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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2020
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
(State or other jurisdiction of
incorporation or organization)

500 North Field Drive, Lake Forest, Illinois
(Address of principal executive offices)

 

76-0515284
(I.R.S. Employer
Identification No.)

60045
(Zip Code)
Registrant’s telephone number, including area code: (847482-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Voting Common Stock, par value $0.01 per share
TEN
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
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        No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes        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.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
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  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares of Class A Voting Common Stock, par value $0.01 per share: 60,951,552 shares outstanding as of May 6, 2020. The number of shares of Class B Non-Voting Common Stock, par value $0.01 per share: 20,308,454 shares outstanding as of May 6, 2020.




TABLE OF CONTENTS
 
 
 
Page
Part I — Financial Information
 
Item 1.
 
 
 
 
 
 
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 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. 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 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, including the effect of the COVID-19 pandemic;
disasters, local and global public health emergencies or other catastrophic events, such as fires, earthquakes and flooding, pandemics or epidemics (including the COVID-19 pandemic), where we or other customers do business 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;
our ability (or inability) to successfully execute cost reduction, performance improvement and other plans, including our plans to respond to the COVID-19 pandemic and our previously announced accelerated performance improvement plan ("Accelerate"), and to realize the anticipated benefits from these plans;
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 and our financial flexibility to respond to the COVID-19 pandemic;
our ability to maintain compliance with the agreements governing our indebtedness and otherwise have sufficient liquidity through the COVID-19 pandemic;
our ability to comply with the covenants contained in our debt instruments;
our working capital requirements;
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 consumer demand for our original equipment ("OE") products or aftermarket products, prices and our ability to have our products included on top selling vehicles, including any shifts in consumer preferences away from historically higher margin products for our customers and us, to other lower margin vehicles, for which we may or may not have supply arrangements;
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;
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 and/or aftermarket products;
our dependence on certain large customers, including the loss of any of our large OE manufacturer 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 OE-customers or any change in customer demand due to delays in the adoption or enforcement of worldwide emissions regulations;
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 automotive 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);
risks inherent in operating a multi-national company, including economic conditions, such as currency exchange and inflation rates, political conditions in the countries where we operate or sell our products, adverse changes in trade agreements, tariffs, immigration policies, political stability, tax and other laws, and potential disruptions of production and supply;
increasing competition from lower cost, private-label products;

3



damage to the reputation of one or more of our leading brands;
the impact of improvements in automotive parts on aftermarket demand for some of our products;
industry-wide 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;
developments relating to our intellectual property, including our ability to adapt to changes in technology and the availability and effectiveness of legal protection for our innovations and brands;
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 in the highly competitive automotive and commercial vehicle supplier industry;
changes in distribution channels or competitive conditions in the markets and countries where we operate;
the evolution towards autonomous vehicles, and car and ride sharing;
customer acceptance of new products;
our ability to successfully integrate, and benefit from, any acquisitions we complete;
our ability to effectively manage our joint ventures and other third-party relationships;
the potential impairment in the carrying value of our long-lived assets, goodwill, and other intangible assets or the inability to fully realize our deferred tax assets;
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;
increases in the costs of raw materials or components, including our ability to successfully reduce the impact of any such cost increases through materials substitutions, cost reduction initiatives, customer recovery, and other methods;
changes by the Financial Accounting Standards Board ("FASB") or the Securities and Exchange Commission ("SEC") of generally accepted accounting principles or other authoritative guidance;
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 or increased costs or loss of revenues relating to products subject to changing regulation;
potential volatility in our effective tax rate;
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; 
pension obligations and other postretirement benefits;
our hedging activities to address commodity price fluctuations; and
the timing and occurrence (or non-occurrence) of other transactions, events and circumstances which may be beyond our control.
In addition, this report includes forward-looking statements regarding the Company's ongoing review of strategic alternatives and the planned separation of the Company into a powertrain technology company and an aftermarket and ride performance company. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include (in addition to the risks set forth above):
the ability to identify and consummate strategic alternatives that yield additional value for shareholders;
the timing, benefits, and outcome of the Company's strategic review process;
the structure, terms, and specific risk and uncertainties associated with any potential strategic alternative;
potential disruptions in our business and stock price as a result of our exploration, review, and pursuit of any strategic alternatives;
the possibility that the Company may not complete the separation of the aftermarket and ride performance business from the powertrain technology business (or achieve some or all of the anticipated benefits of such a separation);

4



the ability to retain and hire key personnel and maintain relationships with customers, suppliers or other business partners;
the potential diversion of management's attention resulting from the separation;
the risk the combined company and each separate company following the separation will underperform relative to our expectations;
the ongoing transaction costs and risk we may incur greater costs following separation of the business;
the risk the spin-off is determined to be a taxable transaction;
the risk the benefits of the separation may not be fully realized or may take longer to realize than expected;
the risk the separation may not advance our business strategy; and
the risk the transaction may have an adverse effect on existing arrangements with us, including those related to transition, manufacturing and supply services and tax matters.
The risks included here are not exhaustive. Refer to “Part II, Item 1A — Risk Factors” herein and “Part I, Item 1A — Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 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 effect 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.


5



PART I FINANCIAL INFORMATION

ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)
(in millions, except share and per share amounts) 
 
Three Months Ended
March 31,
 
2020
 
2019
Revenues
 
 
 
   Net sales and operating revenues
$
3,836

 
$
4,484

 
 
 
 
Costs and expenses
 
 
 
Cost of sales (exclusive of depreciation and amortization)
3,339

 
3,870

Selling, general, and administrative
249

 
318

Depreciation and amortization
171

 
169

Engineering, research, and development
77

 
92

Restructuring charges, net and asset impairments
484

 
16

Goodwill and intangible impairment charges
383

 
60

 
4,703

 
4,525

Other income (expense)
 
 
 
Non-service pension and other postretirement benefit (costs) credits
1

 
(2
)
Equity in earnings (losses) of nonconsolidated affiliates, net of tax
13

 
16

Other income (expense), net
8

 
3

 
22

 
17

Earnings (loss) before interest expense, income taxes, and noncontrolling interests
(845
)
 
(24
)
Interest expense
(75
)
 
(81
)
Earnings (loss) before income taxes and noncontrolling interests
(920
)
 
(105
)
Income tax (expense) benefit
94

 

Net income (loss)
(826
)
 
(105
)
Less: Net income (loss) attributable to noncontrolling interests
13

 
12

Net income (loss) attributable to Tenneco Inc.
$
(839
)
 
$
(117
)
Earnings (loss) per share
 
 
 
Basic earnings (loss) per share:
 
 
 
Earnings (loss) per share
$
(10.34
)
 
$
(1.44
)
Weighted average shares outstanding
81,168,562

 
80,874,637

Diluted earnings (loss) per share:
 
 
 
Earnings (loss) per share
$
(10.34
)
 
$
(1.44
)
Weighted average shares outstanding
81,168,562

 
80,874,637

See accompanying notes to the condensed consolidated financial statements.

6



TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in millions)
 
 
Three Months Ended March 31,
 
2020
 
2019
Net income (loss)
$
(826
)
 
$
(105
)
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment
(219
)
 
35

Cash flow hedges
(2
)
 
4

Defined benefit plans
4

 
1

 
(217
)
 
40

Comprehensive income (loss)
(1,043
)
 
(65
)
Less: Comprehensive income (loss) attributable to noncontrolling interests
(7
)
 
18

Comprehensive income (loss) attributable to common shareholders
$
(1,036
)
 
$
(83
)
See accompanying notes to the condensed consolidated financial statements.




7




TENNECO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except shares)
 
March 31,
2020
 
December 31,
2019
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
767

 
$
564

Restricted cash
3

 
2

Receivables:
 
 
 
Customer notes and accounts, net
2,146

 
2,438

Other
96

 
100

Inventories
2,001

 
1,999

Prepayments and other current assets
623

 
632

Total current assets
5,636

 
5,735

Property, plant and equipment, net
3,012

 
3,627

Long-term receivables, net
8

 
10

Goodwill
505

 
775

Intangibles, net
1,264

 
1,422

Investments in nonconsolidated affiliates
509

 
518

Deferred income taxes
747

 
607

Other assets
543

 
532

Total assets
$
12,224

 
$
13,226

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Short-term debt, including current maturities of long-term debt
$
175

 
$
185

Accounts payable
2,443

 
2,647

Accrued compensation and employee benefits
294

 
325

Accrued income taxes
96

 
72

Accrued expenses and other current liabilities
968

 
1,070

Total current liabilities
3,976

 
4,299

Long-term debt
5,837

 
5,371

Deferred income taxes
84

 
106

Pension and postretirement benefits
1,109

 
1,145

Deferred credits and other liabilities
497

 
490

Commitments and contingencies (Note 13)


 


Total liabilities
11,503

 
11,411

Redeemable noncontrolling interests
72

 
196

Tenneco Inc. shareholders’ equity:
 
 
 
Preferred stock — $0.01 par value; none issued

 

Class A voting stock — $0.01 par value; shares issued: March 31, 2020 — 72,057,592 and December 31, 2019 — 71,727,061
1

 
1

Class B non-voting convertible stock — $0.01 par value; shares issued: March 31, 2020 and December 31, 2019 — 23,793,669

 

Additional paid-in capital
4,427

 
4,432

Accumulated other comprehensive loss
(908
)
 
(711
)
Accumulated deficit
(2,206
)
 
(1,367
)
 
1,314

 
2,355

Shares held as treasury stock — at cost: March 31, 2020 and December 31, 2019 — 14,592,888
(930
)
 
(930
)
Total Tenneco Inc. shareholders’ equity
384

 
1,425

Noncontrolling interests
265

 
194

Total equity
649

 
1,619

Total liabilities, redeemable noncontrolling interests and equity
$
12,224

 
$
13,226

See accompanying notes to the condensed consolidated financial statements.

