Global growth... by design

Transcription

1 A Look Ahead Teeco Ic Aual Report Global growth... by desig North America Lauchig four major ew diesel platforms Itroducig brake products i the aftermarket Expadig share of commercial vehicle exhaust market Opeig two ew just-i-time facilities to service Toyota Europe Expadig Easter Europea footprit Lauchig four ew platforms with electroic suspesio Producig early 800,000 diesel particulate filter uits Korea Supportig two ew emissio-cotrol platforms South America Buildig o 32% reveue growth i 2005 Itroducig gas sprigs i the aftermarket Idia Assumed 100% owership of Idia facilities Lauchig high-volume ride-cotrol platform for a major customer Chia Opeig elastomer plat ad exhaust egieerig facility 23 ew platform lauches for seve customers Icreasig owership of Beijig ride cotrol facility

2 Our Missio Our missio is to be recogized by our customers as the umber-oe techology-drive, global maufacturer ad marketer of value differetiated ride cotrol, emissio cotrol ad elastomer products ad systems. We will stregthe our leadig positio through a shared-value culture of employee ivolvemet, where a itese focus o cotiued improvemet delivers shareholder value i everythig we do. Corporate Profile Safe Harbor Statemet Teeco Ic. is oe of the world s largest desigers, maufacturers ad marketers of emissio-cotrol ad ride-cotrol products ad systems for the automotive origial equipmet market ad aftermarket. The compay became a idepedet corporatio i 1999, allowig sigular focus o strategies to maximize global results. Teeco markets its products pricipally uder the Moroe, Walker, Gillet, ad Clevite Elastomer brad ames. Leadig maufacturers worldwide use our products i their vehicles, attracted pricipally by our advaced techologies. We are oe of the top suppliers to the automotive aftermarket, offerig exceptioally strog brad recogitio amog cosumers ad trade persoel. Please see the Safe Harbor Statemet, risk factors ad the descriptio of our origial equipmet (OE) reveue forecast uder "Maagemet's Discussio ad Aalysis of Fiacial Coditio ad Results of Operatios" i the accompayig Form 10-K, which is icorporated herei by referece. Table of Cotets Gatefold Teeco at a Glace Page 1 Fiacial Highlights Page 2 Chairma s Letter Page 5 Our Competitive Advatages Page 9 Emissios Techologies for Evirometal Madates Page 11 Advaced Techology for Improved Vehicle Ride ad Hadlig Page 12 Growth OEMs for Ehaced Customer Mix Page 13 Chia for Rapid Growth Page 15 Aftermarket Service Products for Icremetal Sales Page 16 Board of Directors ad Officers Page 17+ Form 10-K Iside back cover Ivestor Iformatio

3 Teeco Ic. Origial Equipmet Operatios 2005 Sales Applicatios Products Brads Emissio Cotrol $2,390 millio Passeger cars Light trucks Commercial vehicles Idustrial applicatios Motorbikes Buses Complete exhaust systems Fabricated maifolds Maifold-coverter modules Catalytic coverters Mufflers ad resoators Diesel particulate filter systems NOx abatemet systems Exhaust heat exchagers Exhaust isolators & hagig systems Ride Cotrol $1,030 millio Passeger cars Light trucks Commercial vehicles Golf carts Off-road recreatioal Rail cars Buses Shocks & struts Suspesio bushigs Coil, air & leaf sprigs Torque rods Egie/body mouts Suspesio modules/systems Cotrol arms/bars/liks Cabi dampers Computerized electroic suspesio Ati-roll system Aftermarket Operatios 2005 Sales Applicatios Products Brads Emissio Cotrol $368 millio Passeger cars Light trucks Commercial vehicles Performace vehicles Mufflers Pipes Tubig Moutig compoets Catalytic coverters Performace mufflers Headers Ride Cotrol $653 millio Passeger cars Light trucks Commercial vehicles Performace vehicles Trailers Shocks Struts Cartridges Moutig kits Performace shocks, struts, filters ad brakes Torque rods Suspesio bushigs Egie mouts Coil sprigs Car-appearace products Suspesio lift kits Reveues (millios) $4,441 $4,213 Emissio Cotrol/ Ride Cotrol Balace 62/38 63/37 Origial Equipmet/ Aftermarket Balace 77/23 76/24 percetage of sales 2005 Sales 2005 EBIT* North America 46% 47% Europe, South America, ad Idia 46% 45% Asia Pacific 8% 8% North America 67% 77% Europe, South America, ad Idia 25% 12% Asia Pacific 8% 11% * EBIT is earigs before iterest expese, taxes, ad miority iterest.

