10-Q 1 ten-2013630x10q.htm FORM 10-Q TEN-2013.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ 
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2013
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12387
TENNECO INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
76-0515284
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
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  þ      No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ      No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ
 
Accelerated filer  ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
 
 
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨      No  þ
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 $0.01 per share: 61,095,991 shares outstanding as of August 1, 2013.



TABLE OF CONTENTS
 
 
 
Page
Part I — Financial Information
 
Item 1.
 
Tenneco Inc. and Consolidated Subsidiaries —
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Part II — Other Information
 
Item 1.
Legal Proceedings
*
Item 1A.
Item 2.
Item 3.
Defaults Upon Senior Securities
*
Item 4.
Mine Safety Disclosures
*
Item 5.
Other Information
*
Item 6.
 
*
No response to this item is included herein for the reason that it is inapplicable or the answer to such item is negative.

2


CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, our prospects and business strategies. These forward-looking statements are included in various sections of this report, including the section entitled “Outlook” appearing in Item 2 of this report. The words “may,” “will,” “believe,” “should,” “could,” “plan,” “expect,” “anticipate,” “estimate,” and similar expressions (and variations thereof), identify these forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, these expectations may not prove to be correct. Because these forward-looking statements are also subject to risks and uncertainties, actual results may differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include:
general economic, business and market conditions;
our ability to source and procure needed materials, components and other products and services in accordance with customer demand and at competitive prices;
changes in capital availability or costs, including increases in our cost of borrowing (i.e., interest rate increases), the amount of our debt, our ability to access capital markets at favorable rates, and the credit ratings of our debt;
changes in consumer demand, prices and our ability to have our products included on top selling vehicles, including any shifts in consumer preferences away from light trucks, which tend to be higher margin products for our customers and us, to other lower margin vehicles, for which we may or may not have supply arrangements;
changes in consumer demand for our automotive, commercial or aftermarket products, or changes in automotive and commercial vehicle manufacturers’ production rates and their actual and forecasted requirements for our products, due to difficult economic conditions, such as the prolonged recession in Europe;
the overall highly competitive nature of the automobile and commercial vehicle parts industries, and any resultant inability to realize the sales represented by our awarded book of business (which is based on anticipated pricing and volumes over the life of the applicable program);
the loss of any of our large original equipment manufacturer (“OEM”) customers (on whom we depend for a substantial portion of our revenues), or the loss of market shares by these customers if we are unable to achieve increased sales to other OEMs or any change in customer demand due to delays in the adoption or enforcement of worldwide emissions regulations;
our ability to successfully execute cash management and other cost reduction plans, including our current European cost reduction initiatives, and to realize anticipated benefits from these plans;
industrywide strikes, labor disruptions at our facilities or any labor or other economic disruptions at any of our significant customers or suppliers or any of our customers’ other suppliers;
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, customer recovery and other methods;
the negative impact of higher fuel prices on transportation and logistics costs, raw material costs and discretionary purchases of vehicles or aftermarket products;
the cyclical nature of the global vehicle industry, including the performance of the global aftermarket sector and the impact of vehicle parts’ longer product lives;
costs related to product warranties and other customer satisfaction actions;
the cost and outcome of existing and any future claims or legal proceedings, including, but not limited to, claims or proceedings against us or our customers relating to product performance, product safety or intellectual property rights;
the failure or breach of our information technology systems, including the consequences of any misappropriation, exposure or corruption of sensitive information stored on such systems and the interruption to our business that such failure or breach may cause;
the impact of consolidation among vehicle parts suppliers and customers on our ability to compete;
changes in distribution channels or competitive conditions in the markets and countries where we operate, including the impact of changes in distribution channels for aftermarket products on our ability to increase or maintain aftermarket sales;
economic, exchange rate and political conditions in the countries where we operate or sell our products;
customer acceptance of new products;
new technologies that reduce the demand for certain of our products or otherwise render them obsolete;
our ability to introduce new products and technologies that satisfy customers' needs in a timely fashion;

3


our ability to realize our business strategy of improving operating performance;
our ability to successfully integrate any acquisitions that we complete and effectively manage our joint ventures and other third-party relationships;
changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies;
changes in accounting estimates and assumptions, including changes based on additional information;
any changes by the International Organization for Standardization (ISO) or other such committees in their certification protocols for processes and products, which may have the effect of delaying or hindering our ability to bring new products to market;
the impact of changes in and compliance with laws and regulations, including: environmental laws and regulations, which may result in our incurrence of environmental liabilities in excess of the amount reserved; and any changes to the timing of the funding requirements for our pension and other postretirement benefit liabilities;
the potential impairment in the carrying value of our long-lived assets and goodwill or our deferred tax assets;
potential volatility in our effective tax rate;
natural disasters, such as the 2011 earthquake in Japan and flooding in Thailand, and any resultant disruptions in the supply or production of goods or services to us or by us or in demand by our customers;
acts of war and/or terrorism, as well as actions taken or to be taken by the United States and other governments as a result of further acts or threats of terrorism, and the impact of these acts on economic, financial and social conditions in the countries where we operate; and
the timing and occurrence (or non-occurrence) of other transactions, events and circumstances which may be beyond our control.
The risks included here are not exhaustive. Refer to “Part I, Item 1A — Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2012, for further discussion regarding our exposure to risks. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor to assess the impact such risk factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.


4


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 Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Tenneco Inc. and consolidated subsidiaries as of June 30, 2013, and the related condensed consolidated statements of income, comprehensive income, and cash flows for the three and six month periods ended June 30, 2013 and 2012 and changes in shareholders' equity for the six months ended June 30, 2013 and 2012. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the 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 the 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 the accompanying condensed 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for the year then ended (not presented herein), and in our report dated February 27, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
 
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
August 6, 2013
 
The “Report of Independent Registered Public Accounting Firm” included above is not a “report” or “part of a Registration Statement” prepared or certified by an independent accountant within the meaning of Sections 7 and 11 of the Securities Act of 1933, and the accountants’ Section 11 liability does not extend to such report.


5


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2013
 
Three Months Ended June 30, 2012
 
Six Months Ended June 30, 2013
 
Six Months Ended June 30, 2012
 
(Millions Except Share and Per Share Amounts)
Revenues
 
 
 
 
 
 
 
   Net sales and operating revenues
$
2,067

 
$
1,920

 
$
3,970

 
$
3,832

 
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation and amortization shown below)
1,736

 
1,595

 
3,340

 
3,202

Engineering, research, and development
33

 
28

 
68

 
66

Selling, general, and administrative
106

 
109

 
225

 
227

Depreciation and amortization of other intangibles
50

 
50

 
100

 
99

 
1,925

 
1,782

 
3,733

 
3,594

Other expense
 
 
 
 
 
 
 
Loss on sale of receivables
(1
)
 
(1
)
 
(2
)
 
(2
)
Other

 

 
(1
)
 
(3
)
 
(1
)
 
(1
)
 
(3
)
 
(5
)
Earnings before interest expense, income taxes, and noncontrolling interests
141

 
137

 
234

 
233

Interest expense (net of interest capitalized of $1 million in both of the three months ended June 30, 2013 and 2012, respectively, and $2 million in both of the six months ended June 30, 2013 and 2012, respectively)
20

 
21

 
40

 
63

Earnings before income taxes and noncontrolling interests
121

 
116

 
194

 
170

Income tax expense
47

 
21

 
59

 
39

Net income
74

 
95

 
135

 
131

Less: Net income attributable to noncontrolling interests
11

 
8

 
18

 
14

Net income attributable to Tenneco Inc.
$
63

 
$
87

 
$
117

 
$
117

Earnings per share
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding —
 
 
 
 
 
 
 
Basic
60,542,361

 
59,992,055

 
60,424,540

 
60,067,205

Diluted
61,724,124

 
61,260,871

 
61,532,550

 
61,470,513

Basic earnings per share of common stock
$
1.04

 
$
1.45

 
1.94

 
1.95

Diluted earnings per share of common stock
$
1.02

 
$
1.42

 
1.91

 
1.90

The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated statements of income.


