10-Q 1 ten-2018630x10q.htm 10-Q Document

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, 2018
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and "emerging growth 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)
 
 
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
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: 51,420,528 shares outstanding as of August 3, 2018.



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.
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;
the cost and outcome of existing and any future claims, legal proceedings or investigations, including, but not limited to, any of the foregoing arising in connection with the ongoing global antitrust investigation, product performance, product safety or intellectual property rights;
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 and/or regulatory or legal changes affecting internal combustion engines;
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;
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, and to realize the anticipated benefits from these plans;
risks inherent in operating a multi-national company, including economic conditions, such as currency exchange and inflation rates, and political conditions in the countries where we operate or sell our products, adverse changes in trade agreements, tariffs, immigration policies, political stability, and tax and other laws, and potential disruptions of production and supply;
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 fuel price volatility on transportation and logistics costs, raw material costs, discretionary purchases of vehicles or aftermarket products and demand for off-highway equipment;
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 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;

3


changes in distribution channels or competitive conditions in the markets and countries where we operate, including the impact of increasing competition from lower cost, private-label products on our aftermarket business;
customer acceptance of new products;
our ability to realize our business strategy of improving operating performance;
our ability to successfully integrate, and benefit from, 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 the extensive, increasing and changing laws and regulations to which we are subject, including environmental laws and regulations, which may result in our incurrence of environmental liabilities in excess of the amount reserved;
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;
disasters, such as fires, earthquakes and flooding, and any resultant disruptions in the supply or production of goods or services to us or by us, in demand by our customers or in the operation of our system, disaster recovery capabilities or business continuity capabilities;
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.
In addition, important factors related to the transaction with Federal-Mogul LLC ("Federal-Mogul") that could cause actual results to differ materially from the expectations reflected in the forward-looking statements, including:
the risk that the transaction with Federal-Mogul pursuant to the Membership Interest Purchase Agreement by and among the Company, Federal-Mogul, American Entertainment Properties Corp., and Icahn Enterprises L.P., may not be completed in a timely manner or at all;
the risk that the benefits of the acquisition of Federal-Mogul, including synergies, may not be fully realized or may take longer to realize than expected; and
the risk that, following the acquisition of Federal-Mogul, the combined company may not complete a separation of its powertrain technology business and its aftermarket & ride performance business (or achieve some or all of the anticipated benefits of such a separation).
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, 2017 and "Part II, Item 1A — Risk Factors” of this Form 10-Q 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. Unless otherwise indicated in this report, the forward-looking statements in this report are made as of the date of this report, and, except as required by law, the Company does not undertake any obligation, and disclaims any obligation, to publicly disclose revisions or updates to any forward-looking statements.

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.
Results of Review of Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of Tenneco Inc. and its subsidiaries as of June 30, 2018, and the related condensed consolidated statements of income (loss), comprehensive income (loss) and cash flows for the three-month and six-month periods ended June 30, 2018 and 2017 and the condensed consolidated statements of changes in shareholders' equity for the six-month periods ended June 30, 2018 and 2017, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated February 28, 2018, 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, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. 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 PCAOB, 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.

 
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
August 7, 2018
 

5


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Millions Except Share and Per Share Amounts)
Revenues
 
 
 
 
 
 
 
   Net sales and operating revenues
$
2,537

 
$
2,317

 
$
5,111

 
$
4,609

 
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation and amortization shown below)
2,159

 
1,949

 
4,357

 
3,878

Engineering, research, and development
42

 
36

 
83

 
75

Selling, general, and administrative
156

 
252

 
309

 
393

Depreciation and amortization of other intangibles
59

 
55

 
118

 
107

 
2,416

 
2,292

 
4,867

 
4,453

Other (expense) income
 
 
 
 
 
 
 
Loss on sale of receivables
(2
)
 
(1
)
 
(5
)
 
(2
)
Other (expense) income
(6
)
 
3

 
(9
)
 
(6
)
 
(8
)
 
2

 
(14
)
 
(8
)
Earnings before interest expense, income taxes, and noncontrolling interests
113

 
27

 
230

 
148

Interest expense
20

 
20

 
40

 
35

Earnings before income taxes and noncontrolling interests
93

 
7

 
190

 
113

Income tax expense (benefit)
27

 
(8
)
 
52

 
25

Net income
66

 
15

 
138

 
88

Less: Net income attributable to noncontrolling interests
16

 
18

 
30

 
32

Net income (loss) attributable to Tenneco Inc.
$
50

 
$
(3
)
 
$
108

 
$
56

Earnings per share
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding —
 
 
 
 
 
 
 
Basic
51,258,668

 
53,505,341

 
51,232,639

 
53,662,375

Diluted
51,607,224

 
53,505,341

 
51,546,015

 
53,952,918

Basic earnings (loss) per share of common stock
$
0.98

 
$
(0.05
)
 
$
2.12

 
$
1.05

Diluted earnings (loss) per share of common stock
$
0.98

 
$
(0.05
)
 
$
2.10

 
$
1.05

Cash dividends declared
$
0.25

 
$
0.25

 
$
0.50

 
$
0.50

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

6


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended June 30, 2018
 
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
 
 
$
50

 
 
 
$
16

 
 
 
$
66

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
Cumulative Translation Adjustment
 
 
 
 
 
 
 
 
 
 
 
Balance April 1
$
(222
)
 
 
 
$
5

 
 
 
$
(217
)
 
 
Translation of foreign currency statements
(93
)
 
(93
)
 
(7
)
 
(7
)
 
(100
)
 
(100
)
Balance June 30
(315
)
 
 
 
(2
)
 
 
 
(317
)
 
 
Additional Liability for Pension and Postretirement Benefits
 
 
 
 
 
 
 
 
 
 
 
Balance April 1
(297
)
 
 
 

 
 
 
(297
)
 
 
Additional liability for pension and postretirement benefits, net of tax
4

 
4

 

 

 
4

 
4

Balance June 30
(293
)
 
 
 

 
 
 
(293
)
 
 
Balance June 30
$
(608
)
 
 
 
$
(2
)
 
 
 
$
(610
)
 
 
Other Comprehensive Loss
 
 
(89
)
 
 
 
(7
)
 
 
 
(96
)
Comprehensive (Loss) Income
 
 
$
(39
)
 
 
 
$
9

 
 
 
$
(30
)
The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated statements of comprehensive income (loss).

7


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended June 30, 2017
 
Tenneco Inc.
 
Noncontrolling Interests
 
Total
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income (Loss)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
 
(Millions)
Net (Loss) Income
 
 
$
(3
)
 
 
 
$
18

 
 
 
$
15

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
Cumulative Translation Adjustment
 
 
 
 
 
 
 
 
 
 
 
Balance April 1
$
(317
)
 
 
 
$
(4
)
 
 
 
$
(321
)
 
 
Translation of foreign currency statements
32

 
32

 
2

 
2

 
34

 
34

Balance June 30
(285
)
 
 
 
(2
)
 
 
 
(287
)
 
 
Additional Liability for Pension and Postretirement Benefits
 
 
 
 
 
 
 
 
 
 
 
Balance April 1
(320
)
 
 
 

 
 
 
(320
)
 
 
Additional liability for pension and postretirement benefits, net of tax
4

 
4

 

 

 
4

 
4

Balance June 30
(316
)
 
 
 

 
 
 
(316
)
 
 
Balance June 30
$
(601
)
 
 
 
$
(2
)
 
 
 
$
(603
)
 
 
Other Comprehensive Income
 
 
36

 
 
 
2

 
 
 
38

Comprehensive Income
 
 
$
33

 
 
 
$
20

 
 
 
$
53


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


8


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Six Months Ended June 30, 2018
 
Tenneco Inc.
 