4 Competitors Key Advatages Top Five Customers Top Five Platforms 2005 Market Opportuities ArviMeritor Faurecia Eberspächer Bosal Delphi Nelso Fleetguard Emissio & Ride Cotrol Advaced techologies Experieced team Product/process quality Global program maagemet Japaese alliaces Joit vetures i Chia, Thailad ad U.K. Geeral Motors Corp. DaimlerChrysler AG Ford Motor Co. Volkswage AG PSA Peugeot/Citroë PSA Citroë C5, Peugeot 407, Peugeot 608 GM Escalade, Silverado, Suburba, Avalache, Tahoe, Sierra, Yuko GM Evoy, Trailblazer Dodge Ram Pickup DaimlerChrysler Tow & Coutry, Carava Additioal cotet due to emissio regulatios Diesel aftertreatmet Customized soud atteuatio Demad for diesel/hybrid/ fuel cell Emergig markets Commercial vehicle segmet Adjacet markets Customer relatioships ZF Sachs Delphi ArviMeritor Kayaba Mageti Marelli Hitachi Broad product rage Full-service supplier Just-I-Time (JIT) assembly Test ad validatio systems Kowledge-based egieerig Ford Motor Co. Volkswage AG Geeral Motors Corp. Nissa Motor Co., Ltd. DaimlerChrysler AG GM Silverado, Suburba, Avalache, Tahoe, Sierra, Yuko Ford Focus, Mazda3, Volvo S40 VW Golf, Caddy, Seat Altea Ford Fiesta, Fusio, Mazda2 DaimlerChrysler Tow & Coutry, Carava Vehicle stability/ safety requiremets Modular assembly New techologies Adjacet markets Electroic techologies Emergig markets Seat dampig systems Cabi dampig systems Commercial vehicle segmet Competitors Key Advatages Top Five Customers Leadig Products Market Opportuities ArviMeritor OE Service Bosal Goerlich s Exhaust Systems Iteratioal Muffler Compay Emissio & Ride Cotrol Brad domiace Relatioships with all major wholesale distributors/retailers Global presece Leadig market shares Product iovatio TEMOT Autoteile NAPA Automotive Distributio Iteratioal (ADI) Advace Auto Parts Group Auto Uio (GAU) Quiet-Flow3 Mufflers/ Assemblies Dyomax Ultra-Flo Stailess/ Welded Mufflers/Systems DNX performace exhaust systems SoudFX mufflers Clea Air catalytic coverters Growig umber of vehicles o the road OE Service New techologies Emissio regulatios Performace-product demad Product quality ArviMeritor Kayaba OE Service ZF Sachs Extesive product ad vehicle coverage Targeted marketig programs Itroductio of service parts NAPA Advace Auto Parts O Reilly Auto Parts TEMOT Autoteile Automotive Distributio Iteratioal (ADI) Reflex shocks & struts Sesa-Trac shocks & struts Racho shocks, struts ad suspesio lift kits Quick Strut Gas-Magum shocks Growig umber of vehicles o the road OE Service New techologies Uperformed maiteace Premium mix expasio DNX performace shocks ad struts Broader product coverage Heavy-duty truck peetratio Moro-Matic Plus shocks Safety/istaller educatio DuPot car-care lie Testig/diagostic equipmet Diverse Customer Base Top Customers as a % of Total 2005 Reveues Profile Largest OE Customers 16.7% 11.6% 9.1% 9.0% 6.1% 3.6% 3.3% 2.5% Geeral Motors Ford Motor Co. Volkswage DaimlerChrysler PSA Peugeot Citroë Toyota Motor Co. Nissa Motor Co. BMW AG Largest AM Customers 1. 9% 1. 5% 1. 2% 1. 1% 0. 7% 0. 7% 0. 5% 0. 4% NAPA TEMOT Autoteile GmbH Advace Auto Parts ADI (Automotive Distributio It l) Ui-Select O Reilly Automotive GAU (Group Auto Uio) KFE (Kwik-Fit Europe) People: Approx. 19,000 Maufacturig ad Just-I-Time Facilities: 79 Egieerig Ceters: 13 Coutries Served: 135 As of

5 Year i Review Fiacial Highlights (dollars i millios except share ad per share data) Net sales ad operatig reveues $ 4,441 $ 4,213 $3,766 $3,459 $3,364 $3,528 Earigs before iterest, taxes ad miority Iterest $ 215 $ 174 $ 174 $ 169 $ 90 $ 122 Depreciatio ad amortizatio $ 177 $ 177 $ 163 $ 144 $ 153 $ 151 EBITDA* $ 392 $ 351 $ 337 $ 313 $ 243 $ 273 Net icome (loss) before chage i accoutig priciple $ 58 $ 15 $ 26 $ 31 $ (131) $ (41) Earigs (loss) per share before chage i accoutig priciple $ 1.29 $ 0.35 $ 0.62 $ 0.74 $ (3.47) $ (1.16) Capital expeditures $ 144 $ 130 $ 130 $ 138 $ 127 $ 146 Average diluted shares outstadig 45,321,225 44,180,460 41,767,959 41,667,815 38,001,248 34,906,825 Total debt $ 1,378 $1,420 $ 1,430 $ 1,445 $ 1,515 $ 1,527 Cash ad cash equivalets $ 141 $ 214 $ 145 $ 54 $ 53 $ 35 Debt et of cash balaces $ 1,237 $1,206 $ 1,285 $ 1,391 $ 1,462 $ 1,492 *EBITDA represets icome before cumulative effect of chage i accoutig priciple, iterest expese, icome taxes, miority iterest ad depreciatio ad amortizatio. EBITDA is ot a calculatio based upo geerally accepted accoutig priciples. The amouts icluded i the EBITDA calculatio, however, are derived from amouts icluded i the historical statemets of icome data. I additio, EBITDA should ot be cosidered as a alterative to et icome or operatig icome as a idicator of our performace, or as a alterative to operatig cash flows as a measure of liquidity. We have reported EBITDA because we believe EBITDA is a measure commoly reported ad widely used by ivestors ad other iterested parties as a idicator of a compay s performace. We also believe EBITDA assists ivestors i comparig a compay s performace o a cosistet basis without regard to depreciatio ad amortizatio, which ca vary sigificatly depedig upo may factors. However, the EBITDA measure preseted i this documet may ot always be comparable to similarly titled measures reported by other compaies due to differeces i the compoets of the calculatio. Reveue per employee $ i thousads $176 $153 $156 $197 $229 $234 SG&A* as percetage of reveue 12.1% Stock Price Performace TEN vs. S&P 1500 Auto Parts Idex Based o a iitial ivestmet of $100 o December 31, 2000 Teeco Ic. S&P 1500 Auto Parts Idex TEN +554% 10.5% 10.1%9.7% 9.9% 8.7% S&P 1500 Auto Parts Idex +23% *Sellig, geeral ad admiistrative expeses 1