6


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
For the Three Months Ended June 30, 2013
 
Tenneco Inc.
 
Noncontrolling Interests
 
Total
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income (Loss)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income (Loss)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
(Loss)
 
(Millions)
Net Income
 
 
$
63

 
 
 
$
11

 
 
 
$
74

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
Cumulative Translation Adjustment
 
 
 
 
 
 
 
 
 
 
 
Balance April 1
$
(50
)
 
 
 
$
5

 
 
 
$
(45
)
 
 
Translation of foreign currency statements
(24
)
 
(24
)
 

 

 
(24
)
 
(24
)
Balance June 30
(74
)
 
 
 
5

 
 
 
(69
)
 
 
Additional Liability for Pension and Postretirement Benefits
 
 
 
 
 
 
 
 
 
 
 
Balance April 1
(380
)
 
 
 

 
 
 
(380
)
 
 
Additional Liability for Pension and Postretirement Benefits, net of tax
6

 
6

 
 
 
 
 
6

 
6

Balance June 30
(374
)
 
 
 

 
 
 
(374
)
 
 
Balance June 30
$
(448
)
 
 
 
$
5

 
 
 
$
(443
)
 
 
Other Comprehensive Loss
 
 
(18
)
 
 
 

 
 
 
(18
)
Comprehensive Income
 
 
$
45

 
 
 
$
11

 
 
 
$
56

The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated statements of comprehensive income.

7


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
For the Three Months Ended June 30, 2012
 
Tenneco Inc.
 
Noncontrolling Interests
 
Total
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
(Loss)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
 
(Millions)
Net Income
 
 
$
87

 
 
 
$
8

 
 
 
$
95

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
Cumulative Translation Adjustment
 
 
 
 
 
 
 
 
 
 
 
Balance April 1
$
(4
)
 
 
 
$
3

 
 
 
$
(1
)
 
 
Translation of foreign currency statements
(43
)
 
(43
)
 
1

 
1

 
(42
)
 
(42
)
Balance June 30
(47
)
 
 
 
4

 
 
 
(43
)
 
 
Additional Liability for Pension and Postretirement Benefits
 
 
 
 
 
 
 
 
 
 
 
Balance April 1
(349
)
 
 
 

 
 
 
(349
)
 
 
Additional Liability for Pension and Postretirement Benefits, net of tax
5

 
5

 
 
 
 
 
5

 
5

Balance June 30
(344
)
 
 
 

 
 
 
(344
)
 
 
Balance June 30
$
(391
)
 
 
 
$
4

 
 
 
$
(387
)
 
 
Other Comprehensive Income (Loss)
 
 
(38
)
 
 
 
1

 
 
 
(37
)
Comprehensive Income
 
 
$
49

 
 
 
$
9

 
 
 
$
58

The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated statements of comprehensive income.

8


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
For the Six Months Ended June 30, 2013
 
Tenneco Inc.
 
Noncontrolling Interests
 
Total
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
(Loss)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
(Loss)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
(Loss)
 
(Millions)
Net Income
 
 
$
117

 
 
 
$
18

 
 
 
$
135

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
Cumulative Translation Adjustment
 
 
 
 
 
 
 
 
 
 
 
Balance January 1
$
(24
)
 
 
 
$
5

 
 
 
$
(19
)
 
 
Translation of foreign currency statements
(50
)
 
(50
)
 

 

 
(50
)
 
(50
)
Balance June 30
(74
)
 
 
 
5

 
 
 
(69
)
 
 
Additional Liability for Pension and Postretirement Benefits
 
 
 
 
 
 
 
 
 
 
 
Balance January 1
(384
)
 
 
 

 
 
 
(384
)
 
 
Additional Liability for Pension and Postretirement Benefits, net of tax
10

 
10

 
 
 
 
 
10

 
10

Balance June 30
(374
)
 
 
 

 
 
 
(374
)
 
 
Balance June 30
$
(448
)
 
 
 
$
5

 
 
 
$
(443
)
 
 
Other Comprehensive Income
 
 
(40
)
 
 
 

 
 
 
(40
)
Comprehensive Income
 
 
$
77

 
 
 
$
18

 
 
 
$
95

The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated statements of comprehensive income.

9


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
For the Six Months Ended June 30, 2012
 
Tenneco Inc.
 
Noncontrolling Interests
 
Total
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
(Loss)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
(Loss)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
(Loss)
 
(Millions)
Net Income
 
 
$
117

 
 
 
$
14

 
 
 
$
131

Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
Cumulative Translation Adjustment
 
 
 
 
 
 
 
 
 
 
 
Balance January 1
$
(30
)
 
 
 
$
4

 
 
 
$
(26
)
 
 
Translation of foreign currency statements
(17
)
 
(17
)
 

 

 
(17
)
 
(17
)
Balance June 30
(47
)
 
 
 
4

 
 
 
(43
)
 
 
Additional Liability for Pension and Postretirement Benefits
 
 
 
 
 
 
 
 
 
 
 
Balance January 1
(352
)
 
 
 

 
 
 
(352
)
 
 
Additional Liability for Pension and Postretirement Benefits, net of tax
8

 
8

 
 
 
 
 
8

 
8

Balance June 30
(344
)
 
 
 

 
 
 
(344
)
 
 
Balance June 30
$
(391
)
 
 
 
$
4

 
 
 
$
(387
)
 
 
Other Comprehensive Loss
 
 
(9
)
 
 
 

 
 
 
(9
)
Comprehensive Income
 
 
$
108

 
 
 
$
14

 
 
 
$
122

The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated statements of comprehensive income.

10


TENNECO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
2013
 
December 31,
2012
 
(Millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
235

 
$
223

Restricted cash
5

 

Receivables —
 
 
 
Customer notes and accounts, net
1,196

 
966

Other
22

 
20

Inventories —
 
 
 
Finished goods
271

 
273

Work in process
206

 
207

Raw materials
138

 
133

Materials and supplies
54

 
54

Deferred income taxes
72

 
72

Prepayments and other
248

 
176

Total current assets
2,447

 
2,124

Other assets:
 
 
 
Long-term receivables, net
8

 
4

Goodwill
70

 
72

Intangibles, net
32

 
35

Deferred income taxes
151

 
116

Other
121

 
135

 
382

 
362

Plant, property, and equipment, at cost
3,333

 
3,365

Less — Accumulated depreciation and amortization
(2,223
)
 
(2,243
)
 
1,110

 
1,122

Total Assets
$
3,939

 
$
3,608

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt (including current maturities of long-term debt)
$
120

 
$
113

Trade payables
1,339

 
1,186

Accrued taxes
36

 
50

Accrued interest
9

 
10

Accrued liabilities
246

 
239

Other
44

 
51

Total current liabilities
1,794

 
1,649

Long-term debt
1,158

 
1,067

Deferred income taxes
26

 
27

Postretirement benefits
374

 
407

Deferred credits and other liabilities
194

 
152

Commitments and contingencies
 
 
 
Total liabilities
3,546

 
3,302

Redeemable noncontrolling interests
13

 
15

Tenneco Inc. Shareholders’ equity:
 
 
 
Common stock
1

 
1

Premium on common stock and other capital surplus
3,049

 
3,031

Accumulated other comprehensive loss
(448
)
 
(408
)
Retained earnings (accumulated deficit)
(1,987
)
 
(2,104
)
 
615

 
520

Less — Shares held as treasury stock, at cost
276

 
274

Total Tenneco Inc. shareholders’ equity
339

 
246

Noncontrolling interests
41

 
45

Total equity
380

 
291

Total liabilities, redeemable noncontrolling interests and equity
$
3,939

 
$
3,608

The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated balance sheets.