Noncontrolling Interests
 
Total
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income (Loss)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income (Loss)
 
(Millions)
Net Income
 
 
$
108

 
 
 
$
30

 
 
 
$
138

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
Cumulative Translation Adjustment
 
 
 
 
 
 
 
 
 
 
 
Balance January 1
$
(241
)
 
 
 
$
(3
)
 
 
 
$
(244
)
 
 
Translation of foreign currency statements
(74
)
 
(74
)
 
1

 
1

 
(73
)
 
(73
)
Balance June 30
(315
)
 
 
 
(2
)
 
 
 
(317
)
 
 
Additional Liability for Pension and Postretirement Benefits
 
 
 
 
 
 
 
 
 
 
 
Balance January 1
(300
)
 
 
 

 
 
 
(300
)
 
 
Additional liability for pension and postretirement benefits, net of tax
7

 
7

 

 

 
7

 
7

Balance June 30
(293
)
 
 
 

 
 
 
(293
)
 
 
Balance June 30
$
(608
)
 
 
 
$
(2
)
 
 
 
$
(610
)
 
 
Other Comprehensive (Loss) Income
 
 
(67
)
 
 
 
1

 
 
 
(66
)
Comprehensive Income
 
 
$
41

 
 
 
$
31

 
 
 
$
72


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


9


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Six Months Ended June 30, 2017
 
Tenneco Inc.
 
Noncontrolling Interests
 
Total
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income (Loss)
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Comprehensive
Income
 
(Millions)
Net Income
 
 
$
56

 
 
 
$
32

 
 
 
$
88

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
Cumulative Translation Adjustment
 
 
 
 
 
 
 
 
 
 
 
Balance January 1
$
(338
)
 
 
 
$
(5
)
 
 
 
$
(343
)
 
 
Translation of foreign currency statements
53

 
53

 
3

 
3

 
56

 
56

Balance June 30
(285
)
 
 
 
(2
)
 
 
 
(287
)
 
 
Additional Liability for Pension and Postretirement Benefits
 
 
 
 
 
 
 
 
 
 
 
Balance January 1
(327
)
 
 
 

 
 
 
(327
)
 
 
Additional liability for pension and postretirement benefits, net of tax
11

 
11

 

 

 
11

 
11

Balance June 30
(316
)
 
 
 

 
 
 
(316
)
 
 
Balance June 30
$
(601
)
 
 
 
$
(2
)
 
 
 
$
(603
)
 
 
Other Comprehensive Income
 
 
64

 
 
 
3

 
 
 
67

Comprehensive Income
 
 
$
120

 
 
 
$
35

 
 
 
$
155


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





10



TENNECO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
2018
 
December 31,
2017
 
(Millions)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
235

 
$
315

Restricted cash
2

 
3

Receivables —
 
 
 
Customer notes and accounts, net
1,418

 
1,294

Other
24

 
27

Inventories —
 
 
 
Finished goods
348

 
349

Work in process
282

 
268

Raw materials
190

 
178

Materials and supplies
78

 
74

Prepayments and other
348

 
291

Total current assets
2,925

 
2,799

Other assets:
 
 
 
Long-term receivables, net
12

 
9

Goodwill
47

 
49

Intangibles, net
21

 
22

Deferred income taxes
215

 
204

Other
158

 
144

 
453

 
428

Plant, property, and equipment, at cost
4,027

 
4,008

Less — Accumulated depreciation and amortization
(2,402
)
 
(2,393
)
 
1,625

 
1,615

Total Assets
$
5,003

 
$
4,842

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Short-term debt (including current maturities of long-term debt)
$
78

 
$
83

Accounts payable
1,813

 
1,705

Accrued taxes
42

 
45

Accrued interest
14

 
14

Accrued liabilities
326

 
287

Other
125

 
132

Total current liabilities
2,398

 
2,266

Long-term debt
1,381

 
1,358

Deferred income taxes
11

 
11

Pension and postretirement benefits
261

 
268

Deferred credits and other liabilities
153

 
155

Commitments and contingencies (Note 8)

 

Total liabilities
4,204

 
4,058

Redeemable noncontrolling interests
38

 
42

Tenneco Inc. Shareholders’ equity:
 
 
 
Common stock
1

 
1

Premium on common stock and other capital surplus
3,118

 
3,112

Accumulated other comprehensive loss
(608
)
 
(541
)
Retained earnings (accumulated deficit)
(864
)
 
(946
)
 
1,647

 
1,626

Less — Shares held as treasury stock, at cost
930

 
930

Total Tenneco Inc. shareholders’ equity
717

 
696

Noncontrolling interests
44

 
46

Total equity
761

 
742

Total liabilities, redeemable noncontrolling interests and equity
$
5,003

 
$
4,842

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,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Millions)
 
 
 
 
 
 
 
 
Operating Activities
 
 
 
 
 
 
 
Net income
$
66

 
$
15

 
$
138

 
$
88

Adjustments to reconcile net income to cash provided by operating activities —
 
 
 
 
 
 
 
Depreciation and amortization of other intangibles
59

 
55

 
118

 
107

Deferred income taxes
(8
)
 
(7
)
 
(9
)
 

Stock-based compensation
2

 
2

 
7

 
11

Loss on sale of assets
2

 

 
5

 
1

Changes in components of working capital —
 
 
 
 
 
 
 
Increase in receivables
(16
)
 
(66
)
 
(239
)
 
(225
)
Increase in inventories
(19
)
 
(15
)
 
(53
)
 
(60
)
Increase in prepayments and other current assets
(25
)
 
(11
)
 
(70
)
 
(68
)
(Decrease) increase in payables
(22
)
 
(7
)
 
167

 
86

Decrease in accrued taxes

 
(41
)
 
(3
)
 
(38
)
Increase (decrease) in accrued interest
3

 
3

 

 
(2
)
Increase in other current liabilities
33

 
160

 
30

 
152

Changes in long-term assets
(5
)
 
1

 
(14
)
 

Changes in long-term liabilities
8

 
2

 
1

 
7

Other

 
1

 

 
2

Net cash provided by operating activities
78

 
92

 
78

 
61

Investing Activities
 
 
 
 
 
 
 
Proceeds from sale of assets
3

 
3

 
5

 
6

Proceeds from sale of equity interest

 
9

 

 
9

Cash payments for plant, property, and equipment
(80
)
 
(90
)
 
(164
)
 
(193
)
Cash payments for software related intangible assets
(5
)
 
(6
)
 
(10
)
 
(12
)
Proceeds from deferred purchase price of factored receivables
32

 
27

 
66

 
49

Other
2

 
(4
)
 
2

 
(4
)
Net cash used by investing activities
(48
)
 
(61
)
 
(101
)
 