8



TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
 
Three Months Ended
March 31,
 
2020
 
2019
Operating Activities
 
 
 
Net income (loss)
$
(826
)
 
$
(105
)
Adjustments to reconcile net income (loss) to cash (used) provided by operating activities:
 
 
 
Goodwill and intangible impairment charges
383

 
60

Depreciation and amortization
171

 
169

Deferred income taxes
(166
)
 
(8
)
Stock-based compensation
2

 
7

Restructuring charges and asset impairments, net of cash paid
454

 
(14
)
Change in pension and other postretirement benefit plans
(19
)
 
(17
)
Equity in earnings of nonconsolidated affiliates
(13
)
 
(16
)
Cash dividends received from nonconsolidated affiliates
13

 
15

Changes in operating assets and liabilities:
 
 
 
Receivables
139

 
(312
)
Inventories
(73
)
 
11

Payables and accrued expenses
(136
)
 
157

Accrued interest and accrued income taxes
29

 
(38
)
Other assets and liabilities
(110
)
 
(59
)
Net cash (used) provided by operating activities
(152
)
 
(150
)
Investing Activities
 
 
 
Acquisitions, net of cash acquired

 
(158
)
Proceeds from sale of assets
2

 
1

Net proceeds from sale of business

 
22

Cash payments for property, plant, and equipment
(137
)
 
(210
)
Proceeds from deferred purchase price of factored receivables
56

 
60

Other
2

 
2

Net cash (used) provided by investing activities
(77
)
 
(283
)
Financing Activities
 
 
 
Proceeds from term loans and notes
67

 
28

Repayments of term loans and notes
(84
)
 
(64
)
Debt issuance costs of long-term debt
(8
)
 

Borrowings on revolving lines of credit
3,161

 
2,119

Payments on revolving lines of credit
(2,659
)
 
(1,981
)
Issuance (repurchase) of common shares
(1
)
 
(2
)
Cash dividends

 
(20
)
Net increase (decrease) in bank overdrafts
(2
)
 
(1
)
Other
11

 
(3
)
Distributions to noncontrolling interest partners
(2
)
 
(1
)
Net cash (used) provided by financing activities
483

 
75

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
(50
)
 
19

Increase (decrease) in cash, cash equivalents and restricted cash
204

 
(339
)
Cash, cash equivalents and restricted cash, beginning of period
566

 
702

Cash, cash equivalents and restricted cash, end of period
$
770

 
$
363

Supplemental Cash Flow Information
 
 
 
Cash paid during the period for interest
$
67

 
$
74

Cash paid during the period for income taxes, net of refunds
$
41

 
$
43

Lease assets obtained in exchange for new operating lease liabilities
$
51

 
$
19

Non-cash Investing Activities
 
 
 
Period end balance of accounts payable for property, plant, and equipment
$
96

 
$
101

Deferred purchase price of receivables factored in the period
$
60

 
$
58

Reduction in assets from redeemable noncontrolling interest transaction with owner
$
53

 
$

See accompanying notes to the condensed consolidated financial statements.

9



TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in millions)
 
Tenneco Inc. Shareholders' equity
 
 
 
$0.01 Par Value Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Tenneco Inc. Shareholders' Equity
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2019
$
1

 
$
(930
)
 
$
4,432

 
$
(1,367
)
 
$
(711
)
 
$
1,425

 
$
194

 
$
1,619

Net income (loss)
 
 
 
 
 
 
(839
)
 
 
 
(839
)
 
2

 
(837
)
Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
(199
)
 
(199
)
 
(13
)
 
(212
)
Derivatives
 
 
 
 
 
 
 
 
(2
)
 
(2
)
 

 
(2
)
Defined benefit plans
 
 
 
 
 
 
 
 
4

 
4

 

 
4

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
(1,036
)
 
(11
)
 
(1,047
)
Stock-based compensation, net

 

 
2

 

 

 
2

 

 
2

Reclassification of redeemable noncontrolling interest to permanent equity

 

 

 

 

 

 
82

 
82

Redeemable noncontrolling interest transaction with owner

 

 
(7
)
 



 
(7
)
 

 
(7
)
Balance at March 31, 2020
$
1

 
$
(930
)
 
$
4,427

 
$
(2,206
)
 
$
(908
)
 
$
384

 
$
265

 
$
649


 
Tenneco Inc. Shareholders' equity
 
 
 
$0.01 Par Value Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Tenneco Inc. Shareholders' Equity
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2018
$
1

 
$
(930
)
 
$
4,360

 
$
(1,013
)
 
$
(692
)
 
$
1,726

 
$
190

 
$
1,916

Net Income (loss)
 
 
 
 
 
 
(117
)
 
 
 
(117
)
 
7

 
(110
)
Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
29

 
29

 
4

 
33

Derivatives
 
 
 
 
 
 
 
 
4

 
4

 

 
4

Defined benefit plans
 
 
 
 
 
 
 
 
1

 
1

 

 
1

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
(83
)
 
11

 
(72
)
Stock-based compensation, net

 

 
5

 

 

 
5

 

 
5

Cash dividends ($0.25 per share)

 

 

 
(20
)
 

 
(20
)
 

 
(20
)
Purchase accounting measurement period adjustment

 

 

 

 

 

 
(1
)
 
(1
)
Distributions declared to noncontrolling interests

 

 

 

 

 

 
(1
)
 
(1
)
Balance at March 31, 2019
$
1

 
$
(930
)
 
$
4,365

 
$
(1,150
)
 
$
(658
)
 
$
1,628

 
$
199

 
$
1,827


See accompanying notes to the condensed consolidated financial statements.


10

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

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except share and per share amounts, or as otherwise noted)

1. Description of Business

Tenneco Inc. ("Tenneco" or "the Company") was formed under the laws of Delaware in 1996. Tenneco designs, manufactures, and sells products and services for light vehicle, commercial truck, off-highway, industrial, and aftermarket customers. The Company is one of the world's leading manufacturers of clean air, powertrain, and ride performance products and systems, and serves both original equipment manufacturers ("OEM") and replacement markets worldwide.

On October 1, 2018, the Company completed the acquisition of Federal-Mogul LLC (“Federal-Mogul”) (the “Federal-Mogul Acquisition”), a global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reductions, and safety systems. Federal-Mogul serves the world’s foremost OEM and servicers (“OES”, and together with OEM, “OE”) of automotive, light, medium and heavy-duty commercial vehicles, off road, agricultural, marine, rail, aerospace, and power generation and industrial equipment, as well as the worldwide aftermarket.

The Company has previously announced its intentions, and has agreed to use its reasonable best efforts, to separate the combined company to form two new, independent publicly traded companies, an Aftermarket and Ride Performance company ("DRiV") and a new Powertrain Technology company ("New Tenneco"). Current end-market conditions are affecting the Company's ability to complete a separation within its previously announced timeline and the Company expects these trends will continue throughout this year. The Company is ready to separate the businesses as soon as favorable conditions are present. In order to facilitate the separation, the Company continues to evaluate multiple strategic alternatives, as well as options to deleverage and mitigate the ongoing effect of challenging market conditions and better position it to facilitate a separation transaction.

2. Summary of Significant Accounting Policies

Basis of Presentation Interim Financial Statements
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These statements include all adjustments (consisting of normal recurring adjustments) management believes are necessary to fairly state the results of operations, comprehensive income, financial position, changes in shareholders' equity, and cash flows. The Company's management believes the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements and the notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on March 2, 2020. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. There are many uncertainties related to the COVID-19 global pandemic that could negatively affect the Company's results of operations, financial position, and cash flows.
 
At March 31, 2020, the Company was in compliance with all financial covenants under its credit agreement. After considering the effect of COVID-19 on its 2020 forecast, the Company determined it was likely it would not be able to maintain compliance with its financial covenants, as required by its credit agreement. As a result, on May 5, 2020, the Company entered into a third amendment to its credit agreement to increase the maximum leverage ratio and decrease the minimum interest coverage ratio. The amendment is discussed in more detail in Note 10, Debt and Other Financing Arrangements. In response to the expected economic effects of COVID-19, the Company plans to implement various cost reductions initiatives, including, but not limited to reductions to salaried costs and unpaid furloughs; the restructuring action discussed in Note 4, Restructuring Charges, Net and Asset Impairments; and the deferral of the Company’s portion of its 2020 employer paid payroll taxes and its U.S. qualified pension plan contributions under the Coronavirus Aid, Relief, and Economic Security Act.

Reclassifications: Certain amounts in the prior period have been aggregated or disaggregated to conform to current year presentation. These reclassifications included reclassifying amounts from restructuring charges, net and asset impairments to cost of sales (exclusive of depreciation and amortization) and selling, general, and administrative expenses. These reclassifications affected the three months ended March 31, 2019 and have no effect on previously reported net income, other comprehensive income (loss), and the cash provided (used) by operating, investing or financing activities within the condensed consolidated statements of cash flows.


11

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


Redeemable Noncontrolling Interests: The Company has noncontrolling interests with redemption features. These redemption features could require the Company to make an offer to purchase the noncontrolling interests in the event of a change in control of Tenneco Inc. or certain of its subsidiaries or the passage of time.

At March 31, 2020 and December 31, 2019, the Company held redeemable noncontrolling interests of $41 million and $44 million which were not currently redeemable or probable of becoming redeemable. The redemption of these redeemable noncontrolling interests is not solely within the Company's control, therefore, they are presented in the temporary equity section of the Company's condensed consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered, as a change in control event is generally not probable until it occurs. As such, these noncontrolling interests have not been remeasured to redemption value.

In addition, at March 31, 2020 and December 31, 2019, the Company held redeemable noncontrolling interests of $31 million and $152 million which were currently redeemable or probable of becoming redeemable. These noncontrolling interests are also presented in the temporary equity section of the Company's condensed consolidated balance sheets and have been remeasured to redemption value. The Company immediately recognizes changes to redemption value as a component of noncontrolling interest income (loss) in the condensed consolidated statements of income (loss). These redeemable noncontrolling interests include the following:
During the three months ended March 31, 2020, the Company completed the process to make a tender offer of the shares it did not own for a subsidiary in India acquired by the Company as part of the Federal-Mogul Acquisition on October 1, 2018, in accordance with local regulations. As a result of completing the tender offer, the redeemable noncontrolling interest was no longer redeemable or probable of becoming redeemable and the amount of $82 million was reclassified to permanent equity during the three months ended March 31, 2020. See Note 17, Related Party Transactions, for additional information related to the tender offer of this redeemable noncontrolling interest; and
A 9.5% ownership interest in Öhlins Intressenter AB (the “KÖ Interest”) was retained by K Öhlin Holding AB (“Köhlin”), as a result of the Öhlins acquisition on January 10, 2019. Köhlin has an irrevocable right at any time after the third anniversary of the Öhlins acquisition to sell the KÖ Interest to the Company. Since it is probable the KÖ Interest will become redeemable, the Company recognized the change in carrying value and recorded an adjustment of $15 million during the three months ended March 31, 2020 to reflect its redemption value of $31 million at March 31, 2020.

For the three months ended March 31, 2019, the Company recorded a decrease to the redeemable noncontrolling interests of $8 million, as a result of adjustments made in the measurement period to the preliminary purchase price allocation from the Federal-Mogul Acquisition. The purchase price allocations for the Federal-Mogul acquisition have been finalized.
 
The following is a rollforward of activities in the Company's redeemable noncontrolling interests:
 
Three Months Ended March 31,
 
2020
 
2019
Balance at beginning of period
$
196

 
$
138

Net income (loss) attributable to redeemable noncontrolling interests
(4
)
 
5

Other comprehensive income (loss)
(7
)
 
2

Acquisition and other

 
16

Noncontrolling interest tender offer redemption
(46
)
 

Redemption value measurement adjustment
15

 

Purchase accounting measurement period adjustment

 
(8
)
Reclassification of noncontrolling interest to permanent equity
(82
)
 

Dividends declared

 

Balance at end of period
$
72

 
$
153



Income taxes: On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted into U.S. law, which, among other provisions, included an anti-deferral provision (the Global Intangible Low-Taxed Income tax) effective from 2018 wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of non-U.S. corporations.  The Company has elected the “tax law ordering approach” in that the Company will look to tax law ordering to determine whether its NOL

12

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


carryforward deferred tax asset is expected to be realized. Based on the tax law ordering approach, NOL carryforwards are realizable if they will reduce the expected tax liability when utilized, regardless if the 50% GILTI deduction or related FTCs may have been available.