6 To Our Shareholders Our performace last year was a success o may levels, culmiatig i a 25% icrease i adjusted * earigs per share. We have solved the maagemet dilemma growig the busiess while shrikig costs. Teeco eters 2006 with our most robust portfolio of projected busiess ever, the greatest fiacial stregth i our six-year history, ad a wide rage of competitive advatages. Strategic Growth Drives Robust Sales Projectio We are cocetratig o strategic growth areas: Icreasig our ivestmet i ew techologies for diesel emissio ad electroic ride cotrol products; Positioig ourselves i every highgrowth regio aroud the globe; Peetratig adjacet markets like commercial trucks ad motorcycles; Targetig the fast-growig OEMs i Japa ad Korea; ad Leveragig our strog brads ito higher-replacemet service-parts categories, like brakes ad filters. These buildig blocks provide a foudatio that has Teeco poised for $1 billio of projected OE reveue growth i Furthermore, we estimate 40% of 2007 OE sales will come from these strategic growth areas, up from approximately 22% i Operatig Performace Sparks Share Gai Our performace last year was a success o may levels, as we cotiued to outdistace the competitio ad solidify our leadership positio. Our reveue, operatig icome ad earigs per share reached levels usurpassed at ay time i Teeco s idepedet history. We delivered sales of $4.4 billio, up 5% over 2004, outperformig the idustry s estimated 3% global light-vehicle productio icrease. We reached this milestoe while carefully maagig costs, allowig us to fully traslate the greater reveue ito operatig profit expasio, adjusted* for certai items, despite $135 millio of higher steel prices. The ed result was a 25% improvemet i adjusted* earigs per share. Operatioal accomplishmets i 2005 reflect our expasio ito adjacet markets. Last year, we were awarded Iteratioal Truck & Egie Corp. s medium-duty truck platform that is a big part of our 2007 projected growth. This is high-cotet diesel busiess that marks our first commercial vehicle cotract for emissio cotrol i North America. We also furthered our peetratio ito the two-wheeler market whe we acquired the primary exhaust provider to Harley-Davidso. Teeco stockholders realized a 14% retur o ivestmet i our commo shares last year drive by our solid operatig performace; favorable platform, customer ad geographic mix; ad risig ivestor appreciatio of our growth strategies. I cotrast, the S&P 1500 Auto Idex declied 21% primarily affected by idustry challeges i North America. New Director Brigs Global Perspective Earlier this year, we added Mitsuobu Toy Takeuchi to our board of directors. Toy was formerly the chairma ad chief executive officer of DENSO Iteratioal Americas, Ic., the North America arm of Japabased DENSO Corp., the world's third-largest automotive supplier. His global perspective, vast idustry kowledge ad outstadig busiess judgmet will beefit Teeco greatly as we expad our focus o global growth opportuities. 2 *A explaatio of these adjustmets ca be foud i the Maagemet s Discussio ad Aalysis of the attached Form 10-K. Additioally, a recociliatio of the results is detailed o the iside back cover of this report.

7 A Appropriate Name Chage As I metioed earlier, our strategies for growth are ot limited to the automotive sector. Heavy-duty trucks ad motorcycles have emissioad ride-cotrol products that offer opportuities to expad our top lie ito adjacet, potetially coutercyclical markets. This diversificatio ito sectors outside of automotive led to our ame chage late last year to Teeco Ic. Deletig Automotive from our ame is a atural step i the evolutio of the eterprise. Teeco Ic. is less restrictive i represetig the directio of our compay ad how far we aspire to go. As I look out over the ext decade, it is imperative that we maitai our passioate customer focus ad product leadership i each operatig segmet served, while expadig ito ew oautomotive markets. Three years ago we set our sights o the commercial vehicle market for emissios. Today we have platforms i Europe ad North America that we estimate will icrease our market share i this segmet to 10% by We expect this share to double by the ed of the decade beefitig from the ever-more striget heavy truck emissio regulatios madated for 2009 ad Peetratig other adjacet markets for emissio cotrol, like costructio, agriculture ad idustrial equipmet, ad small egies for lawmowers ad golf carts, represets a sigificat icremetal growth opportuity for Teeco that we expect will exted ad further diversify our reveue stream over the log term. Growig the Busiess While Shrikig Costs While deliverig sustaiable growth, our culture of cotiuous improvemet meas that we are stadardizig busiess processes, operatig more efficietly ad deliverig greater value. Traiig for Lea Maufacturig ad Six Sigma programs to reduce waste ad improve quality has bee effective. Today we are doig more with less. By focusig o our core competecies with a spirit of executio ad disciplie, we have solved the maagemet dilemma growig the busiess while shrikig costs. Our People are the Key Our future will be built aroud the great work of the early 19,000 employees of Teeco. We cotiue to ivest i the developmet of our people as we roll out chage maagemet ad leadership traiig for the hourly workforce. I believe our taleted employees have made ad will cotiue to make Teeco a stadout eterprise, ad it is my privilege to lead them. Mark P. Frissora Chairma, Chief Executive Officer ad Presidet March 2006 Mark P. Frissora Chairma, Chief Executive Officer ad Presidet March