11


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
 
 
 
 
Three Months Ended June 30, 2013
 
Three Months Ended June 30, 2012
 
Six Months Ended June 30, 2013
 
Six Months Ended June 30, 2012
 
(Millions)
 
 
 
 
 
 
 
 
Net income
$
74

 
$
95

 
$
135

 
$
131

Adjustments to reconcile net income to cash provided by operating activities —
 
 
 
 
 
 
 
Depreciation and amortization of other intangibles
50

 
50

 
100

 
99

Deferred income taxes
21

 
(2
)
 
16

 
(7
)
Stock-based compensation
2

 
3

 
7

 
7

Loss on sale of assets
2

 
1

 
2

 
2

Changes in components of working capital —
 
 
 
 
 
 
 
(Increase) decrease in receivables
(77
)
 
(31
)
 
(253
)
 
(212
)
(Increase) decrease in inventories
22

 
(7
)
 
(18
)
 
(83
)
(Increase) decrease in prepayments and other current assets
(32
)
 
(23
)
 
(81
)
 
(39
)
Increase (decrease) in payables
72

 
(2
)
 
149

 
86

Increase (decrease) in accrued taxes
(8
)
 
17

 
(13
)
 
18

Increase (decrease) in accrued interest
(4
)
 
(4
)
 

 
(4
)
Increase (decrease) in other current liabilities
15

 
2

 
7

 
15

Changes in long-term assets
3

 
1

 
3

 
9

Changes in long-term liabilities
(10
)
 
(17
)
 
(20
)
 
(22
)
Other
3

 
3

 
7

 
1

Net cash provided by operating activities
133

 
86

 
41

 
1

Investing Activities
 
 
 
 
 
 
 
Proceeds from the sale of assets

 

 
2

 
1

Cash payments for plant, property, and equipment
(54
)
 
(60
)
 
(124
)
 
(125
)
Cash payments for software related intangible assets
(6
)
 
(3
)
 
(12
)
 
(7
)
Changes in restricted cash
4

 

 
(5
)
 

Net cash (used) by investing activities
(56
)
 
(63
)
 
(139
)
 
(131
)
Financing Activities
 
 
 
 
 
 
 
Issuance of common shares
12

 

 
13

 

Retirement of long-term debt
(3
)
 
(22
)
 
(8
)
 
(403
)
Issuance of long-term debt

 

 

 
250

Debt issuance cost of long-term debt

 
(1
)
 

 
(13
)
Purchase of common stock under the share repurchase program
(2
)
 
(18
)
 
(2
)
 
(18
)
Increase (decrease) in bank overdrafts
44

 
(2
)
 
35

 

Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt
(84
)
 
3

 
107

 
236

Net increase in short-term borrowings secured by accounts receivable

 
30

 

 
60

Capital contribution from noncontrolling interest partner

 
1

 

 
1

Distributions to noncontrolling interest partners
(23
)
 
(18
)
 
(23
)
 
(18
)
Net cash provided (used) by financing activities
(56
)
 
(27
)
 
122

 
95

Effect of foreign exchange rate changes on cash and cash equivalents
(19
)
 
(8
)
 
(12
)
 
2

Increase (decrease) in cash and cash equivalents
2

 
(12
)
 
12

 
(33
)
Cash and cash equivalents, April 1 and January 1, respectively
233

 
193

 
223

 
214

Cash and cash equivalents, June 30
$
235

 
$
181

 
$
235

 
$
181

Supplemental Cash Flow Information
 
 
 
 
 
 
 
Cash paid during the period for interest
$
23

 
$
24

 
$
39

 
$
59

Cash paid during the period for income taxes (net of refunds)
46

 
19

 
71

 
36

Non-cash Investing and Financing Activities
 
 
 
 
 
 
 
Period end balance of trade payables for plant, property, and equipment
$
24

 
$
30

 
$
24

 
$
30


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 the condensed consolidated financial statements are an integral
part of these condensed consolidated statements of cash flows.

12


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
 
Six Months Ended June 30,
 
2013
 
2012
 
Shares
 
Amount
 
Shares
 
Amount
 
(Millions Except Share Amounts)
Tenneco Inc. Shareholders:
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Balance January 1
62,789,382

 
$
1

 
62,101,335

 
$
1

Issued pursuant to benefit plans
156,357

 

 
152,705

 

Stock options exercised
491,064

 

 
115,016

 

Balance June 30
63,436,803

 
1

 
62,369,056

 
1

Premium on Common Stock and Other Capital Surplus
 
 
 
 
 
 
 
Balance January 1
 
 
3,031

 
 
 
3,016

Premium on common stock issued pursuant to benefit plans
 
 
18

 
 
 
6

Balance June 30
 
 
3,049

 
 
 
3,022

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance January 1
 
 
(408
)
 
 
 
(382
)
Other comprehensive income (loss)
 
 
(40
)
 
 
 
(9
)
Balance June 30
 
 
(448
)
 
 
 
(391
)
Retained Earnings (Accumulated Deficit)
 
 
 
 
 
 
 
Balance January 1
 
 
(2,104
)
 
 
 
(2,379
)
Net income attributable to Tenneco Inc.
 
 
117

 
 
 
117

Balance June 30
 
 
(1,987
)
 
 
 
(2,262
)
Less — Common Stock Held as Treasury Stock, at Cost
 
 
 
 
 
 
 
Balance January 1
2,294,692

 
274

 
1,694,692

 
256

Purchase of common stock through stock repurchase program
45,000

 
2

 
600,000

 
18

Balance June 30
2,339,692

 
276

 
2,294,692

 
274

Total Tenneco Inc. shareholders’ equity
 
 
$
339

 
 
 
$
96

Noncontrolling Interests:
 
 
 
 
 
 
 
Balance January 1
 
 
$
45

 
 
 
$
43

Net income
 
 
12

 
 
 
10

Other comprehensive income (loss)
 
 
(1
)
 
 
 
1

Dividends declared
 
 
(15
)
 
 
 
(17
)
Balance June 30
 
 
$
41

 
 
 
$
37

Total equity
 
 
$
380

 
 
 
$
133

The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated statements of changes in shareholders’ equity.


