance of lease
obligations by a former affiliate. Our maximum liability under this guarantee
was approximately $4 million at both March 31, 2005 and 2004, respectively. We
have no recourse in the event of default by the former affiliate. However, we
have not been required to make any payments under this guarantee.

Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our then existing and future
material domestic wholly-owned subsidiaries fully and unconditionally guarantee
our senior credit facility, our senior secured notes and our senior subordinated
notes on a joint and several basis. The arrangement for the senior credit
facility is also secured by first-priority liens on substantially all our
domestic assets and pledges of 66 percent of the stock of certain first-tier
foreign subsidiaries. The arrangement for the $475 million senior secured notes
is also secured by second-priority liens on substantially all our domestic
assets, excluding some of the stock of our domestic subsidiaries. No assets or
capital stock of our direct or indirect foreign subsidiaries secure these notes.
You should also read Note 14 where we present the Supplemental Guarantor
Condensed Consolidating Financial Statements.

We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities, travel and procurement card programs, and
cash management requirements for some of our subsidiaries totaling $26 million.
We have also issued $19 million in letters of credit to support some of our
subsidiaries' insurance arrangements. In addition, we have issued $3 million in
guarantees through letters of credit to guarantee other obligations of
subsidiaries primarily related to environmental remediation activities.

43

CASH FLOWS

Operating Activities

For the three months ended March 31, 2005, operating activities used $99
million in cash compared to a source of $13 million in cash during the same
period last year. For the first three months of 2005, cash used for working
capital was $137 million versus $26 million for the first three months of 2004.
Higher sales levels during the first quarter of 2005 versus the first quarter of
2004 were the primary reason for higher year over year receivables balances that
resulted in a cash outflow of $78 million, an $8 million increase from last
year. Inventory represented a cash outflow of $46 million during the first
quarter of 2005, an increase of $19 over the prior year. This primarily resulted
from building higher inventories in advance of the selling season, particularly
in the aftermarket business units. Accounts payable provided cash of $21
million, down significantly from last year's cash inflow of $79 million. Day's
payable outstanding was in line with our two-year historical average, but much
lower than the levels we experienced in the first quarter of 2004. Last year's
higher payables levels were driven by the timing of purchases and payments to
suppliers, particularly in Europe. Other current liabilities resulted in a use
of $8 million in cash for the first quarter of 2005, versus providing a source
of $15 million in cash during the same period last year. This change of $23
million was related to severance payments and an increase in pension
contributions during the first quarter of 2005, as well as last year's increase
in accruals for a new aftermarket customer. Cash taxes were a $7 million outflow
in the latest three months ending March 31, 2005, compared with a $3 million
outflow in the prior year, primarily due to the timing of foreign tax payments.

In June 2001, we entered into arrangements with two major OE customers in
North America under which, in exchange for a discount, payments for product
sales are made earlier than otherwise required under existing payment terms.
These arrangements reduced accounts receivable by $74 million and $89 million as
of March 31, 2005 and 2004, respectively. One of these programs was discontinued
during the first quarter of 2005. In addition, we have been informed that the
second program will be terminated during the second quarter of 2005. To mitigate
the impact on our liquidity of the termination of these programs, on March 31,
2005, we supplemented our existing senior credit facility by increasing from
$220 million to $285 million the amount of lenders' commitments under the
revolving credit facility portion of the senior credit facility. As part of this
agreement, we reduced from $180 million to $170 million the amount of lenders'
commitments under the tranche B-1 letter of credit/revolving loan facility
portion of the senior credit facility. In April 2005, we further increased the
amount of commitments under our revolving credit facility from $285 million to
$300 million and, as required under the terms of our senior credit facility,
reduced the amount of commitments under our tranche B-1 letter of
credit/revolving loan facility from $170 million to $155 million.

In June 2003, we entered into a similar arrangement with a third major OE
customer in North America. This arrangement reduced accounts receivable by $8
million as of December 31, 2004. This program was discontinued during the first
quarter of 2005.