8 Competitive Advatages Teeco has good customer, platform ad geographic diversity, ad a balace betwee origial equipmet sales (77%) ad aftermarket sales (23%). About 46% of 2005 sales were geerated i North America; 46% i the Europe, South America ad Idia segmet; ad 8% i the Asia Pacific regio. We have OE products o more tha 200 platforms with the top 10 platforms represetig oly 25% of total sales. Reveue by Customer As a percetage of 2005 sales Geographic Reveue Mix 2005 Geeral Motors 16.7% Ford Motor Co. 11.6% Volkswage 9.1% DaimlerChrysler 9.0% North America 46% Europe, S. America ad Idia 46% Asia Pacific 8% PSA Peugeot Citroë 6.1% Toyota Motor Co. 3.6% Nissa Motor Co. 3.3% BMW AG 2.5% Other 38.1% 4

9 Competitive Advatages A Variety of Markets Served Two Wheeler Passeger Car Light-Duty Truck Heavy-Duty Truck Teeco has oe of the broadest global footprits amog automotive parts suppliers. Our geographic diversity helps protect us from regioal dowturs i automotive productio. North America ad our Europe, South America ad Idia segmets each geerated 46% of 2005 reveues with Asia Pacific resposible for the remaiig 8%. As a result, we are well positioed to offset weakess i ay oe regio of the world with growth from aother. Our broad geographic coverage places us closer to our customers, miimizig high shippig costs associated with emissio-cotrol products. Besides beig well-established i Wester Europe, we have peetrated Easter Europe, where our goal is to geerate approximately 25% of our total Europea uit productio by 2010 i lie with that market s productio mix. Moreover, we estimate that Teeco is the #1 emissio-cotrol supplier i Chia, a ecoomy forecasted to grow at a rate more tha double the rate of the U.S. ecoomy over the balace of this decade. We have oe of the best customer mixes amog our peers. I 2005, may North America parts suppliers struggled as a result of their high exposure to domestic OEMs, who cut productio after losig early two poits of market share to foreig automakers. Our balaced customer set made up of more tha 30 OEMs icludes Toyota, Nissa ad Hoda amog its top 10 OE customers. These growth customers represeted 20% of Teeco s total North America OE reveues i 2005, eablig us to outperform the light vehicle market. We cotiue to build relatioships with growig customers, with a goal of matchig our customer reveues with their market shares for optimal balace. I the aftermarket, we have cotracts with four of the top five retailers i North America ad do busiess with virtually all of the major warehouse distributors globally. No sigle aftermarket customer accouted for more tha 2% of our 2005 total reveues. Teeco s broad coverage of vehicle platforms ecompasses productio o the top-sellig vehicles worldwide. We have products o more tha 200 platforms with average aual reveue per platform of about $14 millio, providig a advatageous balace. Suppliers with substatial volumes spread across oly a few platforms are at greater risk i a decliig productio eviromet. I 2005, for example, suppliers with a sigificat percet of their total volume tied to full-size SUVs i North America were meaigfully impacted whe productio o those vehicles declied by early 30%. At Teeco, our largest OE platform represets less tha 5% of total compay reveues. Our top 10 OE Global Footprit Chevrolet Tahoe Automakers must operate globally Teeco does busiess i 135 coutries to remai cost competitive, ad they Teeco has 13 egieerig ceters require that suppliers develop a similar worldwide with aother to ope i footprit. Geographic diversity helps Chia i 2006 reduce logistic costs, allowig for the regioal supply of items that are cost prohibitive to ship globally, like exhaust systems. Equally importat are global egieerig capabilities. 5

10 Our Competitive Advatages platforms make up oly 25% of total sales, ad are split 50/50 betwee passeger cars ad light trucks. Furthermore, of our top 10 platforms, 40% are produced i North America, 30% i Europe ad 30% are global. Expadig peetratio ito syergistic markets helps diversify busiess model. We are positioed to offset cyclical treds i the auto idustry by diversifyig ito adjacet markets with similarly striget evirometal regulatios that drive growth. Today, about 5% of our reveues are derived from the commercial truck market. We expect that percet to icrease sigificatly as we capitalize o the tighteig emissio regulatios for medium- ad heavyduty trucks i 2007 ad 2010 i the U.S., ad i 2006 ad 2009 i Europe. A highly competitive global footprit Oe of the best customer mixes amog our peers Products o more tha 200 vehicle platforms Average platform size oly $14 millio Peetratig adjacet growth markets for greater diversity Iovative techologies across several product lies A stable, experieced maagemet team We also have a growig positio i the two-wheeler market, supplyig exhaust products for BMW ad Harley-Davidso. Motorcycles produce up to 15 times the emissios per mile as the average ew car or light-duty truck. We are utilizig techologies similar to those that make ew cars ad trucks cleaer to cost-effectively reduce motorcycle emissios. A ew set of emissios stadards for motorcycles wet ito effect i 2004 with additioal reductios required for We are well-positioed to take advatage of the evirometal legislatio as it evolves ito off-road market segmets, icludig costructio, agriculture ad idustrial equipmet. Emissios stadards for today s offroad equipmet are relatively leiet compared to those for o-road vehicles. However, i May 2004 the U.S. Evirometal Protectio Agecy itroduced ew off-road emissio stadards, which are to be phased-i betwee These stadards affect approximately oe millio offroad uits. With the additio of the small egie market for lawmowers ad sowblowers, the market opportuity grows to early 19 millio uits. Teeco has iovative techologies across several product lies. Teeco has log bee kow as a leadig product iovator. Today we have global etworks i place to share kowledge ad ideas across departmets ad locatios, ad across global employee populatios. Our goal is to esure that o opportuity is overlooked i our quest to deliver leadig-edge products ad services. Growig demad for our premium products, most otably advaced emissio techologies for gas ad diesel egie vehicles, ad computerized electroic suspesios, ati-rollover devices ad elastomer products i ride cotrol, uderscores the compay s techological achievemets. A stable, experieced maagemet team focuses o executio ad disciplie. Teeco s strategic busiess uits are led by experieced executives who have a prove track record ad average more tha 20 years i the automotive idustry. The majority of our seior maagemet team has bee with the compay sice we became idepedet i late Together, we have remaied disciplied i the executio of the same strategies for six years. Product iovatio ad debt reductio cotiue to be priorities. Two-Wheeler Market Teeco acquired the primary emissiocotrol supplier to Harley-Davidso i early This acquisitio reflects our strategy to grow through adjacetmarket opportuities. Harley-Davidso worldwide has bee i busiess for more tha 100 years with oe of the most lastig brads i U.S. history. Harley-Davidso wated a supplier with a global footprit ad similar depth of experiece. Not oly do we meet those requiremets, but we have prove our ability to easily trasfer our emissiocotrol techology from automobiles to motorcycles. 6