13


TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
Consolidation and Presentation
As you read the accompanying financial statements you should also read our Annual Report on Form 10-K for the year ended December 31, 2012.
In our opinion, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly Tenneco Inc.’s results of operations, comprehensive income, financial position, cash flows, and changes in shareholders’ equity for the periods indicated. We have prepared the unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for annual financial statements.
Our condensed consolidated financial statements include all majority-owned subsidiaries. We carry investments in 20 percent to 50 percent owned companies in which the Company does not have a controlling interest, as equity method investments, at cost plus equity in undistributed earnings since the date of acquisition and cumulative translation adjustments. We have eliminated all intercompany transactions. We have evaluated all significant subsequent events for any impact on these financial statements through the date they were issued.
(2)
Financial Instruments
The carrying and estimated fair values of our financial instruments by class at June 30, 2013 and December 31, 2012 were as follows:
 
June 30, 2013
 
December 31, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(Millions)
Long-term debt (including current maturities)
$
1,160

 
$
1,217

 
$
1,070

 
$
1,136

Instruments with off-balance sheet risk:
 
 
 
 
 
 
 
Foreign exchange forward contracts:
 
 
 
 
 
 
 
Asset derivative contracts

 

 
1

 
1

Asset and Liability Instruments — The fair value of cash and cash equivalents, short and long-term receivables, accounts payable, and short-term debt was considered to be the same as or was not determined to be materially different from the carrying amount.
Long-term Debt — The fair value of our public fixed rate senior notes is based on quoted market prices (level 1). The fair value of our private borrowings under our senior credit facility and other long-term debt instruments is based on the market value of debt with similar maturities, interest rates and risk characteristics (level 2). The fair value of our level 1 debt, as classified in the fair value hierarchy, was $782 million and $790 million at June 30, 2013 and December 31, 2012, respectively. We have classified $425 million and $334 million as level 2 in the fair value hierarchy at June 30, 2013 and December 31, 2012, respectively, since we utilize valuation inputs that are observable both directly and indirectly. We classified the remaining $10 million and $12 million, consisting of foreign subsidiary debt, as level 3 in the fair value hierarchy at June 30, 2013 and December 31, 2012, respectively.
Foreign Exchange Forward Contracts — We use derivative financial instruments, principally foreign currency forward purchase and sales contracts with terms of less than one year, to hedge our exposure to changes in foreign currency exchange rates. Our primary exposure to changes in foreign currency rates results from intercompany loans made between affiliates to minimize the need for borrowings from third parties. Additionally, we enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. We manage counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. We do not enter into derivative financial instruments for speculative purposes. The fair value of our foreign currency forward contracts is based on an internally developed model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics. We record the change in fair value of these foreign exchange forward contracts as part of currency gains (losses) within cost of sales in the condensed consolidated statements of income. The fair value of foreign exchange forward contracts are recorded in prepayments and other current assets or other current liabilities in the condensed consolidated balance sheet. The fair value of our foreign exchange forward contracts, presented on a gross basis at June 30, 2013 and December 31, 2012, respectively, was as follows:

14

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

 
Fair Value of Derivative Instruments
 
June 30, 2013
 
December 31, 2012
 
Asset
Derivatives
 
Liability
Derivatives
 
Total
 
Asset
Derivatives
 
Liability
Derivatives
 
Total
 
(Millions)
Foreign exchange forward contracts

$—

 

$—

 

$—

 
$1
 

$—

 

$1


The fair value of our recurring financial assets at June 30, 2013 and December 31, 2012, respectively, are as follows:
 
June 30, 2013
 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
 
(Millions)
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
n/a
 
$

 
n/a
 
n/a
 
$
1

 
n/a

The fair value hierarchy definition prioritizes the inputs used in measuring fair value into the following levels:
Level 1
Quoted prices in active markets for identical assets or liabilities.
 
 
 
Level 2
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
 
 
 
Level 3
Unobservable inputs based on our own assumptions.
 
The following table summarizes by major currency the notional amounts for foreign currency forward purchase and sale contracts as of June 30, 2013 (all of which mature in 2013):
 
 
Notional Amount
in Foreign Currency
 
 
(Millions)
Australian dollars
—Purchase
3

 
—Sell
(2
)
British pounds
—Purchase
8

European euro
—Sell
(8
)
South African rand
—Purchase
103

Japanese yen
—Purchase
159

 
—Sell
(790
)
U.S. dollars
—Purchase
13

 
—Sell
(17
)
Other
—Purchase
1

 
—Sell
(2
)
Guarantees —We have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee our senior credit facility and our senior notes on a joint and several basis. The arrangement for the senior credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries. No assets or capital stock of our direct or indirect subsidiaries secure our senior notes. For additional information, refer to Note 13 of our condensed consolidated financial statements, where we present the Supplemental Guarantor Condensed Consolidating Financial Statements.
We have two performance guarantee agreements in the U.K. between Tenneco Management Europe Limited (“TMEL”) and the two Walker Group Retirement Plans, the Walker Group Employee Benefit Plan and the Walker Group Executive Retirement Benefit Plan (the “Walker Plans”), whereby TMEL will guarantee the payment of all current and future pension contributions in event of a payment default by the sponsoring or participating employers of the Walker Plans. As a result of our decision to enter into these performance guarantee agreements, the levy due to the U.K. Pension Protection Fund was reduced. The Walker Plans are comprised of employees from Tenneco Walker (U.K.) Limited and our Futaba-Tenneco U.K. joint

15

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

venture. Employer contributions are funded by both Tenneco Walker (U.K.) Limited, as the sponsoring employer and Futaba-Tenneco U.K., as a participating employer. The performance guarantee agreements are expected to remain in effect until all pension obligations for the Walker Plans’ sponsoring and participating employers have been satisfied. The maximum amount payable for these pension performance guarantees is approximately $32 million as of June 30, 2013 which is determined by taking 105 percent of the liability of the Walker Plans calculated under section 179 of the U.K. Pension Act of 2004 offset by plan assets. We did not record an additional liability for this performance guarantee since Tenneco Walker (U.K.) Limited, as the sponsoring employer of the Walker Plans, already recognizes 100 percent of the pension obligation calculated based on U.S. GAAP, for all of the Walker Plans’ participating employers on its balance sheet, which was $5 million and $7 million at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013, all pension contributions under the Walker Plans were current for all of the Walker Plans’ sponsoring and participating employers.
In June 2011, we entered into an indemnity agreement between TMEL and Futaba Industrial Co. Ltd. which requires Futaba to indemnify TMEL for any cost, loss or liability which TMEL may incur under the performance guarantee agreements relating to the Futaba-Tenneco U.K. joint venture. The maximum amount reimbursable by Futaba to TMEL under this indemnity agreement is equal to the amount incurred by TMEL under the performance guarantee agreements multiplied by Futaba’s shareholder ownership percentage of the Futaba-Tenneco U.K. joint venture. At June 30, 2013, the maximum amount reimbursable by Futaba to TMEL is approximately $6 million.
We have issued guarantees through letters of credit in connection with some obligations of our affiliates. As of June 30, 2013, we have guaranteed $39 million in letters of credit to support some of our subsidiaries’ insurance arrangements, foreign employee benefit programs, environmental remediation activities and cash management and capital requirements.
Negotiable Financial Instruments — One of our European subsidiaries receives payment from one of its Original Equipment (OE) customers whereby the accounts receivable are satisfied through the delivery of negotiable financial instruments. We may collect these financial instruments before their maturity date by either selling them at a discount or using them to satisfy accounts receivable that have previously been sold to a European bank. Any of these financial instruments which are not sold are classified as other current assets. The amount of these financial instruments that was collected before their maturity date and sold at a discount totaled $6 million at both June 30, 2013 and December 31, 2012. No negotiable financial instruments were held by our European subsidiary as of June 30, 2013 or December 31, 2012.
In certain instances, several of our Chinese subsidiaries receive payment from OE customers and satisfy vendor payments through the receipt and delivery of negotiable financial instruments. Financial instruments used to satisfy vendor payables and not redeemed totaled $18 million and $12 million at June 30, 2013 and December 31, 2012, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $16 million and $8 million at June 30, 2013 and December 31, 2012, respectively. We classify financial instruments received from our OE customers as other current assets if issued by a financial institution of our customers or as customer notes and accounts, net if issued by our customer. We classified $16 million and $8 million in other current assets at June 30, 2013 and December 31, 2012, respectively. Some of our Chinese subsidiaries that issue their own negotiable financial instruments to pay vendors are required to maintain a cash balance if they exceed certain credit limits with the financial institution that guarantees those financial instruments. A restricted cash balance was not required at those Chinese subsidiaries at June 30, 2013 or December 31, 2012.
The negotiable financial instruments received by one of our European subsidiaries and some of our Chinese subsidiaries are checks drawn by our OE customers and guaranteed by their banks that are payable at a future date. The use of these instruments for payment follows local commercial practice. Because negotiable financial instruments are financial obligations of our customers and are guaranteed by our customers’ banks, we believe they represent a lower financial risk than the outstanding accounts receivable that they satisfy which are not guaranteed by a bank.
Restricted Cash - Two of our Australian subsidiaries have arranged for $5 million in guarantees to be issued by a financial institution to support some of our subsidiaries' insurance arrangements and foreign employee benefit programs. These guarantees were supported by a cash deposit with the financial institution which has been classified as restricted cash on the Tenneco Inc. consolidated balance sheet at June 30, 2013.
(3)
Long-Term Debt and Financing Arrangements
Our financing arrangements are primarily provided by a committed senior secured financing arrangement with a syndicate of banks and other financial institutions. The arrangement is secured by substantially all our domestic assets and pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries, as well as guarantees by our material domestic subsidiaries.
On March 22, 2012, we completed an amendment and restatement of our senior credit facility by increasing the amount and extending the maturity date of our revolving credit facility and adding a new $250 million Tranche A Term Facility. The