Earnings (loss) per share: Basic earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average shares outstanding during the period. Diluted earnings (loss) per share reflects the weighted average effect of all potentially dilutive securities from the date of issuance. Actual weighted average shares outstanding used in calculating earnings (loss) per share were:
 
Three Months Ended March 31,
 
2020
 
2019
Weighted average shares of common stock outstanding
81,168,562

 
80,874,637

Effect of dilutive securities:
 
 
 
Restricted stock, PSUs, and RSUs

 

Stock options

 

Dilutive shares outstanding
81,168,562

 
80,874,637



For the three months ended March 31, 2020 and 2019, the calculation of diluted earnings (loss) per share excluded 1,610,556 and 1,714,950 of share-based awards, as the effect on the calculation would have been anti-dilutive.

New Accounting Pronouncements
Adoption of New Accounting Standards
Income Taxes In December 2019, the FASB issued ASU 2019-12: Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The ASU allows certain simplifications in the annual effective tax rate computations, which did not have a material effect on the financial statements. The Company has early adopted this ASU on a prospective basis beginning January 1, 2020.

Intangibles On January 1, 2020, the Company adopted ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which includes amendments to align the accounting for costs incurred to implement a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The Company adopted this guidance on a prospective basis beginning January 1, 2020 and the effects of the adoption were not material on the consolidated financial statements.

Retirement benefitsIn August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The new standard (i) requires the removal of disclosures that are no longer considered cost beneficial; (ii) clarifies specific requirements of certain disclosures; and (iii) adds new disclosure requirements, including reasons for significant gains and losses related to changes in the benefit obligation. The amendments in this update are effective for fiscal years ending after December 15, 2020. The Company will adopt the enhanced disclosures in the consolidated financial statements for the year ended December 31, 2020.

3. Acquisitions and Divestitures

Öhlins Intressenter AB Acquisition
On January 10, 2019, the Company completed the acquisition of a 90.5% ownership interest in Öhlins Intressenter AB (“Öhlins”, the “Öhlins Acquisition”), a Swedish technology company that develops premium suspension systems and components for the automotive and motorsport industries for a purchase price of $162 million (including $4 million of cash acquired). The remaining 9.5% ownership interest in Öhlins (the “KÖ Interest”) was retained by K Öhlin Holding AB (“Köhlin”). Köhlin has an irrevocable right at any time after the third anniversary of the Öhlins Acquisition to sell the KÖ Interest to the Company. Refer to Note 2, Summary of Significant Accounting Policies, for further information on the KÖ Interest.


13

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

Pro Forma Results
Pro forma results of operations have not been presented because the effects of the Öhlins Acquisition were not material to the Company’s condensed consolidated results of operations.

Assets Held for Sale
As the Company continues to rationalize its product portfolio and focus on core production lines, the Company has classified a non-core business in the Motorparts segment as held for sale. At March 31, 2020, expected proceeds from a sale would be approximately $16 million, which is representative of its fair value. The related assets and liabilities were classified as held for sale at March 31, 2020. A sale is expected to occur within the next twelve months.

The related assets and liabilities are classified as held for sale at March 31, 2020 and December 31, 2019:
                          
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Receivables
$
4

 
$
5

Inventories
6

 
8

Other current assets
2

 
1

Long-lived assets
16

 
18

Goodwill
3

 
4

Impairment on carrying value
(8
)
 
(8
)
Total assets held for sale
$
23

 
$
28

Liabilities
 
 
 
Accounts payable
$
3

 
$
4

Accrued liabilities
2

 
2

Total liabilities held for sale
$
5

 
$
6



The assets and liabilities held for sale are recorded in prepayments and other current assets and accrued expenses and other current liabilities in the condensed consolidated balance sheets at March 31, 2020 and December 31, 2019.

On March 1, 2019, in accordance with a stock and asset purchase agreement, the Company sold certain assets and liabilities related to a non-core business, and received sale proceeds of $22 million, subject to customary working capital adjustments, in the three months ended March 31, 2019.

4. Restructuring Charges, Net and Asset Impairments

The Company's restructuring activities are undertaken as necessary to execute management's strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the Company's businesses and to relocate operations to best cost locations.

The Company's restructuring charges consist primarily of employee costs (principally severance and/or termination benefits) and facility closure and exit costs. The 2019 amounts below reflect the reclassifications to the prior period as discussed in Note 2, Summary of Significant Accounting Policies.


14

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

For the three months ended March 31, 2020 and 2019, restructuring charges, net and asset impairments by segment are as follows:
 
Three Months Ended March 31, 2020
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Corporate
 
Total
Severance and other charges, net
$

 
$
1

 
$
6

 
$
2

 
$
4

 
$
13

Other non-restructuring asset impairments

 

 
455

 

 
16

 
471

Total restructuring charges, net and asset impairments
$

 
$
1

 
$
461

 
$
2

 
$
20

 
$
484


 
Three Months Ended March 31, 2019
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Corporate
 
Total
Severance and other charges, net
$
5

 
$
1

 
$
5

 
$
4

 
$
1

 
$
16

Other non-restructuring asset impairments

 

 

 

 

 

Total restructuring charges, net and asset impairments
$
5

 
$
1

 
$
5

 
$
4

 
$
1

 
$
16


Severance and other charges, net
During the three months ended March 31, 2020, the Company incurred $6 million in restructuring and other costs related to plant relocation and closures within its Ride Performance segment. The Company also incurred $4 million in restructuring for the elimination of certain redundant positions within its corporate component.

In response to the COVID-19 global pandemic, and in conjunction with the Company's previously announced Project Accelerate, the Company expects to reduce its headcount globally, subject to negotiation with works councils in certain jurisdictions. The Company will begin implementing headcount reductions during the second quarter of 2020 and expects these actions to be completed during 2020. The Company expects to record a charge in the range of $25 million to $30 million for the second quarter of 2020 in connection with the cash severance costs expected to be paid.

During the three months March 31, 2019, charges included the following items:
The Company incurred $6 million in restructuring and related costs related to a restructuring plan designed to achieve a portion of the synergies the Company anticipated achieving in connection with the Federal-Mogul Acquisition. Pursuant to the plan, the Company reduced its headcount globally across all segments. The Company began implementing headcount reductions in January 2019 and these actions continued through the end of 2019.
The Ride Performance segment incurred $3 million in restructuring and other costs related to a previously announced plant relocation in Beijing, China and the Hartwell and Owen Sound plant closures.
The Clean Air segment incurred $3 million restructuring and other costs related to the closing of a plant in Rennes, France.

Restructuring Reserve Rollforward
Amounts related to activities that were charges to restructuring reserves by reportable segments are as follows:
 
Reportable Segments
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total Reportable Segments
 
Corporate
 
Total
Balance at December 31, 2019
$
23

 
$
30

 
$
23

 
$
16

 
$
92

 
$
9

 
$
101

Provisions

 
2

 
7

 
2

 
11

 
4

 
15

Revisions to estimates

 
(1
)
 
(1
)
 

 
(2
)
 

 
(2
)
Payments
(4
)
 
(4
)
 
(9
)
 
(4
)
 
(21
)
 
(9
)
 
(30
)
Foreign currency

 

 
(1
)
 

 
(1
)
 

 
(1
)
Balance at March 31, 2020
$
19

 
$
27

 
$
19

 
$
14

 
$
79

 
$
4

 
$
83


15

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

 
Reportable Segments
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total Reportable Segments
 
Corporate
 
Total
Balance at December 31, 2018
$
17

 
$
15

 
$
25

 
$
43

 
$
100

 
$
3

 
$
103

Provisions
5

 
1

 
5

 
4

 
15

 
1

 
16

Payments
(6
)
 
(3
)
 
(5
)
 
(14
)
 
(28
)
 
(2
)
 
(30
)
Balance at March 31, 2019
$
16

 
$
13

 
$
25

 
$
33

 
$
87

 
$
2

 
$
89


The following table provides a summary of the Company's restructuring liabilities and related activity for each type of exit costs:
 
Three months ended March 31, 2020
 
Three months ended March 31, 2019
 
Employee Costs
 
Facility Closure and Other Costs
 
Total
 
Employee Costs
 
Facility Closure and Other Costs
 
Total
Balance at beginning of period
$
97

 
$
4

 
$
101

 
$
98

 
$
5

 
$
103

Provisions
10

 
5

 
15

 
11

 
5

 
16

Revisions to estimates
(2
)
 

 
(2
)
 

 

 

Payments
(23
)
 
(7
)
 
(30
)
 
(25
)
 
(5
)
 
(30
)
Foreign currency
(1
)
 

 
(1
)
 

 

 

Balance at end of period
$
81

 
$
2

 
$
83

 
$
84

 
$
5

 
$
89



Asset impairments
The Company evaluates its long-lived assets for impairment whenever events or circumstances indicate the value of these long-lived asset groups are not recoverable.

As a result of the effects of the COVID-19 global pandemic on the Company's projected financial information, the Company concluded impairment triggers had occurred for certain long-lived asset groups in the Ride Performance segment. Accordingly, the Company tested these long-lived asset groups for recoverability by performing undiscounted cash flow analyses. Based on these analyses, the net carrying values of these asset groups exceeded their undiscounted future cash flows. As such, the Company estimated the fair values of these asset groups at March 31, 2020 and compared them to their carrying values. As the fair values of these long-lived asset groups exceeded their carrying values, the Company recorded long-lived asset impairment charges for property, plant, and equipment of $455 million during the three months ended March 31, 2020. See Note 9, Fair Value for additional information on the fair value estimates used in these analyses.

As a result of changes in the business, the Company assessed and concluded an impairment trigger had occurred for a long-lived asset group in its corporate component. Accordingly, the Company tested this long-lived asset group for recoverability. The Company estimated the fair value of this asset group at March 31, 2020 and compared it to the carrying value. As the fair value of this long-lived asset group exceeded the carrying value, the Company recorded long-lived asset impairment charges of $16 million during the three months ended March 31, 2020, consisting of $11 million of property, plant, and equipment and $5 million of operating lease right-of-use assets, included in other assets within the condensed consolidated balance sheets.

There are many uncertainties regarding the COVID-19 global pandemic that could negatively affect the Company's results of operations, financial position, and cash flows. As a result, if there is an adverse change to the Company’s projected financial information, due to business performance or market conditions, this may be indicative the value of its long-lived assets are not recoverable, which may result in additional non-cash long-lived asset impairment charges in a future period.

5. Inventories

At March 31, 2020 and December 31, 2019, inventory consists of the following:
 
March 31, 2020
 
December 31, 2019
Finished goods
$
981

 
$
1,027

Work in process
483

 
460

Raw materials
435

 
408

Materials and supplies
102

 
104

 
$
2,001

 
$
1,999



6. Goodwill and Other Intangible Assets

As a result of the effects of the COVID-19 global pandemic on the Company's projected financial information, the Company concluded it was more likely than not the fair values value of certain reporting units and its indefinite-lived intangible assets had declined to below their carrying values during the three months ended March 31, 2020.

The Company completed a goodwill impairment analysis for four reporting units with goodwill in the Powertrain, Motorparts, and Ride Performance segments. The difference between the reporting units' carrying values and fair values were recognized as impairment charges. The Company recognized $267 million in non-cash impairment charges related to its goodwill during the three months ended March 31, 2020, which represented full impairments of the goodwill in one reporting unit in the Powertrain segment and one reporting unit in the Ride Performance segment, and partial impairments of goodwill in one reporting unit in the Powertrain segment and one reporting unit in the Motorparts segment.