(145
)
Financing Activities
 
 
 
 
 
 
 
Issuance (repurchase) of common shares under employee stock plans
1

 

 
(1
)
 
(3
)
Cash dividends
(12
)
 
(13
)
 
(25
)
 
(26
)
Retirement of long-term debt
(6
)
 
(2
)
 
(12
)
 
(8
)
Issuance of long-term debt - net

 
136

 

 
136

Debt issuance cost for long-term debt
(2
)
 
(8
)
 
(2
)
 
(8
)
Purchase of common stock under the share repurchase program

 
(44
)
 

 
(60
)
Net decrease in bank overdrafts
(3
)
 
(12
)
 
(7
)
 
(9
)
Net (decrease) increase in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivable
(29
)
 
(57
)
 
48

 
60

Net increase (decrease) in short-term borrowings secured by accounts receivable
10

 

 
(20
)
 
20

Distributions to noncontrolling interest partners
(28
)
 
(33
)
 
(28
)
 
(33
)
Net cash (used) provided by financing activities
(69
)
 
(33
)
 
(47
)
 
69

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
(14
)
 
(7
)
 
(11
)
 
1

Decrease in cash, cash equivalents and restricted cash
(53
)
 
(9
)
 
(81
)
 
(14
)
Cash, cash equivalents and restricted cash, beginning of period
290

 
344

 
318

 
349

Cash, cash equivalents and restricted cash, end of period (Note)
$
237

 
$
335

 
$
237

 
$
335

Supplemental Cash Flow Information
 
 
 
 
 
 
 
Cash paid during the period for interest (net of interest capitalized)
$
17

 
$
16

 
$
40

 
$
38

Cash paid during the period for income taxes (net of refunds)
31

 
28

 
56

 
43

Non-cash Investing and Financing Activities
 
 
 
 
 
 
 
Period end balance of trade payables for plant, property, and equipment
$
54

 
$
51

 
$
54

 
$
51

Deferred purchase price of receivables factored in the period
34

 
27

 
71

 
53

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,
 
2018
 
2017
 
Shares
 
Amount
 
Shares
 
Amount
 
(Millions Except Share Amounts)
Tenneco Inc. Shareholders:
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Balance January 1
66,033,509

 
$
1

 
65,891,930

 
$
1

Issued (repurchased) pursuant to benefit plans
(15,837
)
 

 
35,502

 

Restricted shares forfeited
(7,254
)
 

 
(104,668
)
 

Stock options exercised
4,779

 

 
168,105

 

Balance June 30
66,015,197

 
1

 
65,990,869

 
1

Premium on Common Stock and Other Capital Surplus
 
 
 
 
 
 
 
Balance January 1
 
 
3,112

 
 
 
3,098

Premium on common stock issued pursuant to benefit plans
 
 
6

 
 
 
8

Balance June 30
 
 
3,118

 
 
 
3,106

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance January 1
 
 
(541
)
 
 
 
(665
)
Other comprehensive (loss) income
 
 
(67
)
 
 
 
64

Balance June 30
 
 
(608
)
 
 
 
(601
)
Retained Earnings (Accumulated Deficit)
 
 
 
 
 
 
 
Balance January 1
 
 
(946
)
 
 
 
(1,100
)
Net income attributable to Tenneco Inc.
 
 
108

 
 
 
56

Cash dividends declared
 
 
(25
)
 
 
 
(26
)
  Adjustments to adopt new accounting standards
 
 
 
 
 
 
 
     Revenue recognition (Notes 12 and 15)
 
 
1

 
 
 

     Tax accounting for intra-entity asset transfers (Note 12)
 
 
(2
)
 
 
 

Balance June 30
 
 
(864
)
 
 
 
(1,070
)
Less — Common Stock Held as Treasury Stock at Cost
 
 
 
 
 
 
 
Balance January 1
14,592,888

 
930

 
11,655,938

 
761

Purchase of common stock through stock repurchase program

 

 
1,023,800

 
60

Balance June 30
14,592,888

 
930

 
12,679,738

 
821

Total Tenneco Inc. shareholders’ equity
 
 
$
717

 
 
 
$
615

Noncontrolling Interests:
 
 
 
 
 
 
 
Balance January 1
 
 
$
46

 
 
 
$
47

Net income
 
 
14

 
 
 
14

Other comprehensive income
 
 
2

 
 
 
1

Dividends declared
 
 
(18
)
 
 
 
(20
)
Balance June 30
 
 
$
44

 
 
 
$
42

Total equity
 
 
$
761

 
 
 
$
657

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 --(Continued)
(Unaudited)

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, 2017.
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of Tenneco Inc.’s results of operations, comprehensive income (loss), 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 unaudited condensed consolidated financial statements include all majority-owned subsidiaries. We have eliminated all intercompany transactions.
Segment Information
In the first quarter of 2018, the Company’s reportable segments for financial reporting purposes were revised, and now consist of the following three segments: Clean Air, Ride Performance and Aftermarket. See Note 13, Segment Information for further information.
Prepayments and Other
Prepayments and other included $140 million and $117 million at June 30, 2018 and December 31, 2017, respectively, for in-process tools and dies that we are building for our original equipment customers.
Accounts Payable
Accounts payable included $103 million and $77 million at June 30, 2018 and December 31, 2017, respectively, for accrued compensation and $13 million and $20 million at June 30, 2018 and December 31, 2017, respectively, for bank overdrafts at our European subsidiaries.
Redeemable Noncontrolling Interests
The following is a rollforward of activities in our redeemable noncontrolling interests for the six months ended June 30, 2018 and 2017, respectively:
 
Six Months Ended June 30,
 
2018
 
2017
 
(Millions)
Balance January 1
$
42

 
$
40

Net income attributable to redeemable noncontrolling interests
16

 
19

Other comprehensive (loss) income
(1
)
 
1

Dividends declared
(19
)
 
(35
)
Balance June 30
$
38

 
$
25

Reclassifications
Reclassifications to certain prior year amounts have been made to conform to current year presentation. See Note 12, New Accounting Pronouncements for additional information.