16

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

amended and restated facility replaces our former $556 million revolving credit facility, $148 million Tranche B Term Facility and $130 million Tranche B-1 letter of credit/revolving loan facility. The proceeds from this refinancing transaction were used to repay our $148 million Tranche B Term Facility and, as described below, to fund the purchase and redemption of our $250 million 8.125 percent senior notes due in 2015. As of June 30, 2013, the senior credit facility provides us with a total revolving credit facility size of $850 million and had a $234 million balance outstanding under the Tranche A Term Facility, both of which will mature on March 22, 2017. Funds may be borrowed, repaid and re-borrowed under the revolving credit facility without premium or penalty. The revolving credit facility is reflected as debt on our balance sheet only if we borrow money under this facility or if we use the facility to make payments for letters of credit. Outstanding letters of credit reduce our availability to enter into revolving loans under the facility. We are required to make quarterly principal payments under the Tranche A Term Facility of $3.1 million through March 31, 2014, $6.3 million beginning June 30, 2014 through March 31, 2015, $9.4 million beginning June 30, 2015 through March 31, 2016, $12.5 million beginning June 30, 2016 through December 31, 2016 and a final payment of $125 million is due on March 22, 2017.
The financial ratios required under the amended and restated senior credit facility, and the actual ratios we achieved for the two quarters of 2013, are as follows:
 
Quarter Ended
 
March 31, 2013

June 30, 2013
 
Required

Actual

Required

Actual
Leverage Ratio (maximum)
3.50


1.98


3.50


1.79

Interest Coverage Ratio (minimum)
2.55


8.39


2.55


8.74

The senior credit facility includes a maximum leverage ratio covenant of 3.50 through March 22, 2017 and a minimum interest coverage ratio of 2.55 through December 31, 2013 and 2.75 thereafter, through March 22, 2017.
On March 8, 2012, we announced a cash tender offer to purchase our outstanding $250 million 8.125 percent senior notes due in 2015 and a solicitation of consents to certain proposed amendments to the indenture governing these notes. We received tenders and consents representing $232 million aggregate principal amount of the notes and, on March 22, 2012, we purchased the tendered notes at a price of 104.44 percent of the principal amount (which includes a consent payment of three percent of the principal amount), plus accrued and unpaid interest, and amended the related indenture. On April 6, 2012, we redeemed all remaining outstanding $18 million aggregate principal amount of senior notes that were not purchased pursuant to the tender offer at a price of 104.06 percent of the principal amount, plus accrued and unpaid interest. The additional liquidity provided by the new $850 million revolving credit facility and the new $250 million Tranche A Term Facility was used to fund the total cost of the tender offer and redemption, including all related fees and expenses.
We recorded $17 million of pre-tax charges in March 2012 related to the refinancing of our senior credit facility, the repurchase and redemption of $232 million aggregate principal amount of our 8.125 percent senior notes due in 2015 and the write-off of deferred debt issuance costs relating to these senior notes. We recorded an additional $1 million of pre-tax charges during the second quarter of 2012 relating to the redemption of the remaining $18 million aggregate principal amount of our 8.125 percent senior notes which occurred in April 2012.
At June 30, 2013, of the $850 million available under the revolving credit facility, we had unused borrowing capacity of $621 million with $190 million in outstanding borrowings and $39 million in outstanding letters of credit. The $190 million in outstanding borrowings under the revolving credit facility reflected a banking error on the last day of the second quarter of 2013 that reduced the revolver borrowings and increased bank overdrafts by $40 million. Without this our debt balance would have been $40 million higher. As of June 30, 2013, our outstanding debt also included $234 million related to our Tranche A Term Facility which is subject to quarterly principal payments as described above through March 22, 2017, $225 million of 7.75 percent senior notes due August 15, 2018, $500 million of 6.875 percent senior notes due December 15, 2020, and $130 million of other debt.
(4)
Income Taxes
We reported income tax expenses of $47 million and $21 million in the three month periods ended June 30, 2013 and 2012, respectively, and $59 million and $39 million in the six month periods ended June 30, 2013 and 2012, respectively. The tax expense recorded in the first six months of 2013 includes a net tax benefit of $13 million for tax adjustments primarily related to recognizing a U.S. tax benefit for foreign taxes.
The U.S. tax benefit for foreign taxes is driven by our ability to claim a U.S. foreign tax credit beginning in 2013. The U.S. foreign tax credit regime provides for a credit against U.S. taxes otherwise payable for foreign taxes paid with regard to dividends, interest and royalties paid to us in the U.S.

17

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

In 2008, given our historical losses in the U.S., we concluded that our ability to fully utilize our federal and state net operating loss ("NOL") carryforward was limited. As a result, we recorded a valuation allowance against all of our U.S. deferred tax assets except for our tax planning strategies which had not yet been implemented and which did not depend upon generating future taxable income. Prior to the reversal of the valuation allowance in the third quarter of 2012, we carried a deferred tax asset in the U.S. of $90 million relating to the expected utilization of the federal and state NOL. The recording of a valuation allowance did not impact the amount of the NOL that would be available for federal and state income tax purposes in future periods.
In the third quarter of 2012, we reversed the tax valuation allowance against our net deferred tax assets in the U.S. based on operating improvements we had made, the outlook for light and commercial vehicle production in the U.S. and the positive impact this should have on our U.S. operations. The net income impact of the tax valuation allowance release in the U.S was a tax benefit of approximately $81 million. Our federal NOL at December 31, 2012 totaled $190 million and expires beginning in tax years ending in 2022 through 2030. The state NOLs expire in various tax years through 2032.
Valuation allowances are established in certain foreign jurisdictions for deferred tax assets based on a “more likely than not” standard. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:
Future reversals of existing taxable temporary differences;
Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards;
Tax-planning strategies; and
Taxable income in prior carryback years if carryback is permitted under the relevant tax law.
 