The Company also completed an analysis to determine the fair value of its trade names and trademarks for its reporting units in the Ride Performance and Motorparts segments. It was determined their carrying values exceeded their fair values and the Company recognized $51 million in non-cash impairment charges related these indefinite-lived assets, which represented a full impairment of the trade names and trademarks in one of the reporting units in the Motorparts segment, and a partial impairment of the trade names and trademarks in one of the reporting units in the Ride Performance segment and one of the reporting units in the Motorparts segment. As a result, the remaining carrying value of the Company's trade names and trademarks equals fair value at March 31, 2020.

As discussed in more details in Note 4, Restructuring Charges, Net and Asset Impairments, the Company concluded impairment triggers had occurred for certain long-lived asset groups within the Ride Performance segment. As a result, the Company recorded non-cash impairment charges of $65 million related to its definite-lived intangible assets, which represented full impairments of the definite-lived intangible assets in these two reporting units.

As a result, impairment charges for goodwill and intangible assets recognized by segment during the three months ended March 31, 2020 consist of the following:
 
 
Three months ended March 31, 2020
 
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
Goodwill impairment charges
 
$
160

 
$
37

 
$
70

 
$
267

Trade names and trademarks intangible asset impairment charges
 

 
11

 
40

 
51

Definite-lived intangible assets impairment charges
 

 
65

 

 
65

 
 
$
160

 
$
113

 
$
110

 
$
383



There are many uncertainties regarding the COVID-19 global pandemic that could negatively affect the Company's results of operations, financial position, and cash flows. As a result, if there is an adverse change to the Company’s projected financial information, due to business performance or market conditions, this may be indicative the fair value of its reporting units have declined below their carrying values, which may result in additional non-cash goodwill or intangible asset impairment charges in a future period.

16

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


The following table shows a summary of the number of reporting units with goodwill in each segment and whether or not the reporting unit's fair value exceeds its carrying value by more or less than 10% at March 31, 2020:
 
Segments
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
Number of reporting units with goodwill
3

 
1

 
1

 
1

 
 
 
 
 
 
 
 
Number of reporting units where fair value exceeds carrying value:
 
 
 
 
 
 
 
Greater than 10%
3

 

 
1

 

Less than 10%

 
1

 

 
1

 
 
 
 
 
 
 
 
Goodwill for reporting units where fair value exceeds carrying value:
 
 
 
 
 
 
 
Greater than 10%
$
22

 
$

 
$
7

 
$

Less than 10%

 
165

 

 
311

 
$
22

 
$
165

 
$
7

 
$
311


At March 31, 2020 and December 31, 2019, goodwill consists of the following:
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
Gross carrying amount at December 31, 2019
$
22

 
$
343

 
$
259

 
$
620

 
$
1,244

Foreign exchange

 

 
(3
)
 

 
(3
)
Gross carrying amount at March 31, 2020
22

 
343

 
256

 
620

 
1,241

 
 
 
 
 
 
 
 
 
 
Accumulated impairment loss at December 31, 2019

 
(18
)
 
(212
)
 
(239
)
 
(469
)
Impairment

 
(160
)
 
(37
)
 
(70
)
 
(267
)
Accumulated impairment loss at March 31, 2020

 
(178
)
 
(249
)
 
(309
)
 
(736
)
 
 
 
 
 
 
 
 
 
 
Net carrying value at end of period
$
22

 
$
165

 
$
7

 
$
311

 
$
505



During the first quarter of 2019, the Company reorganized the reporting structure of its Aftermarket, Ride Performance, and Motorparts segments and the underlying reporting units within those segments. The Company reassigned assets and liabilities (excluding goodwill) to the reporting units affected. Goodwill was then reassigned to the reporting units using a relative fair value approach based on the fair value of the elements transferred and the fair value of the elements remaining within the original reporting units. The Company tested goodwill for impairment on a pre-reorganization basis and determined there was no impairment for the affected reporting units. The Company also performed an impairment analysis on a post-reorganization basis and determined $60 million of goodwill was impaired for two reporting units within its Ride Performance segment, one of which was a full impairment of the goodwill. As a result, this non-cash charge was recorded in the three months ended March 31, 2019. Goodwill allocated to other reporting units was supported by the valuation performed at that time.


17

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

At March 31, 2020 and December 31, 2019, the Company's intangible assets consist of the following:
 
 
 
March 31, 2020
 
December 31, 2019
 
Useful Lives
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships and platforms
10 years
 
$
984

 
$
(209
)
 
$
775

 
$
988

 
$
(123
)
 
$
865

Customer contract
10 years
 
8

 
(6
)
 
2

 
8

 
(6
)
 
2

Patents
10 to 17 years
 
1

 
(1
)
 

 
1

 
(1
)
 

Technology rights
10 to 30 years
 
131

 
(41
)
 
90

 
133

 
(37
)
 
96

Packaged kits know-how
10 years
 
54

 
(8
)
 
46

 
54

 
(7
)
 
47

Catalogs
10 years
 
47

 
(7
)
 
40

 
47

 
(6
)
 
41

Licensing agreements
3 to 5 years
 
62

 
(23
)
 
39

 
63

 
(18
)
 
45

Land use rights
28 to 46 years
 
46

 
(3
)
 
43

 
47

 
(3
)
 
44

 
 
 
1,333

 
(298
)
 
1,035

 
1,341

 
(201
)
 
1,140

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names and trademarks
 
 
 
 
 
 
229

 
 
 
 
 
282

Total
 
 
 
 
 
 
$
1,264

 
 
 
 
 
$
1,422



The amortization expense associated with definite-lived intangible assets is as follows:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Amortization expense
 
$
34

 
$
35


The expected future amortization expense for the Company's definite-lived intangible assets is as follows:
 
 
2020
 
2021
 
2022
 
2023
 
2024
 
2025 and thereafter
 
Total
Expected amortization expense
 
$
98

 
$
126

 
$
122

 
$
120

 
$
113

 
$
456

 
$
1,035




7. Investment in Nonconsolidated Affiliates

The Company's ownership interest in affiliates accounted for under the equity method is as follows:
 
March 31, 2020
 
December 31, 2019
Anqing TP Goetze Piston Ring Company Limited (China)
35.7
%
 
35.7
%
Anqing TP Powder Metallurgy Co., Ltd (China)
20.0
%
 
20.0
%
Dongsuh Federal-Mogul Industrial Co. Ltd. (Korea)
50.0
%
 
50.0
%
Farloc Argentina SAIC Y F (Argentina)
23.9
%
 
23.9
%
Federal-Mogul Powertrain Otomotiv A.S. (Turkey)
50.0
%
 
50.0
%
Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. (Turkey)
25.0
%
 
25.0
%
Federal-Mogul TP Liners, Inc. (USA)
46.0
%
 
46.0
%
Frenos Hidraulicos Automotrices, S.A. de C.V. (Mexico)
49.0
%
 
49.0
%
JURID do Brasil Sistemas Automotivos Ltda. (Brazil)
19.9
%
 
19.9
%
KB Autosys Co., Ltd. (Korea)
33.6
%
 
33.6
%
Montagewerk Abgastechnik Emden GmbH (Germany)
50.0
%
 
50.0
%


18

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

The Company's investments in its nonconsolidated affiliates at March 31, 2020 and December 31, 2019 is as follows:
 
March 31, 2020
 
December 31, 2019
Investments in nonconsolidated affiliates
$
509

 
$
518



The carrying amount of the Company's investments in its nonconsolidated affiliates accounted for under the equity method exceeded its share of the underlying net assets by $252 million and $251 million at March 31, 2020 and December 31, 2019.

The following table represents the activity from the Company's investments in its nonconsolidated affiliates for the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31,
 
2020
 
2019
Equity in earnings (losses) of nonconsolidated affiliates, net of tax
$
13

 
$
16

Cash dividends received from nonconsolidated affiliates
$
13

 
$
15



The following tables present summarized aggregated financial information of the Company's nonconsolidated affiliates for the three months ended March 31, 2020 and 2019. The amounts represent 100% of the interest in the nonconsolidated affiliates and not the Company's proportionate share:
 
Three Months Ended March 31, 2020
Statements of Income
Otomotiv A.S.
 
Anqing TP Goetze
 
Other
 
Total
Sales
$
96

 
$
30

 
$
105

 
$
231

Gross profit
$
26

 
$
6

 
$
20

 
$
52

Income from continuing operations
$
23

 
$
7

 
$
9

 
$
39

Net income
$
18

 
$
6

 
$
6

 
$
30


 
Three Months Ended March 31, 2019
Statements of Income
Otomotiv A.S.
 
Anqing TP Goetze
 
Other
 
Total
Sales
$
91

 
$
39

 
$
125

 
$
255

Gross profit
$
21

 
$
16

 
$
23

 
$
60

Income from continuing operations
$
19

 
$
11

 
$
13

 
$
43

Net income
$
18

 
$
9

 
$
11

 
$
38



See Note 17, Related Party Transactions, for additional information on balances and transactions with equity method investments.

8. Derivatives and Hedging Activities

The Company is exposed to market risk, such as fluctuations in foreign currency exchange rates, commodity prices, equity compensation liabilities, and changes in interest rates, which may result in cash flow risks. For exposures not offset within its operations, the Company may enter into various derivative transactions pursuant to its risk management policies, which prohibit holding or issuing derivative financial instruments for speculative purposes. Designation of derivative instruments is performed on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. The Company assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policy.

Market Risks
Foreign Currency Risk
The Company manufactures and sells its products in North America, South America, Asia, Europe, and Africa. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which the Company manufactures and sells its products. The Company

19

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

generally tries to use natural hedges within its foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, the Company considers managing certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the U.S. dollar, euro, British pound, Polish zloty, Singapore dollar, Thailand bhat, South African rand, Mexican peso, and Canadian dollar.

Concentrations of Credit Risk
Financial instruments including cash equivalents and derivative contracts expose the Company to counterparty credit risk for non-performance. The Company's counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company's requirement of high credit standing. The Company's counterparties for derivative contracts are substantial investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counterparty and through monitoring counterparty credit risks. The Company's concentration of credit risk related to derivative contracts at March 31, 2020 and December 31, 2019 is not material.

Other
The Company presents its derivative positions and any related material collateral under master netting agreements on a net basis. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the hypothetical derivative method, are recognized in cost of sales in the condensed consolidated statements of income (loss). Derivative gains and losses included in accumulated other comprehensive income (loss) for effective hedges are reclassified into operations upon recognition of the hedged transaction. Derivative gains and losses associated with undesignated hedges are recognized in cost of sales in the condensed consolidated statements of income (loss).

Derivative Instruments
Foreign Currency Forward Contracts
The Company enters into foreign currency forward purchase and sale contracts to mitigate its exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. In managing its foreign currency exposures, the Company identifies and aggregates existing offsetting positions and then hedges residual exposures through third-party derivative contracts. The gains or losses on these contracts is recognized in cost of sales in the condensed consolidated statements of income (loss). The fair value of foreign currency forward contracts is recorded in prepayments and other current assets or accrued expenses and other current liabilities in the condensed consolidated balance sheets. The fair value of these derivative instruments are not considered material, see Note 9, Fair Value for additional information.