14

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


(2)
Pending Acquisition of Federal-Mogul
On April 10, 2018, Tenneco entered into a Membership Interest Purchase Agreement (the "Purchase Agreement") with Federal-Mogul LLC ("Federal-Mogul"), American Entertainment Properties Corp. ("AEP"), and Icahn Enterprises L.P. ("IEP"), pursuant to which Tenneco will acquire Federal-Mogul (the “Acquisition”).
Subject to the terms and conditions of the Purchase Agreement, Tenneco will (i) pay to AEP an aggregate amount in cash equal to $800 million (the “Cash Consideration”) and (ii) issue and deliver to AEP an aggregate of 29,444,846 shares (the “Stock Consideration”) of Tenneco's common stock, subject to reduction if Tenneco undertakes a primary offering of common stock prior to the closing of the Acquisition described below, which shall be comprised of: (a) a number of shares of common stock (to be reclassified as Class A Voting Common Stock, par value $0.01, at the closing of the Acquisition (“Class A Common Stock”)) equal to 9.9% of the aggregate number of shares of Class A Common Stock issued and outstanding as of immediately following the closing of the Acquisition, and (b) the balance in shares of newly created Class B Non-Voting Common Stock, par value $0.01 (“Class B Common Stock”).
Until the date that is ten business days prior to the anticipated closing date of the Acquisition, Tenneco may elect to conduct an offering of its common stock in order to raise funds to increase the Cash Consideration. Such offering may include up to 7,315,490 shares of common stock that would otherwise have been issued to AEP in connection with the Acquisition. Each share sold in such an offering will decrease the number of shares of common stock issuable to AEP by one share, so the total number of shares of common stock to be issued in connection with the Acquisition will not change if Tenneco undertakes such an offering.
The completion of the Acquisition is subject to certain customary closing conditions and the Purchase Agreement contains customary representations, warranties and covenants by each party that are subject, in some cases, to specified exceptions and qualifications contained in the Purchase Agreement.
Following the closing of the Acquisition, Tenneco has agreed to use its reasonable best efforts to pursue the separation of the combined company’s powertrain technology business and its aftermarket & ride performance business into two separate, publicly traded companies in a spin-off transaction that is expected to be treated as a tax-free reorganization for U.S. federal income tax purposes (the "Spin-off" and, together with the Acquisition, the "Transaction").
Advisory costs associated with the pending acquisition were $18 million and $31 million for the three and six month periods ended June 30, 2018, respectively, and have been recognized as a component of selling, general and administrative expenses in the condensed consolidated statements of income (loss).

15

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

(3)
Financial Instruments
The net carrying and estimated fair values of our financial instruments by class at June 30, 2018 and December 31, 2017 were as follows:
 
June 30, 2018
 
December 31, 2017
 
Net Carrying
Amount
 
Fair
Value
 
Net Carrying
Amount
 
Fair
Value
 
(Millions)
Long-term debt (including current maturities)
$
1,385

 
$
1,335

 
$
1,361

 
$
1,398

Equity swap agreement and foreign currency forward contracts:
 
 
 
 
 
 
 
Asset derivative contracts (a)
2

 
2

 
4

 
4


(a) All derivatives are categorized within Level 2 of the fair value hierarchy.
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 $662 million and $749 million at June 30, 2018 and December 31, 2017, respectively. We have classified $658 million and $634 million as level 2 in the fair value hierarchy at June 30, 2018 and December 31, 2017, respectively, since we utilize valuation inputs that are observable both directly and indirectly. We classified the remaining $15 million, consisting of foreign subsidiary debt, as level 3 in the fair value hierarchy at both June 30, 2018 and December 31, 2017.
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.
Foreign Currency 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 currency forward contracts as part of currency gains (losses) within cost of sales in the consolidated statements of income (loss). The fair value of foreign currency forward contracts are recorded in prepayments and other current assets or other current liabilities in the consolidated balance sheet. The fair value of our foreign currency forward contracts was a net liability position of less than $1 million at both June 30, 2018 and at December 31, 2017.

16

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

The following table summarizes by major currency the notional amounts for foreign currency forward purchase and sale contracts as of June 30, 2018 (all of which mature in 2018):
 
 
Notional Amount
in Foreign Currency
 
 
(Millions)
Canadian dollars
—Sell
(2
)
Chinese yuan
—Purchase
3

U.S. dollars
—Purchase
2

Cash-settled Share Swap Transactions — We selectively use cash-settled share swaps to reduce market risk associated with our deferred liabilities. These equity compensation liabilities increase as our stock price increases and decrease as our stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing us to fix a portion of the liabilities at a stated amount. As of June 30, 2018, we had hedged our deferred liability related to approximately 250,000 common share equivalents. The fair value of the equity swap agreement is recorded in other current assets in the consolidated balance sheet. The fair value of our equity swap agreement was a net asset position of $2 million and $4 million at June 30, 2018 and December 31, 2017, respectively.
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 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 secure our senior notes. For additional information, refer to Note 14, 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 the event of a payment default by the sponsoring or participating employers of the Walker Plans. The Walker Plans are comprised of employees from Tenneco Walker (U.K.) Limited and Futaba (U.K.) Limited, formerly our Futaba-Tenneco (U.K.) joint venture. Employer contributions are funded by Tenneco Walker (U.K.) Limited, as the sponsoring employer, and were also funded by Futaba (U.K.) Limited prior to its ceasing, on April 28, 2017, to be an entity in which Tenneco has an equity interest. 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. 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. As of June 30, 2018 and December 31, 2017, these plans were in an overfunded position and shown under other assets, other on our condensed consolidated balance sheets. At June 30, 2018, all pension contributions under the Walker Plans were current for all of the Walker Plans’ sponsoring and participating employers.
We have issued guarantees through letters of credit in connection with some obligations of our affiliates. As of June 30, 2018, we have guaranteed $29 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.
Financial Instruments — In certain instances, several of our Chinese subsidiaries receive payment from customers through the receipt of financial instruments on the date the customer payments are due. Several of our Chinese subsidiaries also satisfy vendor payments through the delivery of financial instruments on the date the payments are due. Financial instruments issued to satisfy vendor payables and not redeemed totaled $19 million and $11 million at June 30, 2018 and December 31, 2017, respectively, and were classified as notes payable recorded in short-term debt in our condensed consolidated balance sheets. Financial instruments received from original equipment (OE) customers and not redeemed totaled $21 million and $10 million at June 30, 2018 and December 31, 2017, respectively, and were classified as other current assets in our consolidated balance sheets. We classify financial instruments received from our customers as other current assets, recorded in prepayments and other, if issued by a financial institution of our customers or as customer notes and accounts, net if issued by our customer.

17

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

The financial instruments received by some of our Chinese subsidiaries are drafts drawn that are payable at a future date and, in some cases, are negotiable and/or are guaranteed by the banks of the customers. The use of these instruments for payment follows local commercial practice. Because certain of such financial instruments 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.
Supply Chain Financing — Certain of our suppliers in the U.S. participate in supply chain financing programs under which they securitize their accounts receivables from Tenneco. Financial institutions participate in the supply chain financing program on an uncommitted basis and can cease purchasing receivables or drafts from Tenneco's suppliers at any time. If the financial institutions do not continue to purchase receivables or drafts from Tenneco's suppliers under these programs, the participating vendors may have a need to renegotiate their payment terms with Tenneco which in turn would cause our borrowings under our revolving credit facility to increase.
Restricted Cash — Some of our Chinese subsidiaries that issue their own financial instruments to pay vendors are required to maintain a cash balance if they exceed credit limits with the financial institution that guarantees the financial instruments. A restricted cash balance was required at those Chinese subsidiaries for $1 million and $2 million at June 30, 2018 and December 31, 2017, respectively.
One of our subsidiaries in Spain is required by law to maintain a cash deposit with a financial institution to guarantee the maximum estimated loss related to a tax audit until a settlement is reached. The cash deposit required was less than $1 million which has been classified as restricted cash on the Tenneco Inc. consolidated balance sheet at both June 30, 2018 and December 31, 2017. As of December 31, 2017, there was a similar cash deposit required for one of our subsidiaries in Brazil for approximately $1 million. The audit was closed in 2018 and the Brazil subsidiary has no restricted cash balance as of June 30, 2018.