The valuation allowances recorded against deferred tax assets generated by taxable losses in Spain and certain other foreign jurisdictions will impact our provision for income taxes until the valuation allowances are released. Our provision for income taxes will include no tax benefit for losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated.
(5)
Accounts Receivable Securitization
We securitize some of our accounts receivable on a limited recourse basis in North America and Europe. As servicer under these accounts receivable securitization programs, we are responsible for performing all accounts receivable administration functions for these securitized financial assets including collections and processing of customer invoice adjustments. In North America, we have an accounts receivable securitization program with three commercial banks comprised of a first priority facility and a second priority facility. We securitize original equipment and aftermarket receivables on a daily basis under the bank program. In March 2013, the North American program was amended and extended to March 21, 2014. The first priority facility continues to provide financing of up to $110 million and the second priority facility, which is subordinated to the first priority facility, continues to provide up to an additional $40 million of financing. Both facilities monetize accounts receivable generated in the U.S. and Canada that meet certain eligibility requirements, and the second priority facility also monetizes certain accounts receivable generated in the U.S. and Canada that would otherwise be ineligible under the first priority securitization facility. The amount of outstanding third-party investments in our securitized accounts receivable under the North American program was $50 million at both June 30, 2013 and December 31, 2012.
Each facility contains customary covenants for financings of this type, including restrictions related to liens, payments, mergers or consolidations and amendments to the agreements underlying the receivables pool. Further, each facility may be terminated upon the occurrence of customary events (with customary grace periods, if applicable), including breaches of covenants, failure to maintain certain financial ratios, inaccuracies of representations and warranties, bankruptcy and insolvency events, certain changes in the rate of default or delinquency of the receivables, a change of control and the entry or other enforcement of material judgments. In addition, each facility contains cross-default provisions, where the facility could be terminated in the event of non-payment of other material indebtedness when due and any other event which permits the acceleration of the maturity of material indebtedness.
We also securitize receivables in our European operations with regional banks in Europe under seven separate facilities. The commitments for these arrangements are generally for one year, but some may be canceled with notice 90 days prior to renewal. In some instances, the arrangement provides for cancellation by the applicable financial institution at any time upon 15 days, or less, notification. The amount of outstanding third-party investments in our securitized accounts receivable in Europe was $151 million and $94 million at June 30, 2013 and December 31, 2012, respectively.

18

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

If we were not able to securitize receivables under either the North American or European securitization programs, our borrowings under our revolving credit agreement might increase. These accounts receivable securitization programs provide us with access to cash at costs that are generally favorable to alternative sources of financing, and allow us to reduce borrowings under our revolving credit agreement.
In our North American accounts receivable securitization programs, we transfer a partial interest in a pool of receivables and the interest that we retain is subordinate to the transferred interest. Accordingly, we account for our North American securitization program as a secured borrowing. In our European programs, we transfer accounts receivables in their entirety to the acquiring entities and satisfy all of the conditions established under Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing,” to report the transfer of financial assets in their entirety as a sale. The proceeds received in exchange for the transfer of accounts receivable under our European securitization programs approximates the fair value of such receivables. We recognized less than $1 million interest expense in each of the three month periods ended June 30, 2013 and 2012, and $1 million for each of the six month periods ended June 30, 2013 and 2012, relating to our North American securitization program. In addition, we recognized a loss of $1 million in each of the three month periods ended June 30, 2013 and 2012, and $2 million for each of the six month periods ended June 30, 2013 and 2012, on the sale of trade accounts receivable in our European accounts receivable securitization programs, representing the discount from book values at which these receivables were sold to our banks. The discount rate varies based on funding costs incurred by our banks, which averaged approximately three percent during both the first half of 2013 and 2012, respectively.
(6)
Restructuring and Other Charges
Over the past several years, we have adopted plans to restructure portions of our operations. These plans were approved by our Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. In 2012, we incurred $13 million in restructuring and related costs, primarily related to headcount reductions in South America and non-cash asset write downs of $4 million in Europe, of which $10 million was recorded in cost of sales and $3 million was recorded in SG&A. In the second quarter of 2013, we incurred $7 million in restructuring and related costs, primarily related to European cost reduction efforts, the ending of production of leaf springs in Australia, headcount reductions in various regions, and the net impact of freezing our defined benefit plans in the United Kingdom, of which $4 million was recorded in cost of sales and $3 million was recorded in SG&A. In the second quarter of 2012, we incurred $2 million in restructuring and related costs, primarily related to headcount reductions in South America, all of which was recorded in cost of sales. For the first six months of 2013, we have incurred $11 million in restructuring and related costs, primarily related to European cost reduction efforts, our exit from the distribution of aftermarket exhaust products, the ending of production of leaf springs in Australia, headcount reductions in various regions, and the net impact of freezing our defined benefit plans in the United Kingdom, of which $7 million was recorded in cost of sales and $4 million was recorded in SG&A. For the first six months of 2012, we incurred $3 million in restructuring and related costs primarily related to headcount reductions in South America, all of which was recorded in cost of sales.
Amounts related to activities that are part of our restructuring reserves are as follows:
 
December 31,
2012
Restructuring
Reserve
 
2013
Expenses
 
2013
Cash
Payments
 
June 30,
2013
Restructuring
Reserve
 
(Millions)
Employee Severance and Termination Benefits

$—

 

$11

 

($6
)
 

$5

Under the terms of our amended and restated senior credit agreement that took effect on March 22, 2012, we are allowed to exclude $80 million of cash charges and expenses, before taxes, related to cost reduction initiatives incurred after March 22, 2012 from the calculation of the financial covenant ratios required under our senior credit facility. As of June 30, 2013, we have excluded $24 million in cumulative allowable charges relating to restructuring initiatives against the $80 million available under the terms of the senior credit facility.
On January 31, 2013, we announced our plan to reduce structural costs in Europe which includes the closing of the Vittaryd facility in Sweden that we announced in September 2012 and a $7 million charge recorded in the fourth quarter of 2012 related to the impairment of certain assets in the European ride performance business. $3 million of the total of $7 million we incurred in restructuring and related costs in the second quarter of 2013 was related to this initiative. $5 million of the total of $11 million we incurred in restructuring and related costs in the first six months of 2013 was related to this initiative. In 2012, we recorded non-cash charges of $4 million related to the closing of the Vittaryd facility.
(7)
Environmental Matters, Litigation and Product Warranties