One of our European subsidiaries receives payment from an OE customer
whereby accounts receivable are satisfied through the delivery of negotiable
financial instruments. These financial instruments are then sold at a discount
to a European bank. The sales of these financial instruments are not included in
the account receivables sold in 2005. Any of these financial instruments that
were not sold as of December 31, 2004 or March 31, 2005 are classified as other
current assets and are excluded from our definition of cash equivalents.

44

These types of payments accounted for $31 million at March 31, 2005, compared
with $44 million at December 31, 2004.

Investing Activities

Cash used for investing activities was $24 million higher in the first
three months of 2005 compared to the same period one year ago. During the first
quarter of 2005, we used $11 million in cash to acquire the exhaust operations
of Gabilan Manufacturing, partially offset by net proceeds from the sale of
assets of $1 million. In the first quarter of 2004, we received $11 million in
cash from the sale of our Birmingham, U.K. facility. Capital expenditures were
$32 million in the first three months of 2005 compared to $25 million a year
ago. This increase of $7 million in capital expenditures was primarily due to
the timing of future OE customer platform launches.

Financing Activities

Cash flow from financing activities was a $5 million outflow in the first
three months of 2005 compared to being flat in the same period of 2004. This is
primarily attributable to $40 million in cash used to reduce our long-term debt,
partially offset by increased borrowings from our revolving credit facility in
the first quarter of 2005.

INTEREST RATE RISK

Our financial instruments that are sensitive to market risk for changes in
interest rates are our debt securities. We primarily use our revolving credit
facilities to finance our short-term capital requirements. We pay a current
market rate of interest on these borrowings. We have financed our long-term
capital requirements with long-term debt with original maturity dates ranging
from six to ten years.

In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at a per annum rate of
10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus
a spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2004 resulted in lower interest expense of approximately $3 million for the
year. Based on the current LIBOR as determined under these agreements of 2.89
percent (which remains in effect until July 15, 2005), these swaps would reduce
our 2005 annual interest expense by approximately $2 million. These swaps
qualify as fair value hedges in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and as such are recorded on the
balance sheet at market value with an offset to the underlying hedged item,
which is long-term debt. As of March 31, 2005, the fair value of the interest
rate swaps was a liability of approximately $5 million, which has been recorded
as a decrease to long-term debt and an increase to other long-term liabilities.
On March 31, 2005, we had $993 million in long-term debt obligations that have
fixed interest rates. Of that amount, $475 million is fixed through July 2013
and $500 million through November 2014, while the remainder is fixed over
periods of 2005 through 2025. Included in the $993 million is $150 million of
long-term debt obligations subject to variable interest rates as a result of our
swap agreements. There is also $367 million in long-term debt obligations that
have variable interest rates based on a current market rate of interest.

We estimate that the fair value of our long-term debt at March 31, 2005 was
about 104 percent of its book value. A one percentage point increase or decrease
in interest rates would increase or decrease the annual interest expense we
recognize in the income statement and the cash we pay for interest expense by
about $2 million after tax, excluding the effect of the interest rate swaps we
completed in April 2004. A one percentage point increase or decrease in interest
rates on the swaps we completed in April 2004 would increase or decrease the
annual interest expense we recognize in the income statement and the cash we pay
for interest expense by approximately $1 million after tax.

45

OUTLOOK

Substantially higher steel pricing, volatile oil prices and rising interest
rates make this an increasingly uncertain and challenging environment for
automotive suppliers to operate. North American OE light vehicle production
levels for 2004 were 15.8 million units, down one percent from 2003. Current
estimates for 2005 indicate that North American OE light vehicle production
levels will be equal to 2004 at 15.8 million units. However, we remain very
cautious about the outlook for North American production rates due to recent and
significant production cuts by the largest North American automakers and their
apparent reluctance to continue to support higher consumer vehicle sales through
incentives. We believe that new product launches and our position on top-selling
platforms, along with increasing market positions with Toyota, Honda and Nissan,
will help us to offset pressures from lower North American production rates.
Western Europe light vehicle production volumes grew about one percent during
2004 to 16.6 million units. Expectations for 2005 indicate production will
remain flat at 2004 levels. We saw a strong increase in heavy-duty truck
production rates during 2004. Compared to 2003, heavy-duty truck production
rates increased 36 percent in 2004, and are expected to increase another 16 to
19 percent in 2005. Although heavy-duty business represents a small percentage
of our overall revenues, this should benefit our North American operations. In
the global aftermarket, issues that have impacted revenues in the past will
likely continue to be a challenge in 2005. Heightened competition in the
European aftermarket, weaker export sales due to the strong euro and longer
product replacement cycles are expected to have a continued impact on volumes.
We saw signs of sales stabilization in the North American aftermarket exhaust
business unit during 2004 and improved revenues during the first quarter of
2005. We are cautiously optimistic that these North American aftermarket
conditions will continue in 2005. We also plan to continue our efforts to
increase new and existing sales in the North American aftermarket ride control
business unit.