11 Growth Prospects Stricter emissio-cotrol stadards, demad for improved vehicle stability, expected log-term growth i the Chiese auto market, rapid market share gais from the Japaese ad Korea OEMs ad ew aftermarket products create favorable growth prospects for Teeco. Global Origial Equipmet Reveue Projectio* $ i billios $4.5 A estimated 40% of 2007 projected origial equipmet sales will come from strategic growth areas versus 22% i $1 billio icrease over 2006* 4 $3.4 $3.5 $3.2 3 $2.8 $ *Jauary 2006 projectio. See the compay s attached Form 10-K for iformatio regardig the calculatio of its reveue projectio. 7

12 Emissio stadards ad fuel requiremets are tighteig aroud the world. Our 2007 sales of higher-cotet diesel vehicle programs are expected to icrease five-fold from Exhaust tailpipe Muffler Pipe exhaust Heat exchager Diesel oxidatio catalyst Diesel particulate filter Selective catalytic reductio system Ford Motor Compay F-350 The diesel egie is a great alterative for cosumers that demad improved power, torque ad fuel efficiecy. The challege is i meetig future diesel emissios regulatios without degradig the key characteristics of the diesel powertrai. Teeco is well positioed with a good product at the right time. I additio to diesel, Teeco worked collaboratively with our Research ad Iovatio Ceter to deliver the first diesel hybrid to meet Partial Zero Emissios Vehicle (PZEV) requiremets. 8

13 Emissios Techologies for Evirometal Madates Global Diesel Particular Filter (DPF) Busiess Uits i millios Teeco s DPF volumes to icrease five times by 2007 Striget global emissio regulatios offer oe of the most importat growth opportuities for Teeco. While pollutio cotrol measures have drastically reduced light-vehicle emissios over the past two decades, the U.S., Europe, Japa ad other coutries are pushig for eve tighter regulatios i comig years. The best emissio-cotrol opportuity may rest i diesel vehicles. Global lightduty diesel volume is forecasted to grow more tha 50% by 2012 to 19.6 millio uits. J.D. Power ad Associates predicts U.S. light-duty diesel sales will early double to more tha oemillio uits i Last year, oly about 3% of the light vehicles sold i the U.S. had diesel egies, compared to half the vehicles i Europe. Diesel s superior fuel ecoomy ad low carbo dioxide emissios are drivig its forecasted growth. Diesels will also get a boost this October, whe U.S. fuel retailers are required to begi sellig low-sulfur diesel fuel. Ad the eergy bill recetly siged by Presidet Bush gives a tax credit to U.S. purchasers of certai diesel vehicles. Low-sulfur fuel ad better techology will help diesels meet ew federal emissios stadards beig phased i begiig i I Europe, ew diesel emissio regulatios are expected to go ito effect i Teeco is a leadig supplier of advaced emissio-cotrol solutios. We expect diesel platforms to represet about 24% of our projected global OE reveues i 2007, up from just 6% i Also i 2007, we expect to supply 1.5 millio diesel particulate filter uits more tha five times last year s level. We re also i productio with diesel oxidatio catalysts, ad we re supplyig selective catalytic reductio systems for heavy-duty trucks. Furthermore, we re workig o a advaced regeeratio diesel particulate filter ad developig a NOx adsorber catalyst that removes itroge oxides from the exhaust stream. These are just some of our techologies ad developmet activities that address the dramatic diesel growth expected over the ext several years. Our techological expertise, commercialized exhaust product portfolio ad worldwide maufacturig facilities positio us well to capitalize o these growth treds. New Diesel Busiess Supports Growth i New-to-Teeco Busiess Customer Product Ford Super Duty Diesel & Gasolie Emissio Cotrol GM Duramax egies Diesel Emissio Cotrol N.A. OEM Light Duty Diesel Emissio Cotrol Iteratioal Truck Medium Duty Diesel Emissio Cotrol Commercial Vehicle Market Heavy-duty Truck Euro 4 ad Euro 5 are icreasigly striget emissio stadards that will be effective i 2006 ad 2009, respectively. I order to meet these clea-air regulatios, truckmakers are usig a variety of diesel aftertreatmet solutios to cut itroge oxide emissios. Teeco helped lauch DaimlerChrysler s Actros heavy-duty commercial truck i Europe last year usig a advaced-techology emissio-cotrol system that addresses the ew madates. 9