19

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

We are involved in environmental remediation matters, legal proceedings, claims, investigations and warranty obligations that are incidental to the conduct of our business and create the potential for contingent losses. We accrue for potential contingent losses when our review of available facts indicates that it is probable a loss has been incurred and the amount of the loss is reasonably estimable. Each quarter we assess our loss contingencies based upon currently available facts, existing technology, presently enacted laws and regulations and taking into consideration the likely effects of inflation and other societal and economic factors and record adjustments to these reserves as required. As an example, 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 when we evaluate our environmental remediation contingencies. All of our loss contingency estimates are subject to revision in future periods based on actual costs or new information. With respect to our environmental liabilities, where future cash flows are fixed or reliably determinable, we have discounted those liabilities. All other environmental liabilities are recorded at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our consolidated financial statements.
We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense costs related to an existing condition caused by past operations that do not contribute to current or future revenue generation. As of June 30, 2013, we have the obligation to remediate or contribute towards the remediation of certain sites, including one Federal Superfund site. At June 30, 2013, our aggregated estimated share of environmental remediation costs for all these sites on a discounted basis was approximately $17 million, of which $5 million is recorded in other current liabilities and $12 million is recorded in deferred credits and other liabilities in our condensed consolidated balance sheet. For those locations where the liability was discounted, the weighted average discount rate used was 2.10 percent. The undiscounted value of the estimated remediation costs was $20 million. Our expected payments of environmental remediation costs are estimated to be approximately $3 million in 2013, $2 million in 2014, $1 million each year beginning 2015 through 2017 and $12 million in aggregate thereafter.
Based on information known to us, we have established reserves that we believe are adequate for these costs. Although we believe these estimates of remediation costs are reasonable and are based on the latest available information, the costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, certain environmental statutes provide that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at these sites has been considered, where appropriate, in our determination of our estimated liability. We do not believe that any potential costs associated with our current status as a potentially responsible party in the Federal Superfund site, or as a liable party at the other locations referenced herein, will be material to our consolidated results of operations, financial position or cash flows.
We are also from time to time involved in legal proceedings, claims or investigations. Some of these proceedings allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warning issues, and other product liability related matters), taxes, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. For example, one of our Argentine subsidiaries is currently defending against a criminal complaint alleging the failure to comply with laws requiring the proceeds of export transactions to be collected, reported and/or converted to local currency within specified time periods. As another example, in the U.S. we are subject to an audit in 11 states with respect to the payment of unclaimed property to those states, spanning a period as far back as over 30 years. While we vigorously defend ourselves against all of these claims, in future periods, we could be subject to cash costs or charges to earnings if any of these matters are resolved on unfavorable terms. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our future consolidated financial position, results of operations or cash flows.
In addition, we are subject to lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. In the early 2000s we were named in nearly 20,000 complaints, most of which were filed in Mississippi state court and the vast majority of which made no allegations of exposure to asbestos from our product categories. Most of these claims have been dismissed and our current docket of active and inactive cases is less than 500 cases nationwide. A small number of claims have been asserted by railroad workers alleging exposure to asbestos products in railroad cars manufactured by The Pullman Company, one of our subsidiaries. The substantial majority of the remaining claims are related to alleged exposure to asbestos in our automotive products. Only a small percentage of the claimants allege that they were automobile mechanics and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other

20

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

evidence, it is unlikely that mechanics were exposed to asbestos by our former 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 in some cases exceeding 100 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. As major asbestos manufacturers and/or users continue to go out of business or file for bankruptcy, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or charges to earnings if any of these matters are resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolutions. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future consolidated financial condition, results of operations or cash flows.
We provide warranties on some of our products. The warranty terms vary but range from one year up to limited lifetime warranties on some of our premium aftermarket products. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified on OE products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. We actively study trends of our warranty claims and take action to improve product quality and minimize warranty claims. We believe that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. The reserve is included in both current and long-term liabilities on the balance sheet.
Below is a table that shows the activity in the warranty accrual accounts:
 
Six Months Ended June 30,
 
2013
 
2012
 
(Millions)
Beginning Balance January 1,
$
23

 
$
26

Accruals related to product warranties
6

 
7

Reductions for payments made
(9
)
 
(9
)
Ending Balance June 30,
$
20

 
$
24


In the fourth quarter of 2011, we encountered an issue in our North America OE ride control business involving struts supplied on one particular OE platform. As a result, we directly incurred approximately $2 million in premium freight and overtime costs in the fourth quarter of 2011 and $3 million in 2012. In the first quarter of 2013 we incurred a charge of $2 million in connection with the resolution of all existing claims pertaining to this matter. We paid the customer the $2 million in the second quarter of 2013.

(8)
Earnings Per Share
Earnings per share of common stock outstanding were computed as follows:

21


 
Three Months Ended June 30, 2013
 
Three Months Ended June 30, 2012
 
Six Months Ended June 30, 2013
 
Six Months Ended June 30, 2012
 
(Millions Except Share and Per Share Amounts)
Basic earnings per share —
 
 
 
 
 
 
 
Net income attributable to Tenneco Inc.
$
63

 
$
87

 
$
117

 
$
117

Weighted Average shares of common stock outstanding
60,542,361

 
59,992,055

 
60,424,540

 
60,067,205

Earnings per share of common stock
$
1.04

 
$
1.45

 
$
1.94

 
$
1.95

Diluted earnings per share —
 
 
 
 

 

Net income attributable to Tenneco Inc.
$
63

 
$
87

 
$
117

 
$
117

Weighted Average shares of common stock outstanding
60,542,361

 
59,992,055

 
60,424,540

 
60,067,205

Effect of dilutive securities:
 
 
 
 

 

Restricted stock
170,950

 
109,722

 
157,551

 
139,995

Stock options
1,010,813

 
1,159,094

 
950,459

 
1,263,313

Weighted Average shares of common stock outstanding including dilutive securities
61,724,124

 
61,260,871

 
61,532,550

 
61,470,513

Earnings per share of common stock
$
1.02

 
$
1.42

 
$
1.91

 
$
1.90


Options to purchase 830,486 and 524,701 shares of common stock were outstanding as of June 30, 2013 and 2012, respectively, but not included in the computation of diluted earnings per share respectively, because the options were anti-dilutive.
(9)
Common Stock
Equity Plans — We have granted a variety of awards, including common stock, restricted stock, restricted stock units, performance units, stock appreciation rights (“SARs”), and stock options to our directors, officers, and employees.

Accounting Methods — We have recorded $1 million in compensation expense in each of the three month periods ended June 30, 2013 and 2012 and $3 million in compensation expense for each of the six month periods ended June 30, 2013 and 2012, related to nonqualified stock options as part of our selling, general and administrative expense. This resulted in a decrease of $0.02 in both basic and diluted earnings per share for the three month periods ended June 30, 2013 and 2012 and a decrease of $0.05 in both basic and diluted earnings per share for the six month periods ended June 30, 2013 and 2012.
For employees eligible to retire at the grant date, we immediately expense stock options and restricted stock. If employees become eligible to retire during the vesting period, we immediately recognize any remaining expense associated with their stock options and restricted stock.
As of June 30, 2013, there was approximately $8 million of unrecognized compensation costs related to our stock option awards that we expect to recognize over a weighted average period of 1.7 years.
Compensation expense for restricted stock, restricted stock units, long-term performance units and SARs was $5 million and $2 million for the three months ended June 30, 2013 and 2012, respectively, and $8 million for each of the six months ended June 30, 2013 and 2012 and was recorded in selling, general, and administrative expense in our condensed consolidated statements of income.
Cash received from stock option exercises for the six months ended June 30, 2013 and 2012 was $10 million and $2 million, respectively. Stock option exercises in the first six months of 2013 and 2012 would have generated an excess tax benefit of $3 million and $1 million, respectively. We did not record the excess tax benefit as we have federal and state net operating losses which were not being utilized.
Assumptions — We calculated the fair values of stock option awards using the Black-Scholes option pricing model with the weighted average assumptions listed below. The fair value of share-based awards is determined at the time the awards are granted which is generally in January of each year, and requires judgment in estimating employee and market behavior.