These factors make us cautious concerning the outlook for the remainder of
2005. However, we believe our diversified customer base, geographies, product
lines, platforms and markets provide the opportunity to offset declines in one
area. We are also benefiting from environmental legislation and consumer safety
concerns that drive higher content for exhaust and ride control suppliers with
innovative product solutions.

We are intensely focused on mitigating the impact of higher costs by
implementing a restructuring initiative announced in the fourth quarter, which
is expected to generate $20 million in annual savings; improving manufacturing
efficiency with Lean; generating at least $20 million in Six Sigma savings; and
capitalizing on the projected $270 million increase in the 2005 OE book of
business. Lower interest expense as a result of our company's debt refinancing
in the fourth quarter of 2004 and amendments to our senior credit facility in
the first quarter of 2005 will also help mitigate the impact. In addition, we
are actively addressing higher steel costs and anticipate that these increases,
net of other expected material cost savings and recovery from customers, will be
between $30 million and $50 million for 2005.

ENVIRONMENTAL AND OTHER MATTERS

We are subject to a variety of environmental and pollution control laws and
regulations in all jurisdictions in which we operate. We expense or capitalize,
as appropriate, expenditures for ongoing compliance with environmental
regulations that relate to current operations. We expense expenditures that
relate to an existing condition caused by past operations and that do not
contribute to current or future revenue generation. We record liabilities when
environmental assessments indicate that remedial efforts are probable and the
costs can be reasonably estimated. Estimates of the liability are based upon
currently available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and other
societal and economic factors. We consider all available evidence including
prior experience in remediation of contaminated sites, other companies' cleanup
experiences and data released by the United States Environmental Protection
Agency or other organizations. These estimated liabilities are subject to
revision in future periods based on actual costs or new information. Where
future cash flows are fixed or reliably determinable, we have discounted the
liabilities. All other environmental liabilities are recorded at their
undiscounted amounts. We evaluate recoveries separately from the liability and,
when they are assured, recoveries are recorded and reported separately from the
associated liability in our financial statements.

46

As of March 31, 2005, we are designated as a potentially responsible party
in one Superfund site. We have estimated our share of the remediation costs for
this site to be less than $1 million in the aggregate. In addition to the
Superfund site, we may have the obligation to remediate current or former
facilities, and we estimate our share of remediation costs at these facilities
to be approximately $10 million. For the Superfund site and the current and
former facilities, we have established reserves that we believe are adequate for
these costs. Although we believe our estimates of remediation costs are
reasonable and are based on the latest available information, the cleanup costs
are estimates and are subject to revision as more information becomes available
about the extent of remediation required. At some sites, we expect that other
parties will contribute to the remediation costs. In addition, at the Superfund
site, the Comprehensive Environmental Response, Compensation and Liability Act
provides that our liability could be joint and several, meaning that we could be
required to pay in excess of our share of remediation costs. Our understanding
of the financial strength of other potentially responsible parties at the
Superfund site, and of other liable parties at our current and former
facilities, has been considered, where appropriate, in our determination of our
estimated liability.

We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund site, or as a liable party at our
current or former facilities, will not be material to our results of operations
or consolidated financial position.

From time to time we are subject to product warranty claims whereby we are
required to bear costs of repair or replacement of certain of our products.
Warranty claims may range from individual customer claims to full recalls of all
products in the field. See Note 6 to our consolidated financial statements
included under Item 1 for information regarding our warranty reserves.