18

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

(4)
Debt and Other Financing Arrangements
Long-Term Debt
A summary of our long-term debt obligations at June 30, 2018 and December 31, 2017 is set forth in the following table:
 
June 30, 2018
 
December 31, 2017
 
Principal
 
Carrying Amount (1)
 
Principal
 
Carrying Amount (1)
 
(Millions)
Tenneco Inc. —
 
 
 
 
 
 
 
Revolver borrowings due 2022
$
278

 
$
278

 
$
244

 
$
244

Senior Tranche A Term Loan due 2022
380

 
378

 
390

 
388

5 3/8% Senior Notes due 2024
225

 
222

 
225

 
222

5% Senior Notes due 2026
500

 
493

 
500

 
492

Other subsidiaries —
 
 
 
 
 
 
 
Other long-term debt due in 2020
6

 
6

 
5

 
5

Notes due 2018 through 2028
10

 
8

 
12

 
10

 
1,399

 
1,385

 
1,376

 
1,361

Less — maturities classified as current
4

 
4

 
3

 
3

Total long-term debt
$
1,395

 
$
1,381

 
$
1,373

 
$
1,358


(1) Carrying amount is net of unamortized debt issuance costs and debt discounts. Total unamortized debt issuance costs were $12 million and $13 million as of June 30, 2018 and December 31, 2017, respectively, and the total unamortized debt discount was $2 million as of both June 30, 2018 and December 31, 2017.
Short-Term Debt
Our short-term debt includes the current portion of long-term debt and borrowings by the parent company and foreign subsidiaries, which includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements. Information regarding our short-term debt as of June 30, 2018 and December 31, 2017 is as follows:
 
June 30,
2018
 
December 31,
2017
 
(Millions)
Maturities classified as current
$
4

 
$
3

Short-term borrowings
74

 
80

Total short-term debt
$
78

 
$
83

Financing Arrangements
Our financing arrangements are primarily provided by a committed senior secured credit facility 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.
Funds may be borrowed, repaid and re-borrowed under the revolving credit facility without premium or penalty (subject to any customary LIBOR breakage fees). The revolving credit facility is reflected as debt on our balance sheet only if we borrow money under this facility. Outstanding letters of credit reduce our availability to borrow revolving loans under the facility. We are required to make quarterly principal payments under the term loan A facility of $5 million through June 30, 2019, $7.5 million beginning September 30, 2019 through June 30, 2020, $10 million beginning September 30, 2020 through March 31, 2022 and a final payment of $260 million is due on May 12, 2022. We have excluded the required payments, within the next twelve months, under the term loan A facility totaling $20 million from current liabilities as of June 30, 2018, because we have the intent and ability to refinance the obligations on a long-term basis by using our revolving credit facility.

19

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

The financial ratios required under the senior credit facility, and the actual ratios we achieved for the first two quarters of 2018, are as follows:
 
Quarter Ended
 
June 30, 2018
 
March 31, 2018
 
Required

Actual
 
Required

Actual
Leverage Ratio (maximum)
3.50


1.79

 
3.50


2.09

Interest Coverage Ratio (minimum)
2.75


10.84

 
2.75


9.87

The senior credit facility includes a maximum leverage ratio covenant of 3.50 and a minimum interest coverage ratio of 2.75, in each case through May 12, 2022. The senior credit facility provides us with the flexibility not to exclude certain otherwise excludable charges incurred in any relevant period from the calculation of the leverage and interest coverage ratios for such period.
At June 30, 2018, of the $1,600 million available under the revolving credit facility, we had unused borrowing capacity of $1,322 million with $278 million in outstanding borrowings and no outstanding letters of credit.
Recently Committed Senior Credit Facility
In connection with the execution of the Purchase Agreement, as discussed in Note 2, Pending Acquisition of Federal-Mogul, we entered into a debt commitment letter, pursuant to which JPMorgan Chase Bank, N.A. and Barclays Bank PLC (the "Commitment Parties") have committed to provide a $4.9 billion senior credit facility, a portion of which will be used to finance the Cash Consideration portion of the purchase price and replace the Company’s existing senior credit facilities and certain senior facilities of Federal-Mogul. In June 2018, the Commitment Parties completed the syndication of the commitments for the $4.9 billion senior credit facility among a group of banks and other financial institutions. The new senior credit facility will consist of a five-year $1.5 billion revolving credit facility, a five-year $1.7 billion term loan A facility and a seven-year $1.7 billion term loan B facility. The new credit facilities will be secured on a senior basis by substantially all assets of the Company on a pari passu basis with Federal-Mogul’s existing secured notes, and will be guaranteed by certain material domestic subsidiaries. The commitment to provide financing is subject to specified limited conditions.


20

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

(5)
Income Taxes
For interim tax reporting we estimate our annual effective tax rate and apply it to our year to date ordinary income. Jurisdictions where no tax benefit can be recognized due to a valuation allowance are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a particular quarter due to the mix and timing of actual earnings versus annual projections. The tax effects of certain items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
We reported income tax expense of $27 million and income tax benefit of $8 million in the three month periods ended June 30, 2018 and 2017, respectively. The tax expense recorded in the second quarter of 2018 included a net tax benefit of $5 million relating to acquisition charges and $2 million of tax expense for changes in the toll tax as discussed below. The tax benefit recorded in the second quarter of 2017 included a net tax benefit of $50 million relating to an antitrust settlement accrual.
We reported income tax expense of $52 million and $25 million in the six month periods ended June 30, 2018 and 2017, respectively. The tax expense recorded in the first six months of 2018 included tax benefits of $7 million relating to acquisition charges and $2 million of tax expense for changes in the toll tax as discussed below. The tax expense recorded in the first six months of 2017 included a net tax benefit of $49 million primarily relating to an antitrust settlement accrual.
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted into U.S. law, which, among other provisions, lowered the corporate income tax rate effective January 1, 2018 from 35% to 21%, and implemented significant changes with respect to U.S. tax treatment of earnings originating from outside the U.S. Many of the provisions of TCJA are subject to regulatory interpretation and U.S. state conforming enactment. The IRS issued Notice 2018-26 on April 2, 2018, which provided additional guidance to assist taxpayers in computing the toll tax. Based on the new guidance, a $2 million discrete charge was recorded in income tax expense for the second quarter of 2018. We will continue to refine our estimates throughout the measurement period provided for in SEC Staff Accounting Bulletin 118, or until our accounting is complete.
Our losses in various foreign taxing jurisdictions represented sufficient negative evidence to require us to maintain a full valuation allowance against certain of our net deferred tax assets. We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. If recent operational improvements continue in certain of our foreign subsidiaries, we believe it is reasonably possible that sufficient positive evidence may be available to release all, or a portion, of its valuation allowance in the next twelve months.  This may result in a one-time tax benefit of up to $54 million, primarily related to Spain.
We believe it is reasonably possible that up to $7 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of income tax examinations may be recognized within the next twelve months.