22

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

 
Six Months Ended June 30,
 
2013
 
2012
Stock Options Granted
 
 
 
Weighted average grant date fair value, per share
$
19.84

 
$
17.35

Weighted average assumptions used:
 
 
 
Expected volatility
66.4
%
 
73.5
%
Expected lives
4.9

 
4.7

Risk-free interest rates
0.7
%
 
0.8
%
Dividend yields
%
 
%
 
Expected volatility is calculated based on current implied volatility and historical realized volatility for the Company.
Expected lives of options are based upon the historical and expected time to post-vesting forfeiture and exercise. We believe this method is the best estimate of the future exercise patterns currently available.
The risk-free interest rates are based upon the Constant Maturity Rates provided by the U.S. Treasury. For our valuations, we used the continuous rate with a term equal to the expected life of the options.
Stock Options — The following table reflects the status and activity for all options to purchase common stock for the period indicated:
 
Six Months Ended June 30, 2013
 
Shares
Under
Option
 
Weighted Avg.
Exercise
Prices
 
Weighted Avg.
Remaining
Life in Years
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
(Millions)
Outstanding Stock Options
 
 
 
 
 
 
 
Outstanding, January 1, 2013
2,447,475

 
$
20.14

 
4.1
 
$
29

Granted
311,539

 
36.29

 
 
 
 
Canceled
(7,225
)
 
11.73

 
 
 
 
Forfeited
(14,920
)
 
14.59

 
 
 
 
Exercised
(82,622
)
 
19.96

 
 
 
1

Outstanding, March 31, 2013
2,654,247

 
$
22.12

 
4.3
 
$
41

Granted
388

 
38.90

 
 
 
 
Forfeited
(450
)
 
21.81

 
 
 
 
Exercised
(393,442
)
 
22.53

 
 
 
7

Outstanding, June 30, 2013
2,260,743

 
22.06

 
4.7
 
44

 
 
 
 
 
 
 
 
The weighted average grant-date fair value of options granted during the six months ended June 30, 2013 and 2012 was $19.84 and $17.49, respectively. The total fair value of shares vested was $3 million for both the periods ended June 30, 2013 and 2012.

Restricted Stock — The following table reflects the status for all nonvested restricted shares for the period indicated:

23

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

 
Six Months Ended June 30, 2013
 
Shares
 
Weighted Avg.
Grant Date
Fair Value
Nonvested Restricted Shares
 
 
 
Nonvested balance at January 1, 2013
348,918

 
$
31.69

Granted
204,731

 
36.28

Vested
(154,160
)
 
29.54

Forfeited

 

Nonvested balance at March 31, 2013
399,489

 
$
34.88

Granted
226

 
38.90

Vested
(15,289
)
 
35.40

Forfeited

 

Nonvested balance at June 30, 2013
384,426

 
34.86

The fair value of restricted stock grants is equal to the average of the high and low trading price of our stock on the date of grant. As of June 30, 2013, approximately $9 million of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 2.0 years. The total fair value of restricted shares vested was $5 million and $4 million at June 30, 2013 and 2012, respectively.
In January 2013, our Board of Directors approved a share repurchase program, authorizing us to repurchase up to 550,000 shares of Tenneco’s outstanding common stock over a 12 months period. This share repurchase program is intended to offset dilution from shares of restricted stock and stock options issued in 2013 to employees. We purchased 45,000 shares during the second quarter of 2013 through open market purchases, which were funded through cash from operations at a total cost of $2 million at an average price of $44.56 per share. These repurchased shares are held as part of our treasury stock which increased to 2,339,692 shares at June 30, 2013 from 2,294,692 shares at December 31, 2012.
Long-Term Performance Units, Restricted Stock Units and SARs — Long-term performance units, restricted stock units and SARs are paid in cash and recognized as a liability based upon their fair value. As of June 30, 2013, $18 million of total unrecognized compensation costs is expected to be recognized over a weighted-average period of approximately 2.1 years.

(10)
Pension Plans, Postretirement and Other Employee Benefits
Net periodic pension costs and postretirement benefit costs consist of the following components:
 
Three Months Ended June 30,
 
Pension
 
Postretirement
 
2013
 
2012
 
2013
 
2012
 
US
 
Foreign
 
US
 
Foreign
 
US
 
US
 
(Millions)
Service cost — benefits earned during the period
$
1

 
$
3

 
$

 
$
2

 
$

 
$

Interest cost
4

 
4

 
5

 
5

 
2

 
1

Expected return on plan assets
(6
)
 
(5
)
 
(6
)
 
(6
)
 

 

Net amortization:
 
 
 
 
 
 
 
 
 
 
 
Actuarial loss
3

 
3

 
2

 
2

 
1

 
2

Prior service cost (credit)

 
1

 

 
1

 
(2
)
 
(2
)
Net pension and postretirement costs
$
2

 
$
6

 
$
1

 
$
4

 
$
1

 
$
1




24

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

 
Six Months Ended June 30,
 
Pension
 
Postretirement
 
2013
 
2012
 
2013
 
2012
 
US
 
Foreign
 
US
 
Foreign
 
US
 
US
 
(Millions)
Service cost — benefits earned during the period
$
1

 
$
5

 
$

 
$
4

 
$

 
$

Interest cost
9

 
8

 
10

 
9

 
3

 
3

Expected return on plan assets
(11
)
 
(10
)
 
(11
)
 
(11
)
 

 

Net amortization:
 
 
 
 
 
 
 
 
 
 
 
Actuarial loss
5

 
6

 
4

 
4

 
2

 
3

Prior service cost (credit)

 
1

 

 
1

 
(3
)
 
(3
)
Net pension and postretirement costs
$
4

 
$
10

 
$
3

 
$
7

 
$
2

 
$
3


For the six months ended June 30, 2013, we made pension contributions of $12 million and $15 million for our domestic and foreign pension plans, respectively. Based on current actuarial estimates, we believe we will be required to contribute approximately $32 million for the remainder of 2013. Pension contributions beyond 2013 will be required, but those amounts will vary based upon many factors including, for example, the performance of our pension fund investments during 2013.
We made postretirement contributions of approximately $4 million during the first six months of 2013. Based on current actuarial estimates, we believe we will be required to contribute approximately $5 million for the remainder of 2013.
The assets of some of our pension plans are invested in trusts that permit commingling of the assets of more than one employee benefit plan for investment and administrative purposes. Each of the plans participating in the trust has interests in the net assets of the underlying investment pools of the trusts. The investments for all our pension plans are recorded at estimated fair value, in compliance with the accounting guidance on fair value measurement.
 
Amounts recognized for pension and postretirement benefits in other comprehensive income for the three and six month periods ended June 30, 2013 and 2012 include the following components:
 
Three Months Ended June 30,
 
2013
 
2012
 
Before-Tax
Amount
 
Tax
Benefit
 
Net-of-Tax
Amount
 
Before-
Tax
Amount
 
Tax
Benefit
 
Net-of-Tax
Amount
 
(Millions)
Defined benefit pension and postretirement plans:
 
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost included in net periodic pension and postretirement cost
$
(1
)
 
$

 
$
(1
)
 
$
(1
)
 
$

 
$
(1
)
Amortization of actuarial loss included in net periodic pension and postretirement cost
7

 

 
7

 
6

 

 
6

Other comprehensive income – pension benefits
$
6

 
$

 
$
6

 
$
5

 
$

 
$
5



25

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

 
Six Months Ended June 30,
 
2013
 
2012
 
Before-Tax
Amount
 
Tax
Benefit
 
Net-of-Tax
Amount
 
Before-