The following table summarizes by position the notional amounts for foreign currency forward contracts at March 31, 2020 (all of which mature in 2021):
 
Notional Amount
Long positions
$
52

Short positions
$
(53
)


Cash-Settled Share and Index Swap Transactions
The Company selectively uses swaps to reduce market risk associated with its deferred compensation liabilities, which increase as the Company's stock price increases and decrease as the Company's stock price decreases. The Company has entered into a cash-settled share swap agreement that moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. At March 31, 2020, the Company hedged its deferred compensation liability related to approximately 1,350,000 common share equivalents, an increase of 750,000 common share equivalents from December 31, 2019. In the first quarter of 2020, the Company entered into an S&P 500 index fund ETF swap agreement to further reduce its market risk. This agreement will act as a natural hedge offsetting an equivalent amount of indexed investments in the Company's deferred compensation plans. The fair value of these swap agreements is recorded in prepayments and other current assets or accrued expenses and other current liabilities in the condensed consolidated balance sheets. The fair value of these derivative instruments are not considered material, see Note 9, Fair Value for additional information.

Hedging Instruments
Cash Flow Hedges — Commodity Price Risk — The Company’s production processes are dependent upon the supply of certain raw materials that are exposed to price fluctuations on the open market. The primary purpose of the Company’s commodity

20

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

price forward contract activity is to manage the volatility associated with forecasted purchases for up to eighteen months in the future. The Company monitors its commodity price risk exposures regularly to maximize the overall effectiveness of its commodity forward contracts. Principal raw materials hedged include copper, tin, and nickel. In certain instances, within this program, foreign currency forwards may be used in order to match critical terms for commodity exposure.

The Company has designated these contracts as cash flow hedging instruments. The Company records unrecognized gains and losses in other comprehensive income (loss) (“OCI or OCL”) and makes regular reclassifying adjustments into cost of sales within the condensed consolidated statements of income (loss) when the underlying hedged transaction is recognized in earnings. The Company had commodity derivatives outstanding with an equivalent notional amount of $21 million and $19 million at March 31, 2020 and December 31, 2019. Substantially all of the commodity price hedge contracts mature within one year.

Net Investment Hedge — Foreign Currency Borrowings — The Company has foreign currency denominated debt, 784 million of which was designated as a net investment hedge in certain foreign subsidiaries and affiliates of the Company. Changes to its carrying value are included in shareholders' equity in the foreign currency translation component of OCL and offset against the translation adjustment on the underlying net assets of those foreign subsidiaries and affiliates, which are also recorded in OCL. The Company’s debt instruments are discussed further in Note 10, Debt and Other Financing Arrangements.

The following table is a summary of the carrying value of derivative and non-derivative instruments designated as hedges at March 31, 2020 and December 31, 2019:
 
 
  
Carrying Value
 
Balance sheet classification
  
March 31, 2020
 
December 31, 2019
Commodity price hedge contracts designated as cash flow hedges
Accrued expenses and other current liabilities
 
$
3

 
$

Foreign currency borrowings designated as net investment hedges
Long-term debt
  
$
865

  
$
850


The following table represents the amount of gain (loss) recognized in accumulated other comprehensive income (loss) before any reclassifications into net income (loss) for derivative and non-derivative instruments designated as hedges for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
 
 
2020
 
2019
Commodity price hedge contracts designated as cash flow hedges
  
$
(3
)
  
$
4

Foreign currency borrowings designated as net investment hedges
  
$
14

  
$
19



The Company estimates about $3 million included in accumulated OCI or OCL at March 31, 2020 will be reclassified into earnings within the following twelve months. See Note 15, Shareholders' Equity for further information.

9. Fair Value

A three-level valuation hierarchy, based upon observable and unobservable inputs, is used for fair value measurements. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. 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.



21

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the assets and liabilities included in the Company's condensed consolidated balance sheets at March 31, 2020 and December 31, 2019 that are recognized at fair value on a recurring basis and indicate the fair value hierarchy utilized to determine such fair values:
 
 
 
March 31, 2020
 
December 31, 2019
 
Fair value
hierarchy
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Derivative asset (liability) instruments:
 
 
 
 
 
 
 
 
 
Swap agreements
Level 2
 
$
(2
)
 
$
(2
)
 
$
(1
)
 
$
(1
)
Commodity contracts
Level 2
 
$
(3
)
 
$
(3
)
 
$

 
$



Asset and Liability Instruments
The carrying value of cash and cash equivalents, restricted cash, short and long-term receivables, accounts payable, and short-term debt approximates fair value.

Cash-Settled Share and Index Swap Agreements
The Company's stock price is used as an observable input in determining the fair value of the cash-settled share swap agreement. The S&P 500 index ETF price is used as an observable input in determining the fair value of this swap agreement.

Commodity Contracts and Foreign Currency Contracts
The Company calculates the fair value of its commodity contracts and foreign currency contracts using commodity forward rates and currency forward rates, to calculate forward values, and then discounts the forward values. The discount rates for all derivative contracts are based on bank deposit rates. The fair value of the Company's foreign currency forward contracts was a net liability position of $1 million at March 31, 2020 and net asset position of less than $1 million at December 31, 2019.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to items measured at fair value on a recurring basis, assets may be measured at fair value on a nonrecurring basis. These assets include long-lived assets and intangible assets which may be written down to fair value as a result of impairment.

Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or circumstances indicate the value of these long-lived asset groups are not recoverable. As a result of the effects of the COVID-19 global pandemic on the Company's projected financial information, the Company concluded certain impairment triggers had occurred for certain long-lived asset groups. After failing the undiscounted cash flow recoverability test, the Company estimated the fair values of these long-lived asset groups at March 31, 2020 and compared them to their net carrying values. The fair value measurements related to these long-lived asset groups rely primarily on Company-specific inputs and the Company's assumptions about the use of the assets, as observable inputs are not available (level 3). To determine the fair value of the long-lived asset groups, the Company utilized an asset-based approach. The Company believes the assumptions and estimates used to determine the estimated fair values of the long-lived asset groups are reasonable; however, these estimates and assumptions are subject to a high degree of uncertainty. Due to the many variables inherent in estimating fair value differences in assumptions could have a material effect on the results of the analyses.

As the fair values of the long-lived asset groups exceeded their net carrying values, the Company recorded long-lived asset impairment charges consisting of $65 million of definite-lived intangible assets and $455 million of property, plant, and equipment, during the three months ended March 31, 2020. See Note 4, Restructuring Charges, Net and Asset Impairments for additional information on asset impairments and see Note 6, Goodwill and Other Intangible Assets, for additional information on the definite-lived intangible asset impairments.

Goodwill and Indefinite-Lived Intangible Assets
The Company evaluates the carrying value of its goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter of each year, or more frequently if events or circumstances indicate these assets might be impaired. As a result of the effects of the COVID-19 global pandemic on the Company's projected financial information, the Company concluded it was more likely than not the fair values of certain reporting units and its indefinite-lived intangible assets had declined to below their carrying values. The Company completed analyses to estimate the fair values of these reporting units and its trade names

22

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

and trademarks. These fair value measurements require the Company to make significant assumptions and estimates about the (i) projected operating margins, (ii) revenue growth rate, and (iii) discount rate, which is risk-adjusted based on the aforementioned items, as observable inputs are not available (level 3). The Company believes the assumptions and estimates used to determine the estimated fair value are reasonable; however, these estimates and assumptions are subject to a high degree of uncertainty. Due to the many variables inherent in estimating fair value, differences in assumptions could have a material effect on the results of the analyses.

It was determined the carrying values of the reporting units, and trade names and trademarks exceeded their fair values. As result, the Company recognized $267 million in non-cash impairment charges related to its goodwill and $51 million in non-cash impairment charges related to its indefinite-lived assets during the three months ended March 31, 2020. As a result, the remaining carrying value of the Company's trade names and trademarks equals fair value at March 31, 2020. See Note 6, Goodwill and Other Intangible Assets, for additional information on the goodwill and indefinite-lived intangible asset impairments.

During the first quarter of 2019, the Company reorganized the reporting structure of its Aftermarket, Ride Performance, and Motorparts segments and the underlying reporting units within those segments. See Note 6, Goodwill and Other Intangible Assets, for additional information on the goodwill impairment recognized in the three months ended March 31, 2019.

Financial Instruments Not Carried at Fair Value
The estimated fair value of the Company's outstanding debt is as follows:
 
 
 
March 31, 2020
 
December 31, 2019
 
Fair value
hierarchy
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt (including current maturities):
 
 
 
 
 
 
 
 
 
Term loans and senior notes
Level 2
 
$
5,128

 
$
3,871

 
$
5,179

 
$
5,113



The fair value of the Company's public senior notes and private borrowings under its senior credit facility is based on observable inputs, and its borrowings on the revolving credit facility approximate fair value. The Company also had $183 million and $192 million at March 31, 2020 and December 31, 2019 in other debt whose carrying value approximates fair value, which consists primarily of foreign debt with maturities of one year or less.


23

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

10. Debt and Other Financing Arrangements

Long-Term Debt
A summary of our long-term debt obligations at March 31, 2020 and December 31, 2019 is set forth in the following table:
 
March 31, 2020
 
December 31, 2019
 
Principal
 
Carrying Amount (a)
 
Principal
 
Carrying Amount (a)
Credit Facilities
 
 
 
 
 
 
 
Revolver Borrowings
 
 
 
 
 
 
 
Due 2023
$
700

 
$
700

 
$
183

 
$
183

Term Loans
 
 
 
 
 
 
 
LIBOR plus 1.75% Term Loan A due 2019 through 2023
1,594

 
1,584

 
1,615

 
1,608

LIBOR plus 3.00% Term Loan B due 2019 through 2025
1,679

 
1,619

 
1,683

 
1,623

Senior Unsecured Notes
 
 
 
 
 
 
 
$225 million of 5.375% Senior Notes due 2024
225

 
222

 
225

 
222

$500 million of 5.000% Senior Notes due 2026
500

 
494

 
500

 
494

Senior Secured Notes
 
 
 
 
 
 
 
€415 million 4.875% Euro Fixed Rate Notes due 2022
458

 
470

 
465

 
479

€300 million of Euribor plus 4.875% Euro Floating Rate Notes due 2024
331

 
334

 
336

 
340

€350 million of 5.000% Euro Fixed Rate Notes due 2024
386

 
405

 
392

 
413

Other debt, primarily foreign instruments
12

 
12

 
14

 
13

 
 
 
5,840

 
 
 
5,375

Less - maturities classified as current
 
 
3

 
 
 
4

Total long-term debt
 
 
$
5,837

 
 
 
$
5,371

 
(a) 
Carrying amount is net of unamortized debt issuance costs and debt discounts or premiums. Total unamortized debt issuance costs were $78 million and $76 million at March 31, 2020 and December 31, 2019. Total unamortized debt (premium) discount, net was $(33) million and $(37) million at March 31, 2020 and December 31, 2019.