21

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

(6)
Accounts Receivable Securitization and Factoring Programs
We securitize or factor some of our accounts receivable on a limited recourse basis in the U.S. and Europe. As servicer under these accounts receivable securitization and factoring programs, we are responsible for performing all accounts receivable administration functions for these securitized and factored financial assets including collections and processing of customer invoice adjustments. In the U.S., 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 April 2017, the U.S. program was amended and extended to April 30, 2019. The first priority facility provides financing of up to $155 million and the second priority facility, which is subordinated to the first priority facility, provides up to an additional $25 million of financing. Both facilities monetize accounts receivable generated in the U.S. that meet certain eligibility requirements and the second priority facility also monetizes certain accounts receivable generated in the U.S. 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 U.S. program was $10 million and $30 million, recorded in short-term debt, at June 30, 2018 and December 31, 2017, respectively.
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.
On December 14, 2017, we entered into a new accounts receivable factoring program in the U.S. with a commercial bank. Under this program, we sell receivables from one of our U.S. OE customers at a rate that is favorable versus our senior credit facility. This arrangement is uncommitted and provides for cancellation by the commercial bank with no less than 30 days prior written notice. The amount of outstanding third-party investments in our accounts receivable sold under this program was $122 million and $107 million at June 30, 2018 and December 31, 2017, respectively.
We also factor receivables in our European operations with regional banks in Europe under various separate facilities. The commitments for these arrangements are generally for one year, but some may be cancelled with notice 90 days prior to renewal. In some instances, the arrangement provides for cancellation by the applicable financial institution at any time upon notification. The amount of outstanding third-party investments in our accounts receivable sold under programs in Europe was $255 million and $218 million at June 30, 2018 and December 31, 2017, respectively. Certain programs in Europe have deferred purchase price arrangements with the banks. We received cash to settle the deferred purchase price for $32 million and $27 million in the three month periods ended June 30, 2018 and 2017, respectively, and $66 million and $49 million in the six month periods ended June 30, 2018 and 2017, respectively.
If we were not able to securitize or factor receivables under either the U.S. or European programs, our borrowings under our revolving credit agreement might increase. These accounts receivable securitization and factoring 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 U.S. accounts receivable securitization program, 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 U.S. securitization program as a secured borrowing. In our U.S. and European accounts receivable factoring programs, we transfer accounts receivable in their entirety to the acquiring entities and satisfy all of the conditions established under ASC Topic 860, “Transfers and Servicing,” to report the transfer of financial assets in their entirety as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under our U.S. and European factoring programs approximates the fair value of such receivables. We recognized $1 million interest expense in each of the three month periods ended June 30, 2018 and 2017, and $2 million in each of the six month periods ended June 30, 2018 and 2017, relating to our U.S. securitization program. In addition, we recognized a loss of $2 million and $1 million in the three month periods ended June 30, 2018 and 2017, respectively, and $4 million and $2 million in the six month periods ended June 30, 2018 and 2017, respectively, on the sale of trade accounts receivable in our U.S. and European accounts receivable factoring programs, representing the discount from book values at which these receivables were sold to our banks. The remaining loss on receivables recognized is unrelated to the aforementioned factoring programs. The discount rate varies based on funding costs incurred by our banks, which averaged approximately two percent during both the first six months of 2018 and 2017 for the European programs and three percent and two percent during the first six months of 2018 and 2017, respectively, for the US program.

22

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


(7)
Restructuring and Other Charges
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 the second quarter of 2018, we incurred $31 million in restructuring and related costs, primarily related to a headcount reduction at a Clean Air plant in Germany, the accelerated move of our Beijing Ride Performance plant, and other cost improvement initiatives. In the first six months of 2018, we incurred $43 million in restructuring and related costs, primarily related to the headcount reduction at a Clean Air plant in Germany, the accelerated move of our Beijing Ride Performance plant, and other cost improvement initiatives.
In the second quarter of 2017, we incurred $17 million in restructuring and related costs, including asset write-downs of $1 million, primarily related to closing a Clean Air manufacturing plant in Australia. In the first six months of 2017, we incurred $32 million in restructuring and related costs, including asset write-downs of $2 million, primarily related to closing a Clean Air Belgian JIT plant in response to the end of production on a customer platform, closing a Clean Air manufacturing plant in Australia and cost improvement initiatives in Europe.
The Company's restructuring and other charges are classified in the condensed consolidated statements of income (loss) as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Millions)
Cost of sales
$
23

 
$
12

 
$
32

 
$
23

Engineering, research, and development

 

 
1

 

Selling, general and administrative
8

 
4

 
10

 
7

Depreciation and amortization of other intangibles

 
1

 

 
2

 
$
31

 
$
17

 
$
43

 
$
32

Other Structural Cost Reductions
The Company has also been tracking other costs unrelated to manufacturing operations, that are intended to support achievement of Acquisition synergies. These other costs were $9 million for each of the three and six month periods ended June 30, 2018, of which $4 million was recorded in engineering, research, and development and $5 million in selling, general and administrative expenses.
Amounts related to activities that were charged to our restructuring reserves, including costs incurred to support future structural cost reductions, are as follows:
 
December 31,
2017
Restructuring
Reserve
 
2018
Expenses
 
2018
Cash
Payments
 
Impact of Exchange Rates
 
June 30, 2018
Restructuring
Reserve
 
(Millions)
Employee severance, termination benefits and other related costs
$
25

 
$
41

 
$
(31
)
 
$

 
$
35

Under the terms of our amended and restated senior credit agreement that took effect on May 12, 2017, we are allowed to exclude, at our discretion, (i) up to $35 million in 2017 and $25 million each year thereafter of cash restructuring charges and related expenses, with the ability to carry forward any amount not used in one year to the following year, and (ii) up to $150 million in the aggregate of all costs, expenses, fees, fines, penalties, judgments, legal settlements and other amounts associated with any restructuring, litigation, claim, proceeding or investigation related to or undertaken by us or any of our subsidiaries, together with any related provision for taxes, incurred for any quarterly period ending after May 12, 2017 in the calculation of the financial covenant ratios required under our senior credit facility. As of June 30, 2018, we elected not to exclude any of the $210 million of allowable cash charges and related expenses recognized in 2017 and in the first six months of 2018 for restructuring related costs and antitrust settlements against the $35 million annual limit for 2017, $25 million for 2018 and the $150 million aggregate limit available under the terms of the senior credit facility.

23

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


(8)
Environmental Matters, Legal Proceedings and Product Warranties
We are involved in environmental remediation matters, legal proceedings, claims (including warranty claims) and investigations. These matters are typically incidental to the conduct of our business and create the potential for contingent losses. We accrue for 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. 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.
Environmental Matters
We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations. As of June 30, 2018, we have the obligation to remediate or contribute towards the remediation of certain sites, including one Federal Superfund site. Our aggregated estimated share of environmental remediation costs for all these sites on a discounted basis was approximately $17 million at June 30, 2018, of which $3 million is recorded in other current liabilities and $14 million is recorded in deferred credits and other liabilities in our consolidated balance sheet. For those locations where the liability was discounted, the weighted-average discount rate used was 2.6 percent. The undiscounted value of the estimated remediation costs was $21 million. Our expected payments of environmental remediation costs are estimated to be approximately $2 million in 2018, $3 million in 2019, $1 million each year beginning 2020 through 2022 and $13 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 financial position, results of operations, or liquidity.
Antitrust Investigations and Litigation
On March 25, 2014, representatives of the European Commission were at Tenneco GmbH's Edenkoben, Germany administrative facility to gather information in connection with an ongoing global antitrust investigation concerning multiple automotive suppliers. On March 25, 2014, we also received a related subpoena from the U.S. Department of Justice (“DOJ”).
On November 5, 2014, the DOJ granted us conditional leniency pursuant to an agreement we entered into under the Antitrust Division's Corporate Leniency Policy. This agreement provides us with important benefits in exchange for our self-reporting of matters to the DOJ and our continuing full cooperation with the DOJ's resulting investigation. For example, the DOJ will not bring any criminal antitrust prosecution against us, nor seek any criminal fines or penalties, in connection with the matters we reported to the DOJ. Additionally, there are limits on our liability related to any follow-on civil antitrust litigation in the U.S. The limits include single rather than treble damages, as well as relief from joint and several antitrust liability with other relevant civil antitrust action defendants. These limits are subject to our satisfying the DOJ and any court presiding over such follow-on civil litigation.
On April 27, 2017, Tenneco received notification from the European Commission (EC) that it has administratively closed its global antitrust inquiry regarding the production, assembly, and supply of complete exhaust systems. No charges against Tenneco or any other competitor were initiated at any time and the EC inquiry is now closed.