We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, and other product liability related matters), taxes,
employment matters, and commercial or contractual disputes, sometimes related to
acquisitions or divestitures. We vigorously defend ourselves against all of
these claims. In future periods, we could be subjected to cash costs or non-cash
charges to earnings if any of these matters is resolved on unfavorable terms.
However, although the ultimate outcome of any legal matter cannot be predicted
with certainty, based on present information, including our assessment of the
merits of the particular claim, we do not expect that these legal proceedings or
claims will have any material adverse impact on our future consolidated
financial position or results of operations. In addition, we are subject to a
number of lawsuits initiated by a significant number of claimants alleging
health problems as a result of exposure to asbestos. Many of these cases involve
significant numbers of individual claimants. However, only a small percentage of
these claimants allege that they were automobile mechanics who were allegedly
exposed to our former muffler products and a significant number appear to
involve workers in other industries or otherwise do not include sufficient
information to determine whether there is any basis for a claim against us. We
believe, based on scientific and other evidence, it is unlikely that mechanics
were exposed to asbestos by our former muffler products and that, in any event,
they would not be at increased risk of asbestos-related disease based on their
work with these products. Further, many of these cases involve numerous
defendants, with the number of each in some cases exceeding 200 defendants from
a variety of industries. Additionally, the plaintiffs either do not specify any,
or specify the jurisdictional minimum, dollar amount for damages. As major
asbestos manufacturers continue to go out of business, we may experience an
increased number of these claims. We vigorously defend ourselves against these
claims as part of our ordinary course of business. In future periods, we could
be subject to cash costs or non-cash charges to earnings if any of these matters
is resolved unfavorably to us. To date, with respect to claims that have
proceeded sufficiently through the judicial process, we have regularly achieved
favorable resolution in the form of a dismissal of the claim or a judgment in
our favor. Accordingly, we presently believe that these asbestos-related claims
will not have a material adverse impact on our future financial condition or
results of operations.

47

EMPLOYEE STOCK OWNERSHIP PLANS

We have established Employee Stock Ownership Plans for the benefit of our
employees. Under the plans, subject to limitations in the Internal Revenue Code,
participants may elect to defer up to 50 percent of their salary through
contributions to the plan, which are invested in selected mutual funds or used
to buy our common stock. We currently match in cash 50 percent of each
employee's contribution up to eight percent of the employee's salary. We
recorded expense for these matching contributions of approximately $2 million
for each of the three months ended March 31, 2005 and 2004, respectively. All
contributions vest immediately.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding our exposure to interest rate risk, see the
caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations," which is
incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the quarter covered by this report. Based
on their evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that the company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by our company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.

During the quarter ended March 31, 2005, we implemented a new Enterprise
Resource Planning system in a German emissions control facility resulting in a
material change in our processes over financial reporting at that facility. We
assessed the design effectiveness of the internal controls over the key
processes affected by the system change. As a result of this assessment,
management believes that we maintained adequate internal control over financial
reporting. We implemented this new system as part of a planned upgrade of our
information systems.

48

PART II

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None.

(b) Not applicable.

(c) Purchase of equity securities by the issuer and affiliated
purchasers. The following table provides information relating to the Company's
purchase of shares of its common stock in the first quarter of 2005. All of
these purchases reflect shares withheld upon vesting of restricted stock upon
employees' retirement, to satisfy tax withholding obligations.

The Company presently has no publicly announced repurchase plan or program,
but intends to continue to satisfy tax withholding obligations in connection
with the vesting of outstanding restricted stock through the withholding of
shares.

ITEM 6. EXHIBITS

(a) Exhibits. The exhibits filed with this report are listed on the
Exhibit Index following the signature page of this report, which is incorporated
herein by reference.

49

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934,
Tenneco Automotive Inc. has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.

TENNECO AUTOMOTIVE INC.

By: /s/ KENNETH R. TRAMMELL
------------------------------------
Kenneth R. Trammell
Senior Vice President and
Chief Financial Officer

Dated: May 10, 2005

50

INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2005

- ---------------

* Filed herewith.

58