Short-Term Debt
The Company's short-term debt at March 31, 2020 and December 31, 2019 consists of the following:
 
March 31,
 
December 31,
 
2020
 
2019
Maturities classified as current
$
3

 
$
4

Short-term borrowings(a)
171

 
179

Bank overdrafts
1

 
2

Total short-term debt
$
175

 
$
185

 
(a) Includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements.

Amortization of debt issuance costs and original issue discounts (premiums)
Interest expense associated with the amortization of the debt issuance costs and original issue discounts recognized in the Company's condensed consolidated statements of income (loss) for the three months ended March 31, 2020 and 2019 is:
 
Three Months Ended March 31,
 
2020
 
2019
Amortization of debt issuance fees
$
5

 
$
5




24

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

Included in the table above is the amortization of debt issuance costs on the revolver of $1 million in both the three months ended March 31, 2020 and 2019. These costs are included in other assets in the condensed balance sheets. The amortization of the debt premium on the Senior Secured Notes reduced interest expense by $3 million in both the three months ended March 31, 2020 and 2019.

Credit Facilities
Financing Arrangements
 
 Committed Credit Facilities
at March 31, 2020
 
Term
 
Available(b)
 
 
 
(in billions)
Tenneco Inc. revolving credit facility (a)
2023
 
$
0.8

Tenneco Inc. Term Loan A
2023
 

Tenneco Inc. Term Loan B
2025
 

Subsidiaries’ credit agreements
2020 - 2028
 

 
 
 
$
0.8

 
(a) 
The Company is required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment.
(b) 
Letters of credit reduce the available borrowings under the revolving credit facility.

The Company also has $69 million of outstanding letters of credit under uncommitted facilities at March 31, 2020.

As of March 31, 2020, the Company had liquidity of $1.57 billion, comprised of $770 million cash and $800 million undrawn on its revolving credit facility. Subsequent to March 31, 2020, the Company drew down the remaining amount available under its revolving credit facility to enhance its liquidity position.

Term Loans
On October 1, 2018, the Company entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and other lenders (the "New Credit Facility") in connection with the Federal-Mogul Acquisition, which has been amended by the first amendment, dated February 14, 2020 ("the "First Amendment"), by the second amendment, dated February 14, 2020 ("the Second Amendment"), and by the third amendment, dated May 5, 2020 (the "Third Amendment"). The New Credit Facility provides $4.9 billion of total debt financing, consisting of a five-year $1.5 billion revolving credit facility, a five-year $1.7 billion term loan A facility ("Term Loan A"), and a seven-year $1.7 billion term loan B facility ("Term Loan B"). The Company paid $8 million in one-time fees in connection with the First Amendment and Second Amendment and paid $10 million in connection with the Third Amendment.

New Credit Facility — Interest Rates and Fees
At March 31, 2020, before giving effect to the Third Amendment, the interest rate on borrowings under the revolving credit facility and the Term Loan A facility was LIBOR plus 2.00% and will remain at LIBOR plus 2.00% for each relevant period for which the Company’s consolidated net leverage ratio (as defined by the New Credit Facility) is equal to or greater than 3.0 to 1. The interest rate on borrowings under the revolving credit facility and the Term Loan A facility are subject to step-downs as follows:
Consolidated net leverage ratio
Interest rate
greater than 3.0 to 1
LIBOR plus 2.00%
less than 3.0 to 1 and greater than 2.5 to 1
LIBOR plus 1.75%
less than 2.5 to 1 and greater than 1.5 to 1
LIBOR plus 1.50%
less than 1.5 to 1
LIBOR plus 1.25%


The Third Amendment provides for an increase to the margin applicable to borrowings under the revolving credit facility and
the Term Loan A facility at certain leverage levels as set forth below as one of several conditions for obtaining the less restrictive financial maintenance covenants described below under New Credit Facility — Other Terms and Conditions:

25

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

Consolidated net leverage ratio
Interest rate
greater than 6.0 to 1
LIBOR plus 2.50%
less than 6.0 to 1 and greater than 4.5 to 1
LIBOR plus 2.25%


Initially, and so long as the Company’s corporate family rating is Ba3 (with a stable outlook) or higher from Moody’s Investors Service, Inc. (“Moody’s”) and BB- (with a stable outlook) or higher from Standard & Poor’s Financial Services LLC (“S&P”), the interest rate on borrowings under the Term Loan B facility will be LIBOR plus 2.75%; at any time the foregoing conditions are not satisfied, the interest rate on the Term Loan B facility will be LIBOR plus 3.00%. When the Term Loan B facility is no longer outstanding and the Company and its subsidiaries have no other secured indebtedness (with certain exceptions set forth in the New Credit Facility), and upon the Company achieving and maintaining two or more corporate credit and/or corporate family ratings higher than or equal to BBB- from S&P, BBB- from Fitch Ratings Inc. (“Fitch”) and/or Baa3 from Moody’s (in each case, with a stable or positive outlook), the collateral under the New Credit Facility may be released. On June 3, 2019, Moody’s lowered our corporate family rating to B1 and the interest rate on borrowings under the term loan B was raised to LIBOR plus 3.00%.

New Credit Facility — Other Terms and Conditions Before giving effect to the Third Amendment, the New Credit Facility also contained two financial maintenance covenants for the revolving credit facility and the Term Loan A facility including (i) a requirement to have a consolidated net leverage ratio (as defined in the New Credit Facility) at the end of each fiscal quarter, with step-downs, as follows: 
(i) Consolidated net leverage ratio
not greater than 4.50 to 1
through March 31, 2021
not greater than 4.25 to 1
through September 30, 2021
not greater than 4.00 to 1
through March 31, 2022
not greater than 3.75 to 1
through September 30, 2022
not greater than 3.50 to 1
thereafter
and (ii) a requirement to maintain a consolidated interest coverage ratio (as defined in the New Credit Facility) for any period of four consecutive fiscal quarters of not less than 2.75 to 1.

After giving effect to the Third Amendment, the Company must comply with certain less restrictive financial maintenance covenants for the revolving credit facility and the Term Loan A facility. The financial maintenance covenants are subject to several covenant reset triggers (“Covenant Reset Triggers”) that limit certain activities of the Company by implementing more restrictive affirmative and negative covenants, as more fully described below. If a Covenant Reset Trigger occurs, the financial maintenance covenants revert back to the previous financial maintenance covenants in effect immediately prior to the Third Amendment (and described above) (the “Prior Financial Covenants”). The financial maintenance covenants include (i) a requirement to have a senior secured leverage ratio (as defined in the New Credit Facility), with step-downs, as detailed in the table below; (ii) a requirement to have a consolidated net leverage ratio (as defined in the New Credit Facility), with step-downs, as follows:
(i) Senior secured net leverage ratio
 
(ii) Consolidated net leverage ratio
not greater than 6.75 to 1
at June 30, 2020
 
not greater than 4.50 to 1
at March 31, 2020
not greater than 9.50 to 1
at September 30, 2020
 
not greater than 5.25 to 1
at March 31, 2022
not greater than 8.75 to 1
at December 31, 2020
 
not greater than 4.75 to 1
at June 30, 2022
not greater than 8.25 to 1
at March 31, 2021
 
not greater than 4.25 to 1
at September 30, 2022
not greater than 4.50 to 1
at June 30, 2021
 
not greater than 3.75 to 1
thereafter
not greater than 4.25 to 1
at September 30, 2021
 
 
 
not greater than 4.00 to 1
at December 31, 2021
 
 
 

and (iii) a requirement to maintain a consolidated interest coverage ratio (as defined in the New Credit Facility) for any period of four consecutive fiscal quarters of not less than 2.75 to 1 as of March 31, 2020, 2.00 to 1 as of June 30, 2020, 1.50 to 1 through March 31, 2021, and 2.75 to 1 thereafter.

The Company may make a one-time election to revert back to the Prior Financial Covenants and terminate the Covenant Reset Triggers upon delivery of a covenant reset certificate that attests to compliance with the Prior Financial Covenants as of the end

26

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

of the relevant fiscal period (“Covenant Reset Certificate”).

The Covenant Reset Triggers include certain limitations on the ability of the Company and its restricted subsidiaries to, among other things, (a) incur additional indebtedness, (b) enter into additional sales and leasebacks, (c) create additional liens over their assets, (d) pay dividends or distributions to Tenneco’s stockholders, (e) prepay certain unsecured indebtedness of the Company or its restricted subsidiaries (as more fully described below), (f) make additional investments, (g) dispose of material intellectual property, and (h) reinvest the proceeds of certain asset sales in the business in lieu of repaying indebtedness, each as more specifically described in the Third Amendment. These limitations are in addition to other affirmative and negative covenants (with customary exceptions, materiality qualifiers and limitations) in the New Credit Agreement, including with respect to: financial reporting; payment of taxes; maintenance of existence; compliance with law and material contractual obligations; maintenance of property and insurance; inspection of property, books and records; notices of certain events; compliance with environmental laws; provision and maintenance of collateral perfection; satisfaction of the financial maintenance covenants described above; incurrence of indebtedness; permitting liens over assets; mergers, consolidations, dispositions or other fundamental transactions; dispositions and asset sales; restricted payments; investments; compliance with limitations on certain transactions with nonconsolidated affiliates; sale and leaseback transactions; changes in fiscal periods; negative pledge clauses in certain contracts; changes to lines of business; prepayments and modifications of certain subordinated indebtedness (as more fully described below); use of proceeds; transactions involving special purpose finance subsidiaries; and transactions related to effectuating a spin-off (as defined in the New Credit Agreement), each as more specifically described in the New Credit Agreement.

After giving effect to the Third Amendment, so long as no default exists under its New Credit Facility, the Company would be permitted to (i) make regularly scheduled interest and principal payments as and when due in respect of the Senior Unsecured Notes, (ii) refinance the Senior Unsecured Notes with the net cash proceeds of permitted refinancing indebtedness (as defined in the New Credit Facility); (iii) make payments in respect of the Senior Unsecured Notes in an amount equal to the net cash proceeds of qualified capital stock (as defined in the New Credit Facility) issued after May 5, 2020; (iv) convert any Senior Unsecured Notes into qualified capital stock issued after May 5, 2020; and (v) make additional payments of the Senior Unsecured Notes provided that after giving effect to such additional payments the consolidated leverage ratio would be equal to or less than 2.00 to 1 after giving effect to such additional payments. The foregoing limitations regarding repayment and refinancing of the Senior Unsecured Notes and such incremental equivalent debt apply from the effectiveness of the Third Amendment until delivery of a Covenant Reset Certificate.

The covenants in the New Credit Facility generally prohibit the Company from repaying certain subordinated indebtedness. So long as no default exists, the Company would, under its New Credit Facility, be permitted to repay or refinance its subordinated indebtedness (i) with the net cash proceeds of permitted refinancing indebtedness (as defined in the New Credit Facility); (ii) in an amount equal to the net cash proceeds of qualified capital stock (as defined in the New Credit Facility) issued after October 1, 2018; (iii) in exchange for qualified capital stock issued after October 1, 2018; and (iv) with additional payments provided that such additional payments are capped based on a pro forma consolidated leverage ratio after giving effect to such additional payments.

Such additional payments on subordinated indebtedness (x) will not be permitted at any time the pro forma consolidated leverage ratio is greater than 2.00 to 1 after giving effect to such additional payments and (y) will be permitted in an unlimited amount at any time the pro forma consolidated leverage ratio is equal to or less than 2.00 to 1 after giving effect to such additional payments.