14 Ride quality ad hadlig characteristics remai amog the top ifluecers i cosumer buyig decisios. Teeco s electroic suspesio itegrates the latest techology ito a highly advaced ride-cotrol system. Cotiuously Cotrolled Electroic Suspesio Volvo S80 Safety, comfort ad hadlig are key to cosumer buyig decisios. Volvo used Teeco s computerized electroic suspesio to develop our cotiuously cotrolled chassis cocept, called Four- C, which is stadard o our performace vehicles ad optioal o our S60, V70, XC70 ad S80 models. We looked for a parter to further ehace ride cotrol ad hadlig, ad believe Teeco fully uderstads how to combie ew techical solutios, itegratios ad refiemets. 10

15 Advaced Techology for Improved Vehicle Ride ad Hadlig Elastomer Products V-Rod Bushigs ad Cartridges Torque Rod Teeco develops techologically advaced ride-cotrol products that focus o safety as well as comfort. We estimate we are the top supplier to the aftermarket, led by our worldfamous Moroe brad, ad the #2 provider to origial equipmet maufacturers worldwide. Our ridecotrol sales i 2005 cotributed $1.7 billio to Teeco s total reveue, with about 60% of this comig from the origial equipmet market. Strategically, we have dedicated ourselves to developig ad commercializig premium products. Our advaced Cotiuously Cotrolled Electroic Suspesio (CES) product provides vehicle hadlig ad safety improvemets by cotiuously moitorig road coditios ad vehicle movemet, makig istataeous adjustmets to vehicle suspesio. We are curretly producig CES for early all Volvo models i Europe as well as Audi s A6 ad Avat vehicles. Our ati-rollover suspesio techology, Kietic, which offers improved vehicle stability, is available today o Toyota s Lexus GX470 sport utility vehicle. Ad we ve developed fluid-filled elastomers that act as dampers to miimize oise, vibratio ad harshess. All are leadig-edge products. For example, CES typically sells for roughly seve times the price of a stadard shock. The computerized electroic shock absorber market share for Teeco was 9% i 2005, but we project it will grow sigificatly over the ext five years. We cotiue to exted product techologies from our origial equipmet busiess to the aftermarket. This practice expads the marketig reach of each product, spreads out the developmet costs ad ehaces the retur o our ivestmet. The ride-cotrol aftermarket has bee strog i recet years, ad ca be couter-cyclical to the origial equipmet auto-parts market. Our global Safety Triagle aftermarket campaig educates both istallers ad cosumers o the importace of vehicle maiteace ad replacig wor shock absorbers, which ca help improve stoppig, steerig ad vehicle stability. Global Platform Capabilities Teeco was awarded the Volkswage global emissio- ad ride-cotrol platform that icludes the VW Golf ad Audi A3 models. Uder a global platform developmet strategy, commo vehicle platforms are tailored by local desig ad egieerig to suit each geographic ed market. Teeco leveraged its cross-border syergies ad capabilities i egieerig, purchasig ad maufacturig to successfully lauch this strategic platform across North America, Europe ad the Asia Pacific regio. 11

16 Growth OEMs for Ehaced Customer Mix Japaese OEMs as a percetage of total North America Origial Equipmet sales 16.3% 18.7% 19.9% Wiig ew busiess with Asia OEMs, urturig established relatioships with the top three Japaese automakers i North America, extedig our Europea OEM customer base ad a more recet focus o buildig relatioships with Korea OEMs will positio Teeco at the forefrot of global automotive growth. I North America, the Big Three U.S. automakers' sales were dow 2% i 2005, while Asia brads' sales climbed 7%. The Detroit Big Three s market share i the U.S. was 56.9% last year, dow from 58.7% i 2004 ad 61.7% three years ago, while Asia brads' U.S. market share rose to 36.5%, up from 34.6% i % Reveue from Japaese suppliers represeted 20% of our North America origial equipmet sales i 2005, up from 19% i 2004 ad 16% i We cotiue to build o these relatioships. I fact, we are expadig our desig, developmet ad program maagemet capabilities i Japa to further ehace the value we brig to these customers. Our relatioships with the Japaese automakers started i 1988 with a sigle customer i a sigle market. Today, this busiess spas the globe as we maufacture products for seve Japaese customers i 14 coutries. The umber of Japaese platforms i North America also cotiues to grow. Our products are o may leadig programs icludig: the Lexus RX330, Toyota Siea, Hoda Pilot, Acura MDX, Nissa Pathfider ad Nissa Altima. Teeco also was awarded the exhaust busiess o Toyota's high-volume Tudra truck platform that lauches i Toyota is the secod-raked automotive group i the world i terms of productio ad sales. Worldwide, Toyota is our sixth-largest customer amog more tha 30 differet OEMs served. I the highly competitive ad everchagig automotive idustry, we are cotiuously workig to improve our customer mix by targetig growth customers i growth markets. For optimal balace, our goal is to have each of our customer s percet of our total OE reveues reflect its market share. Growig with Japaese OEMs Toyota Tudra Toyota looks to its suppliers to provide superior parts ad materials, particularly those that support quatum leaps i the value of its vehicles. Teeco works to meet those goals with its advaced emissio-cotrol products that address higher evirometal stadards, ad iovative suspesio systems, which combie ride comfort ad safer hadlig. 12