24

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

Certain other competition agencies are also investigating possible violations of antitrust laws relating to products supplied by our company. We have cooperated and continue to cooperate fully with all of these antitrust investigations, and take other actions to minimize our potential exposure.
Tenneco and certain of its competitors are also currently defendants in civil putative class action litigation, and are subject to similar claims filed by other plaintiffs, in the United States and Canada. More related lawsuits may be filed, including in other jurisdictions. Plaintiffs in these cases generally allege that defendants have engaged in anticompetitive conduct, in violation of federal and state laws, relating to the sale of automotive exhaust systems or components thereof. Plaintiffs seek to recover, on behalf of themselves and various purported classes of purchasers, injunctive relief, damages and attorneys’ fees. However, as explained above, because we received conditional leniency from the DOJ, our civil liability in U.S. follow on actions is limited to single damages and we will not be jointly and severally liable with the other defendants, provided that we have satisfied our obligations under the DOJ leniency agreement and approval is granted by the presiding court. Typically, exposure for follow-on actions in Canada is less than the exposure for U.S. follow-on actions.
Following the EC’s decision to administratively close its antitrust inquiry into exhaust systems in 2017, Tenneco’s receipt of conditional leniency from the DOJ in 2014 and discussions during the third quarter of 2017 following the appointment of a special settlement master in the civil putative class action cases pending against Tenneco and/or certain of its competitors in the U.S., Tenneco continues to vigorously defend itself and/or take actions to minimize its potential exposure to matters pertaining to the global antitrust investigation, including engaging in settlement discussions when it is in the best interests of the company and its stockholders. For example, in October 2017, Tenneco settled an administrative action brought by Brazil's competition authority for an amount that was not material. Additionally, in February 2018, Tenneco settled civil putative class action litigation in the United States brought by classes of indirect purchasers, end-payors and auto dealers. No other classes of plaintiffs have brought claims against Tenneco in the United States. Based upon those earlier developments, including settlement discussions, Tenneco established a reserve of $132 million in its second quarter 2017 financial results for settlement costs that were probable, reasonably estimable, and expected to be necessary to resolve Tenneco’s antitrust matters globally, which primarily involves the resolution of civil suits and related claims. Of the $132 million reserve that was established, $64 million has been paid life-to-date resulting in a remaining reserve of $68 million as of June 30, 2018, which is recorded in other current liabilities. While Tenneco continues to cooperate with certain competition agencies investigating possible violations of antitrust laws relating to products supplied by Tenneco, and the company may be subject to other civil lawsuits and/or related claims, no amount of this reserve is attributable to matters with the DOJ or the EC, and no such amount is expected based on current information.
Our reserve for antitrust matters is based upon all currently available information and an assessment of the probability of events for those matters where Tenneco can make a reasonable estimate of the costs to resolve such outstanding matters. Tenneco’s estimate involves significant judgment, given the number, variety and potential outcomes of actual and potential claims, the uncertainty of future rulings and approvals by a court or other authority, the behavior or incentives of adverse parties or regulatory authorities, and other factors outside of the control of Tenneco. As a result, Tenneco’s reserve may change from time to time, and actual costs may vary. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, we do not expect that any such change in the reserve will have a material adverse impact on our annual consolidated financial position, results of operations or liquidity.
Other Legal Proceedings, Claims and Investigations
For many years we have been and continue to be subject to lawsuits initiated by claimants alleging health problems as a result of exposure to asbestos. Our current docket of active and inactive cases is less than 500 cases nationwide. A small number of claims have been asserted against one of our subsidiaries by railroad workers alleging exposure to asbestos products in railroad cars. The substantial majority of the remaining claims are related to alleged exposure to asbestos in our automotive products although a significant number of those claims appear also to involve occupational exposures sustained in industries other than automotive. We believe, based on scientific and other evidence, it is unlikely that claimants 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, in many cases 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 position, results of operations or liquidity.

25

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

We are also from time to time involved in other legal proceedings, claims or investigations. Some of these matters involve allegations of 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, unclaimed property, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. Additionally, some of these matters involve allegations relating to legal compliance. For example, in July 2017 a complaint was filed against us in federal district court in Chicago, Illinois alleging that we misappropriated a third party's trade secrets in connection with certain of our ride control products.
While we vigorously defend ourselves against all of these legal proceedings, claims and investigations and take other actions to minimize our potential exposure, 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, except as described above under "Antitrust Investigations" and in this paragraph, we do not expect the legal proceedings, claims or investigations currently pending against us will have any material adverse impact on our consolidated financial position, results of operations or liquidity. With respect to the trade secret claim described above, we are in the process of evaluating the claim but, at this stage of the case and given the inherent uncertainly of litigation, we are unable to estimate whether a loss is reasonably possible. While we do not believe that this litigation will have a material adverse effect on our annual consolidated financial position, results of operations or liquidity, we cannot assure you that this will be the case.
Warranty Matters
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 with our 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 condensed consolidated balance sheets.
Below is a table that shows the activity in the warranty accrual accounts:
 
Six Months Ended June 30,
 
2018
 
2017
 
(Millions)
Beginning Balance January 1,
$
26

 
$
20

Accruals related to product warranties
8

 
11

Reductions for payments made
(5
)
 
(4
)
Ending Balance June 30,
$
29

 
$
27



26

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

(9)
Earnings Per Share
Earnings per share of common stock outstanding were computed as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Millions Except Share and Per Share Amounts)
Basic earnings (loss) per share —
 
 
 
 
 
 
 
Net income (loss) attributable to Tenneco Inc.
$
50

 
$
(3
)
 
$
108

 
$
56

Weighted Average shares of common stock outstanding
51,258,668

 
53,505,341

 
51,232,639

 
53,662,375

Earnings (loss) per share of common stock
$
0.98

 
$
(0.05
)
 
$
2.12

 
$
1.05

Diluted earnings (loss) per share —
 
 
 
 

 

Net income (loss) attributable to Tenneco Inc.
$
50

 
$
(3
)
 
$
108

 
$
56

Weighted Average shares of common stock outstanding
51,258,668

 
53,505,341

 
51,232,639

 
53,662,375

Effect of dilutive securities:
 
 
 
 

 

Restricted stock
298,826

 

 
251,971

 
111,459

Stock options
49,730

 

 
61,405

 
179,084

Weighted Average shares of common stock outstanding including dilutive securities
51,607,224

 
53,505,341

 
51,546,015

 
53,952,918

Earnings (loss) per share of common stock
$
0.98

 
$
(0.05
)
 
$
2.10

 
$
1.05


Options to purchase 123,947 and 834 shares of common stock were outstanding as of June 30, 2018 and 2017, respectively, but not included in the computation of diluted earnings per share because the options were anti-dilutive.