The New Credit Facility contains customary representations and warranties, including, as a condition to future revolver borrowings, that all such representations and warranties are true and correct, in all material respects, on the date of borrowing, including representations (with customary exceptions, materiality qualifiers and limitations) as to: existence; compliance with law; power, authority and enforceability; no violation of law or material contracts; material litigation; no default under the New Credit Agreement and related documents; ownership of property, including material intellectual property; payment of material taxes; compliance with margin stock regulations; labor matters; ERISA; Investment Company Act matters; subsidiaries; use of loan proceeds; environmental matters; accuracy of information; security documents; solvency; anti-corruption laws and sanctions; and that since December 31, 2017 there has been no development or event that has had a material adverse effect on the business or financial condition of the Company and its subsidiaries, each as more specifically described in the New Credit Facility.

The New Credit Facility includes customary events of default and other provisions that could require all amounts due

27

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

thereunder to become immediately due and payable, either automatically or at the option of the lenders, if the Company fails to comply with the terms of the New Credit Facility or if other customary events occur. These events of default (with customary exceptions, materiality qualifiers, limitations and grace periods) include (i) failure to pay obligations under the New Credit Agreement when due; (ii) material inaccuracy of representations and warranties; (iii) failure to comply with the covenants in the New Credit Facility and related documents (as summarized above); (iv) cross-default to material indebtedness; (v) commencement of bankruptcy or insolvency proceedings; (vi) ERISA events; (vii) certain material judgments; (viii) invalidity of unenforceability of security and guarantee documents; and (ix) change of control, each as more specifically described in the New Credit Facility.

Senior Notes
The Company has outstanding 5.375% senior unsecured notes due December 15, 2024 ("2024 Senior Notes") and 5.000% senior unsecured notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes"). The Company has outstanding 5.000% euro denominated fixed rate notes which are due July 15, 2024 ("5.000% Euro Fixed Rate Notes"), 4.875% euro denominated fixed rate notes due April 15, 2022 ("4.875% Euro Fixed Rate Notes"), and floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Notes, the "Senior Secured Notes").

Senior Unsecured Notes and Senior Secured Notes — Other Terms and Conditions The Senior Unsecured Notes and Senior Secured Notes contain covenants that will, among other things, limit the Company's ability to create liens and enter into sale and leaseback transactions. In addition, the Senior Secured Notes and 2024 Senior Unsecured Notes also require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, the Company's consolidated fixed charge coverage ratio, as calculated on a pro forma basis, be greater than 2.00, as well as containing restrictions on its operations, including limitations on: (i) incurring additional indebtedness; (ii) paying dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations.

Subject to limited exceptions, all of the Company's existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee its Senior Unsecured Notes and Senior Secured Notes on a joint and several basis. There are no significant restrictions on the ability of the subsidiaries that have guaranteed the Company's Senior Notes to make distributions to the Company.

At March 31, 2020, the Company was in compliance with all of its financial covenants.

Other Debt
Other debt consists primarily of subsidiary debt.

Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements
The Company has securitization programs for some of its accounts receivable, with limited recourse provisions. Borrowings on these securitization programs, which are recorded in short-term debt, at March 31, 2020 and December 31, 2019 are as follows:
 
March 31, 2020
 
December 31, 2019
Borrowings on securitization programs
$
8

 
$
4



Off-Balance Sheet Arrangements
In the Company's European and U.S. accounts receivable factoring programs, accounts receivables are transferred in their entirety to the acquiring entities and are accounted for as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under these factoring programs approximates the fair value of such receivables. Certain programs in Europe have deferred purchase price arrangements with the banks.

The Company is the servicer of the receivables under some of these arrangements and is responsible for performing all accounts receivable administration functions. Where the Company receives a fee to service and monitor these transferred accounts receivables, such fees are sufficient to offset the costs and as such, a servicing asset or liability is not recorded as a result of such activities.


28

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

In the U.S and Canada, the Company participates in supply chain financing programs with certain of the Company's aftermarket customers through a drafting program.

The amount of accounts receivable outstanding and derecognized for these factoring and drafting arrangements was $1.1 billion and $1.0 billion at March 31, 2020 and December 31, 2019. In addition, the deferred purchase price receivable was $37 million and $33 million at March 31, 2020 and December 31, 2019.

Proceeds from the factoring of accounts receivable qualifying as sales and drafting programs was $1.2 billion for both the three months ended March 31, 2020 and 2019.

The following table represents the Company's expenses associated with these arrangements for the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31,
 
2020
 
2019
Loss on sale of receivables(a)
$
6

 
$
8

 
(a) Amount is included in "Interest expense" in the condensed consolidated statements of income (loss).

If the Company were not able to factor receivables or sell drafts under either of these programs, its borrowings under its revolving credit agreement might increase. These programs provide the Company with access to cash at costs that are generally favorable to alternative sources of financing and allow the Company to reduce borrowings under its revolving credit agreement.

11. Pension Plans, Postretirement and Other Employee Benefits

The Company sponsors several defined benefit pension plans ("Pension Benefits") and health care and life insurance benefits ("Other Postretirement Benefits", or "OPEB") for certain employees and retirees around the world.

Components of net periodic benefit cost (credit) for the three months ended March 31, 2020 and 2019 are as follows:
 
Three Months Ended March 31,
 
Pension
 
Other Postretirement Benefits
 
2020
 
2019
 
 
U.S.
 
Non-U.S.
 
U.S.
 
Non-U.S.
 
2020
 
2019
Service cost
$

 
$
6

 
$
1

 
$
6

 
$

 
$

Interest cost
10

 
4

 
13

 
7

 
2

 
3

Expected return on plan assets
(16
)
 
(4
)
 
(17
)
 
(5
)
 

 

Net amortization:
 
 
 
 
 
 
 
 
 
 
 
Actuarial loss
2

 
2

 
1

 
1

 
1

 
1

Prior service cost (credit)

 

 

 

 
(2
)
 
(2
)
Net pension and postretirement costs (credits)
$
(4
)
 
$
8

 
$
(2
)
 
$
9

 
$
1

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 


12. Income Taxes

For interim tax reporting, the Company estimates its annual effective tax rate and applies it to 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 effect of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a 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.
 
For the three months ended March 31, 2020, the Company recorded income tax benefit of $94 million on loss from continuing operations before income taxes of $920 million. This compares to recording no income tax expense on losses from continuing operations of $105 million in the three months ended March 31, 2019.

Income tax expense for the three months ended March 31, 2020 differs from the U.S. statutory rate due primarily to $105 million of tax benefit recognized relating to the impairment of $854 million of assets, pre-tax income taxed at rates higher than the U.S. statutory rate, and pre-tax losses with no tax benefit. Income tax expense for the three months ended March 31, 2019 differs from the U.S. statutory rate due primarily to pre-tax income taxed at rates higher than the U.S. statutory rate and pre-tax losses with no tax benefit.

The Company evaluates its deferred tax assets 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 operational results decline due to the COVID-19 global pandemic in certain jurisdictions, exceed current estimates, or economic recovery takes longer than currently anticipated, the Company believes it is reasonably possible there may be sufficient negative evidence for a valuation allowance to be recorded in the next twelve months. This may result in a one-time tax expense of up to $550 million, primarily related to the U.S., China, France, Poland, and Spain.

The Company believes it is reasonably possible up to $32 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.

After considering the effect of COVID-19 on the 2020 forecast, the Company is not projecting sufficient income to utilize its 2011 and 2012 foreign tax credit carryforwards of $29 million and $21 million. The Company has certain U.S. reserves that provide positive evidence these foreign tax credits would be utilized in the event of an assessment by the U.S. tax authorities; therefore, it has netted the foreign tax credit carryforward deferred tax assets with its uncertain tax position liability on the
balance sheet. Should the 2011 and 2012 foreign tax credit carryforwards expire without utilization, the foreign tax credit carryforward deferred tax assets would be written off with a charge to income tax expense. 

13. Commitments and Contingencies

Environmental Matters
The Company is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates. The Company has been notified by the U.S. Environmental Protection Agency, other national environmental agencies, and various provincial and state agencies it may be a potentially responsible party (“PRP”) under such laws for the cost of remediating hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and other national and state or provincial environmental laws. PRP designation typically requires the funding of site investigations and subsequent remedial activities. Many of the sites that are likely to be the costliest to remediate are often current or former commercial waste disposal facilities to which numerous companies sent wastes. Despite the potential joint and several liability which might be imposed on the Company under CERCLA and some of the other laws pertaining to these sites, its share of the total waste sent to these sites generally has been small. The Company believes its exposure for liability at these sites is not material.

On a global basis, the Company has also identified certain other present and former properties at which it may be responsible for cleaning up or addressing environmental contamination, in some cases as a result of contractual commitments and/or federal or state environmental laws. The Company is seeking to resolve its responsibilities for those sites for which a claim has been received.

The Company expenses or capitalizes, as appropriate, expenditures for ongoing compliance with environmental regulations. At March 31, 2020, the Company has an obligation to remediate or contribute towards the remediation of certain sites, including the sites discussed above at which it may be a PRP.

The Company maintains the aggregated estimated share of environmental remediation costs for all these sites on a discounted basis in the condensed consolidated balance sheets as follows:
 
March 31, 2020
 
December 31, 2019
Accrued expenses and other current liabilities
$
7

 
$
8

Deferred credits and other liabilities
28

 
28

 
$
35

 
$
36



For those locations where the liability was discounted, the weighted average discount rate used was 0.5% and 1.3% at March 31, 2020 and December 31, 2019.

The Company's expected payments of environmental remediation costs for non-indemnified locations are estimated to be approximately:
 
2020
 
2021
 
2022
 
2023
 
2024
 
2025 and thereafter
Expected payments
$
6

 
$
4

 
$
2

 
$
2

 
$
2

 
$
15



Based on information known to the Company from site investigations and the professional judgment of consultants, the Company has established reserves it believes are adequate for these costs. Although the Company believes these estimates of remediation costs are reasonable and are based on the latest available information, the costs are estimates, difficult to quantify based on the complexity of the issues, and are subject to revision as more information becomes available about the extent of remediation required. At some sites, the Company expects other parties will contribute to the remediation costs. In addition, certain environmental statutes provide the Company's liability could be joint and several, meaning the Company could be required to pay amounts in excess of its share of remediation costs. The financial strength of the other PRPs at these sites has been considered, where appropriate, in the determination of the estimated liability. The Company does not believe any potential costs associated with its current status as a PRP, or as a liable party at the other locations referenced herein, will be material to its annual consolidated financial position, results of operations, or liquidity.


29

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

Antitrust Investigations and Litigation
On March 25, 2014, representatives of the European Commission (EC) 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 the same date, the Company also received a related subpoena from the U.S. Department of Justice (“DOJ”).