17 Chia for Rapid Growth Our ride-cotrol joit veture i Chia produces 1.1 millio shocks ad struts aually. We estimate that Teeco is the top emissio cotrols maufacturer i Chia, operatig five facilities through four majority-owed joit vetures. We also are a up-ad-comig supplier of ridecotrol parts through oe majorityowed eterprise i Beijig. Our early ivestmets i Chia, datig back to 1995, have give us experiece i that market that few other auto-parts maufacturers possess. Chia is the world s fastest growig automotive market ad recetly became the world s secod-largest market for automotive sales. As a percetage of global idustry sales, Chia ow represets 8.7%, up from 4.3% i Furthermore, i 2005, Chia accouted for 23.2% of the total idustry s global growth. Ford ad GM estimate Chia will surpass the U.S. as the world s largest car market by Additioally, global light-vehicle productio i Chia is expected to grow 7% compouded aually through this decade. As a result, it represets a importat growth opportuity for automotive parts suppliers. Virtually all of our productio i Chia is for use i the Chiese market, supplyig OEMs that produced more tha five millio vehicles i I keepig with the expected growth, we are opeig our first wholly owed elastomer maufacturig plat as well as our first emissio cotrol egieerig facility joit veture, both located ear Shaghai, later this year. We are also ivestig i the diversity of our customer base i Chia. Twetythree platforms lauchig over the ext 18 moths brig us additioal busiess with Geeral Motors, Ford, Suzuki, PSA, Nissa, DaimlerChrysler ad Mazda. Our goal is to distribute our sales i Chia more favorably, so that evetually our reveue mix tracks the OEMs market shares i Chia. Diversifyig Our Customer Base i Chia Ford Focus Chag A Ford chose Teeco as its 2005 Top Supplier i Chia for emissiocotrol products based o our outstadig egieerig capabilities, o-time delivery ad favorable cost structure. As a global supply parter, our desig, product developmet ad maufacturig processes meet Ford s egieerig requiremets for cotiuous improvemet. Teeco also helps Chag A Ford satisfy Chia's Euro 3 evirometal regulatios through techological iovatio. 13

18 The automotive aftermarket offers sigificat growth potetial due to uperformed vehicle maiteace. Teeco is capitalizig o this opportuity by expadig ito ew product categories. Moroe Quick Strut DNX Performace Products: Lowerig Sprig Kits, Air Filters, Brake Pads, Tail Pipe Extesios Moroe Premium Brake Pads DNX Stailess Steel Dual Tailpipe Extesio Dupot Car Care Products DNX High Performace Stailess Steel Muffler Temot Iteratioal Temot Iteratioal is oe of the strogest aftermarket trade associatios i Europe. Our leadig warehouse distributors favor major brads over private label. We recommed suppliers that provide superior techologies, outstadig logistics ad strog promotioal support. Teeco is a preferred supplier with our buyig group for both its Moroe ad Walker products. We view them as a strategic parter ad a bechmark for evaluatig our supplier base. 14

19 Aftermarket Service Products for Icremetal Sales Teeco is the leadig provider of emissio-cotrol ad ride-cotrol products to the idepedet replacemet-parts market i both North America ad Europe. We geerate 23% of our total sales from the aftermarket. Achievig lower maufacturig costs by combiig origial equipmet ad aftermarket productio i the same facilities, ad relocatig sources of supply to low-cost coutries, Aggressive ivestmet i comprehesive istaller traiig ad marketig programs, Covicig istallers to upgrade their customers ito premium brads, such as our Reflex shock absorbers ad Quiet-Flow mufflers, ad Lie extesios through products origially developed for the OEM market. Teeco cotiues to commuicate the eed to improve vehicle ride ad safety to aftermarket cosumers. The demad for aftermarket products is drive primarily by three factors: the umber of miles vehicles are drive, a amout that has icreased by almost 2% compouded aually sice 1999; the umber of vehicles i operatio, which has rise to 225 millio i 2004 from 206 millio i 1998; ad the average age of light vehicles o the road, which reached a uprecedeted 7.9 years i Teeco s success i supplyig replacemet parts through retailers ad warehouse distributors is primarily due to: The stregth of our achor brads, Moroe shock absorbers ad Walker mufflers, As a cosequece, our aftermarket busiess has achieved stable growth, better tha most of our competitors, mitigatig the cyclicality i demad from the automakers. The Automotive Aftermarket Idustry Associatio says a estimated $62 billio of vehicle maiteace goes uperformed each year. Based o this data, sector sales could icrease substatially if cosumers were educated o the safety value of proper maiteace. We are ow supplemetig our hard replacemet parts mufflers ad shocks with a ew emphasis o service parts, products that are replaced more frequetly like car-care chemicals, high-performace air filters ad premium brake compoets. We ited to expad our service parts busiess, ow i its ifacy, by leveragig our sales ad distributio assets ad our brad ames. Caadia Tire Cosumers ad professioal istallers alike recogize Moroe as a top-quality brad of shocks ad struts. Our research idicates there is o limit to extedig the brad to other automotive parts associated with safety, durability ad performace. The itroductio of Moroe brakes provides a valuable ew product offerig ad is importat to the goals of our strategic partership, which iclude movig cosumers up the value ladder, ad icreasig profitability ad customer satisfactio. 15