(10)
Common Stock
Equity Plans — We have granted a variety of awards, including common stock, restricted stock, restricted stock units, performance share units, stock appreciation rights (“SARs”), and stock options to our directors, officers, and employees.
Accounting Methods — We recorded no compensation expense in each of the three month periods ended June 30, 2018 and 2017, and no compensation expense and less than $1 million of compensation expense (net of tax) for the six month periods ended June 30, 2018 and 2017, respectively, related to nonqualified stock options as part of our selling, general and administrative expense. This had no impact on basic or diluted earnings per share for the three month periods ended June 30, 2018 and 2017 and six month period ended June 30, 2018 and a decrease of less than $0.01 in both basic and diluted earnings per share for the six month period ended June 30, 2017.
Prior to 2018, for employees eligible to retire at grant date, we immediately expensed stock options and restricted stock. In 2018, we prospectively changed our vesting policy regarding retirement eligibility and now require a retirement eligible employee (or an employee who becomes retirement eligible) to provide at least one year of service from the grant date in order for the award to vest. If an employee becomes retirement eligible after the first year of vesting but before completion of the three-year term, we amortize the expense for stock options and restricted stock over a period starting at the grant date to the date an employee becomes retirement eligible.
As of June 30, 2018, there was no unrecognized compensation cost related to our stock option awards.
Compensation expense for restricted stock, restricted stock units, long-term performance units, performance share units and SARs (net of tax) was $1 million and $2 million for the three month periods ended June 30, 2018 and 2017, respectively, and $4 million and $8 million for the six month periods ended June 30, 2018 and 2017, respectively, and was recorded in selling, general, and administrative expense.
Cash received from stock option exercises for the six month periods ended June 30, 2018 and 2017 was less than $1 million and $6 million, respectively.
Stock options exercised in the first six months of 2018 and 2017 generated a tax benefit of less than $1 million and $2 million, respectively.

27

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

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, 2018
 
Shares
Under
Option
 
Weighted Avg.
Exercise
Prices
 
Weighted Avg.
Remaining
Life in Years
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
(Millions)
Outstanding Stock Options
 
 
 
 
 
 
 
Outstanding, January 1, 2018
318,016

 
$
43.60

 
2.6
 
$
5

Exercised
(4,607
)
 
26.78

 
 
 

Outstanding, March 31, 2018
313,409

 
43.84

 
2.1
 
4

Forfeited
(2,368
)
 
54.34

 
 
 

Outstanding, June 30, 2018
311,041

 
$
43.76

 
1.8
 
$
2

There have been no stock options granted since 2015. Accordingly, no options vested during the six months period ended June 30, 2018. The total fair value of shares vested from options that were granted prior to 2015 for the six months period ended June 30, 2017 was $2 million.
Restricted Stock — The following table reflects the status for all nonvested restricted shares for the period indicated:
 
Six Months Ended June 30, 2018
 
Shares
 
Weighted Avg.
Grant Date
Fair Value
Nonvested Restricted Shares
 
 
 
Nonvested balance at January 1, 2018
410,251

 
$
49.95

Granted
17,440

 
55.05

Vested
(168,409
)
 
47.08

Forfeited
(5,108
)
 
48.68

Nonvested balance at March 31, 2018
254,174

 
52.23

Granted
1,573

 
47.97

Vested
(60,434
)
 
49.89

Forfeited
(2,482
)
 
57.15

Nonvested balance at June 30, 2018
192,831

 
$
53.14

The fair value of restricted stock grants is usually equal to the average of the high and low trading price of our stock on the date of grant. As of June 30, 2018, approximately $5 million of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 1.4 years. The total fair value of restricted shares vested was $11 million and $14 million at June 30, 2018 and 2017, respectively.
Share Repurchase Program — In January 2015, our Board of Directors approved a share repurchase program, authorizing our company to repurchase up to $350 million of our outstanding common stock over a three year period. In October 2015, our Board of Directors expanded this share repurchase program, authorizing the repurchase of an additional $200 million of the Company's outstanding common stock.
In February 2017, our Board of Directors authorized the repurchase of up to $400 million of the Company's outstanding common stock over the next three years, inclusive of $112 million that remained authorized under earlier repurchase programs. The Company anticipates acquiring the shares through open market or privately negotiated transactions, which will be funded through cash from operations. The repurchase program does not obligate the Company to repurchase shares within any specific time or situations, and opportunities in higher priority areas could affect the cadence of this program. We did not repurchase any shares through this program in the six months ended June 30, 2018. Since we announced the share repurchase program in January 2015, we have repurchased 11.3 million shares for $607 million through June 30, 2018.
Treasury shares were 14,592,888 shares at June 30, 2018 and December 31, 2017, respectively.

28

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

Dividends — On February 1, 2017, Tenneco announced the reinstatement of a quarterly dividend program under which we expect to pay quarterly dividends of $0.25 per share on our common stock, representing planned annual dividends of $1.00 per share. We paid a quarterly dividend of $0.25 per share in each of the first and second quarters of 2017 and 2018. Dividends declared and paid were $25 million and $26 million in the six month periods ended June 30, 2018 and 2017, respectively. While we currently expect that comparable quarterly cash dividends will continue to be paid in the future, our dividend program and the payment of future cash dividends under the program are subject to continued capital availability, the judgment of our Board of Directors and our continued compliance with the provisions pertaining to the payment of dividends under our debt agreements.
Long-Term Performance Units, Performance Share Units, Restricted Stock Units and SARs — Long-term performance units, restricted stock units granted prior to 2018 and SARs are paid in cash and recognized as a liability based upon their fair value. Performance share units and restricted stock units granted in 2018 onward are settled in shares upon vesting and recognized in equity based on their fair value. As of June 30, 2018, $26 million of total unrecognized compensation costs is expected to be recognized over a weighted-average period of approximately 2 years.

(11)
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
 
2018
 
2017
 
2018
 
2017
 
US
 
Foreign
 
US
 
Foreign
 
US
 
US
 
(Millions)
Service cost — benefits earned during the period
$

 
$
2

 
$

 
$
2

 
$

 
$

Interest cost (a)
2

 
3

 
2

 
3

 
1

 
2

Expected return on plan assets (a)
(3
)
 
(5
)
 
(3
)
 
(11
)
 

 

Net amortization:
 
 
 
 
 
 
 
 
 
 
 
Actuarial loss (a)
1

 
2

 
2

 
3

 
3

 
2

Prior service credit (a)

 

 

 

 
(1
)
 
(1
)
Net pension and postretirement costs
$

 
$
2

 
$
1

 
$
(3
)
 
$
3

 
$
3