20 Board of Directors ad Officers Top row, left to right: Charles W. Cramb 1 Executive Vice Presidet, Fiace & Techology, ad Chief Fiacial Officer Avo Products, Ic. Timothy R. Doova Executive Vice Presidet Strategy ad Busiess Developmet ad Geeral Cousel Teeco Ic. M. Kathry Eickhoff-Smith 1,3 Retired Presidet ad Chief Ecoomist Eickhoff Ecoomics, Ic. Mark P. Frissora Chairma, Chief Executive Officer Presidet Teeco Ic. Frak E. Macher 1 Presidet ad Chief Executive Officer Collis & Aikma Corporatio Roger B. Porter 2,3 IBM Professor of Busiess ad Govermet Harvard Uiversity Bottom row, left to right: David B. Price, Jr. 2,3 Chief Executive Officer ad Presidet Birdet Price, LLC Deis G. Severace 1 Acceture Professor of Busiess Iformatio & Techology, Stephe M. Ross School of Busiess, Uiversity of Michiga Paul T. Stecko 2,3 Chairma ad Chief Executive Officer Packagig Corporatio of America Mitsuobu Takeuchi Retired Chairma ad Chief Executive Officer DENSO Iteratioal Americas, Ic. Jae L. Warer 2 Group Presidet Fiishig Systems Illiois Tool Works Ic. 1 Audit Committee 2 Compesatio/Nomiatig/ Goverace Committee 3 Three-Year Idepedet Director Evaluatio Committee Orage umbers idicate the committee chair. Officers Mark P. Frissora Chairma, Chief Executive Officer Presidet Timothy R. Doova Executive Vice Presidet Strategy ad Busiess Developmet Geeral Cousel Hari N. Nair Executive Vice Presidet Maagig Director Europe, South America ad Idia Keeth R. Trammell Executive Vice Presidet Chief Fiacial Officer Richard P. Scheider Seior Vice Presidet Global Admiistratio Timothy E. Jackso Seior Vice Presidet, Techology Geeral Maager, Asia Pacific Paul Schultz Seior Vice Presidet Global Maufacturig Supply Chai Maagemet Bret J. Bauer Seior Vice Presidet Geeral Maager, North America Origial Equipmet Emissio Cotrol Neal A. Yaos Seior Vice Presidet Geeral Maager, North America Origial Equipmet Ride Cotrol Aftermarket Lois Boyd Vice Presidet ad Geeral Maager Commercial Vehicle Systems/ Specialty Markets Global Program Maagemet Josep Foros Vice Presidet Geeral Maager, Europe Origial Equipmet Ride Cotrol Ulrich Mehlma Vice Presidet Geeral Maager, Europe Origial Equipmet Emissio Cotrol Theo Boeu Vice Presidet, Fiace, Europe H. William Haser Vice Presidet Chief Iformatio Officer Joh E. Kuz Vice Presidet ad Treasurer Paul D. Novas Vice Presidet Fiace ad Admiistratio Europe James A. Perkis Vice Presidet ad Cotroller James K. Spagler Vice Presidet Global Commuicatios J. Jeffrey Zimmerma Vice Presidet, Law 16

21 Ivestor Iformatio Corporate Headquarters Teeco Ic. 500 North Field Drive Lake Forest, Illiois Web Site Corporate Iformatio Idividuals iterested i receivig the compay s latest quarterly earigs press release or other compay literature should write the Ivestor Relatios Departmet at the corporate headquarters address or call Iformatio about Teeco Ic. is also available o the compay s web site. Stock Listig Teeco s commo stock is listed uder the ticker symbol TEN. TEN is traded primarily o the New York Stock Exchage ad also o the followig exchages: Chicago, Pacific ad Lodo. As of February 20, 2006, there were approximately 23,610 holders of record of the compay s commo stock, par value $0.01 per share. Ivestor Iquiries Securities aalysts, portfolio maagers ad represetatives of fiacial istitutios seekig iformatio about the compay should cotact the Ivestor Relatios departmet: Stockholder Iquiries For stockholder services such as exchage of certificates, issuace of certificates, lost certificates, chage of address, chage i registered owership or share balace, write, call or the compay's trasfer aget: America Stock Trasfer & Trust Compay, as aget for Wachovia Bak, N.A. 59 Maide Lae New York, New York Toll Free Click o "Shareholder Accout Access" Divideds The compay expects that for the foreseeable future it will follow a policy of retaiig earigs i order to fiace the cotiued developmet of its busiess. Additioal iformatio o the compay s divided policy ad restrictios o the paymet of divideds ca be foud i Part II, Item 5 ad i Maagemet s Discussio ad Aalysis i the Aual Report o Form 10-K for the year eded December 31, Aual Meetig The Aual Meetig of Stockholders will be held at 10:00 a.m. Cetral Time o Tuesday, May 9, 2006, at Teeco Ic. headquarters, 500 North Field Drive, Lake Forest, Illiois The iformatio o our web site is ot part of this aual report Recociliatio of Adjusted Operatig Icome ad Earigs Per Share (see Chairma s Letter, page 2) Year Eded Year Eded Dec. 31, 2005 Dec. 31, 2004 EBIT Earigs EBIT Earigs (Millios) Per Share (Millios) Per Share Earigs measures $215 $1.29 $174 $0.35 Adjustmets (reflect o-gaap measures): Restructurig ad restructurig-related expeses New aftermarket customer-chageover costs Cosultig fees idexed to stock price Tax adjustmets (0.09) (0.47) Costs related to refiacig of debt 0.60 No-GAAP earigs measures $237 $1.52 $226 $1.22 Stock Price Data Sales Prices Sales Prices Sales Prices Sales Prices High Low High Low High Low High Low First Quarter* $23.17 $19.61 $17.36 $12.07 $14.88 $ 6.73 $4.32 $2.01 Secod Quarter $17.22 $11.55 $15.34 $10.09 $4.65 $2.25 Third Quarter $20.06 $16.30 $14.51 $11.95 $7.45 $3.61 Fourth Quarter $19.95 $15.70 $17.49 $10.93 $7.32 $4.66 * 2006 First Quarter through February 17, 2006

22 Teeco Ic Aual Report 500 North Field Drive Lake Forest, Illiois NYSE: TEN