On November 5, 2014, the DOJ granted conditional leniency to the Company, its subsidiaries, and its 50% affiliates as of such date ("2014 Tenneco Entities") pursuant to an agreement the Company entered into under the Antitrust Division's Corporate Leniency Policy. This agreement provides important benefits to the 2014 Tenneco Entities in exchange for the Company's self-reporting of matters to the DOJ and its continuing full cooperation with the DOJ's resulting investigation. For example, the DOJ will not bring any criminal antitrust prosecution against the 2014 Tenneco Entities, nor seek any criminal fines or penalties, in connection with the matters the Company reported to the DOJ. Additionally, there are limits on the liability of the 2014 Tenneco Entities related to any follow-on civil antitrust litigation in the United States. 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 the Company satisfying the DOJ and any court presiding over such follow-on civil litigation.

On April 27, 2017, the Company received notification from the EC that it has administratively closed its global antitrust inquiry regarding the production, assembly, and supply of complete exhaust systems. No charges against the Company or any other competitor were initiated at any time and the EC inquiry is now closed.

Certain other competition agencies are also investigating possible violations of antitrust laws relating to products supplied by the Company and its subsidiaries, including Federal-Mogul. The Company has cooperated and continues to cooperate fully with all of these antitrust investigations and take other actions to minimize its potential exposure.

The Company 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 the DOJ granted conditional leniency to the 2014 Tenneco Entities, the Company's civil liability in U.S. follow-on actions with respect to these entities is limited to single damages and the Company will not be jointly and severally liable with the other defendants, provided that the Company has satisfied its 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, receipt by the 2014 Tenneco Entities of conditional leniency from the DOJ 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 the Company and/or certain of its competitors in the United States, the Company 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, the Company settled an administrative action brought by Brazil's competition authority for an amount that was not material. In December 2018, the Company settled a separate administrative action brought by Brazil’s competition authority against a Federal-Mogul subsidiary, also for an amount that was not material.

Additionally, in February 2018, the Company settled civil putative class action litigation in the United States brought by classes of direct purchasers, end-payors and auto dealers. No other classes of plaintiffs have brought claims against the Company in the United States. Based upon those earlier developments, including settlement discussions, the Company 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 its antitrust matters globally, which primarily involves the resolution of civil suits and related claims. Of the $132 million reserve that was established, $109 million was paid through March 31, 2020. In connection with the resolution of certain claims, $9 million was released from the reserve in the third quarter of 2019 and $30 million was paid out in the first quarter of 2020 from amounts that were included in the reserve. At March 31, 2020 the reserve was $14 million, of which $2 million was recorded in accrued expenses and other current liabilities and $12 million was recorded in deferred credits and other liabilities in the Company's condensed consolidated balance sheets. While the Company, including its Federal-Mogul subsidiaries, continues to cooperate with certain competition agencies investigating possible violations of

30

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

antitrust laws relating to products supplied by the Company, 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.

The Company's reserve for its antitrust matters is based upon all currently available information and an assessment of the probability of events for those matters where the Company can make a reasonable estimate of the costs to resolve such outstanding matters. The Company'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 its control. As a result, the Company'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, the Company does not expect any such change in the reserve will have a material adverse effect on the Company's annual consolidated financial position, results of operations or liquidity.

Other Legal Proceedings, Claims and Investigations
For many years the Company has been and continues to be subject to lawsuits initiated by claimants alleging health problems as a result of exposure to asbestos. The Company's current docket of active and inactive cases is less than 500 cases in the United States and less than 50 in Europe.

With respect to the claims filed in the United States, the substantial majority of the claims are related to alleged exposure to asbestos in the Company's line of Walker® exhaust automotive products although a significant number of those claims appear also to involve occupational exposures sustained in industries other than automotive. A small number of claims have been asserted against one of the Company's subsidiaries by railroad workers alleging exposure to asbestos products in railroad cars. The Company believes, based on scientific and other evidence, it is unlikely that U.S. claimants were exposed to asbestos by the Company's 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. Additionally, in many cases the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages.

With respect to the claims filed in Europe, the substantial majority relate to occupational exposure claims brought by current and former employees of Federal-Mogul facilities in France and amounts paid out were not material. A small number of occupational exposure claims have also been asserted against Federal-Mogul entities in Italy and Spain.

As major asbestos manufacturers and/or users continue to go out of business or file for bankruptcy, the Company may experience an increased number of these claims. The Company vigorously defends itself against these claims as part of its ordinary course of business. In future periods, the Company could be subject to cash costs or charges to earnings if any of these matters are resolved unfavorably to the Company. To date, with respect to claims that have proceeded sufficiently through the judicial process, the Company has regularly achieved favorable resolutions. Accordingly, the Company presently believes that these asbestos-related claims will not have a material adverse effect on the Company's annual consolidated financial position, results of operations or liquidity.

The Company is also from time to time involved in other legal proceedings, claims or investigations. Some of these matters involve allegations of damages against the Company 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, advertising matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. Additionally, some of these matters involve allegations relating to legal compliance.

While the Company vigorously defends itself against all of these legal proceedings, claims and investigations and take other actions to minimize its potential exposure, in future periods, the Company 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 the Company's assessment of the merits of the particular claim, the Company does expect the legal proceedings, claims or investigations currently pending against it will have any material adverse effect on its annual consolidated financial position, results of operations or liquidity.


31

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

Asset Retirement Obligations
The Company’s primary asset retirement obligations ("ARO") activities relate to the removal of hazardous building materials at its facilities. The Company records an ARO at fair value upon initial recognition when the amount is probable and can be reasonably estimated. ARO fair values are determined based on the Company’s determination of what a third party would charge to perform the remediation activities, generally using a present value technique.

The Company's ARO liabilities in the condensed consolidated balance sheets are as follows:
 
March 31, 2020
 
December 31, 2019
Accrued expenses and other current liabilities
$
3

 
$
3

Deferred credits and other liabilities
12

 
13

 
$
15

 
$
16



Warranty Matters
The Company provides warranties on some of its products. The warranty terms vary but range from one year up to limited lifetime warranties on some of its 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 the Company's products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. The Company believes 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.

The following represents the changes in the Company's warranty accrual for the three months ended March 31, 2020 and 2019:
 
Three months ended March 31,
 
2020
 
2019
Balance at beginning of period
$
54

 
$
45

Accruals related to product warranties
3

 
5

Reductions for payments made
(6
)
 
(2
)
Foreign currency

 

Balance at end of period
$
51

 
$
48



14. Share-Based Compensation

Share-Based Compensation Expense (Benefit)
Share-based compensation expense is included in selling, general and administrative expenses in the condensed consolidated statements of income (loss). The total share-based compensation expense is as follows:
 
Three Months Ended March 31,
 
2020
 
2019
Cash-settled share-based compensation expense (benefit)
$

 
$
(1
)
Share-settled share-based compensation expense (benefit)
2

 
7

 
$
2

 
$
6



Cash-Settled Awards
The Company has granted restricted stock units ("RSUs") to certain key employees that are payable in cash. These awards are classified as liabilities, valued based on the fair value of the award at the grant date, and remeasured at each reporting date until settlement, with compensation expense being recognized in proportion to the completed requisite period up until date of settlement. In the first quarter of 2020, all cash-settled, share-based long-term performance units were paid and none remain outstanding.

At March 31, 2020, approximately $3 million of total unrecognized compensation costs is expected to be recognized on the cash-settled RSU's over a weighted-average period 3 years.

32

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


Share-Settled Awards
The Company has granted restricted stock, RSUs, and performance share units ("PSUs") to its directors and certain key employees that are payable in common stock. These awards are settled in shares upon vesting and recognized in equity based on their fair value.

The following table reflects the status of all nonvested restricted shares, share-settled RSUs, and PSUs for the three months ended March 31, 2020:
 
Restricted Stock
 
Share-Settled RSUs
 
PSUs
 
Shares
 
Weighted Avg.
Grant Date
Fair Value
 
Units
 
Weighted Avg.
Grant Date
Fair Value
 
Units
 
Weighted Avg.
Grant Date
Fair Value
Nonvested balance at beginning of period
35,630

 
$
63.27

 
1,125,346

 
$
37.91

 
806,233

 
$
34.12

Granted
169,781

 
9.15

 
1,389,681

 
7.47

 

 

Vested
(196,332
)
 
39.59

 
(280,394
)
 
41.47

 

 

Forfeited

 

 
(238,283
)
 
34.37

 
(213,843
)
 
26.74

Nonvested balance at end of period
9,079

 
$
57.92

 
1,996,350

 
$
27.84

 
592,390

 
$
36.25


At March 31, 2020, approximately $32 million of total unrecognized compensation costs is expected to be recognized on the share-settled awards over a weighted-average period of approximately 2 years.

15. Shareholders' Equity

Common Stock Outstanding
The Company has authorized 175,000,000 shares ($0.01 par value) of Class A Common Stock at March 31, 2020 and December 31, 2019. The Company has authorized 25,000,000 shares ($0.01 par value) of Class B Common Stock at March 31, 2020 and December 31, 2019.

Total common stock outstanding and changes in common stock issued are as follows:
 
Three Months Ended March 31,
 
Class A Common Stock
 
Class B Common Stock
 
2020
 
2019
 
2020
 
2019
Shares issued at beginning of period
71,727,061

 
71,675,379

 
23,793,669

 
23,793,669

Issuance (repurchased) pursuant to benefit plans
450,175

 
120,622

 

 

Restricted stock forfeited and withheld for taxes
(119,644
)
 
(54,293
)
 

 

Stock options exercised

 
8,438

 

 

Shares issued at end of period
72,057,592

 
71,750,146

 
23,793,669

 
23,793,669

 
 
 
 
 
 
 
 
Treasury stock
14,592,888

 
14,592,888

 

 

Total shares outstanding
57,464,704

 
57,157,258

 
23,793,669

 
23,793,669



Class B Common Stock Conversion
Effective April 1, 2020, Icahn Enterprises L.P. ("IEP") exercised its right to convert 3,485,215 shares of the Company’s Class B Common Stock into 3,485,215 shares of the Company’s Class A Common Stock. As a result, IEP holds 9,136,392 shares, or approximately 14.99%, of the Company’s outstanding Class A Common Stock and 20,308,454 shares of the Company’s Class B Common Stock.

Preferred Stock
The Company had 50,000,000 shares of preferred stock ($0.01 par value) authorized at both March 31, 2020 and December 31, 2019. No shares of preferred stock were issued or outstanding at those dates.

Shareholder Rights Plan
On April 15, 2020, the Company's Board of Directors approved a Section 382 Rights Plan, which will expire on the earliest to occur of (i) the close of business on the day following the certification of the voting results of the Company’s 2021 annual meeting of stockholders, if at such stockholder meeting or any other meeting of stockholders of the Company duly held prior to such meeting, a proposal to ratify the Section 382 Rights Plan has not been passed by the requisite vote of the Company’s

33

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

stockholders; (ii) the date on which the Board of Directors determines in its sole discretion that (x) the Section 382 Rights Plan is no longer necessary for the preservation of material valuable tax attributes or (y) the tax attributes have been fully utilized and may no longer be carried forward; and (iii) the close of business on October 2, 2021.

Pursuant to the Section 382 Rights Plan, our Board of Directors declared a dividend of (i) one preferred share purchase right (a “Class A Right”), payable on April 27, 2020, for each share of Class A Voting Common Stock and (ii) one preferred share purchase right (a “Class B Right” and, together with the Class A Rights, the “Rights”), payable on April 27, 2020, for each share of Class B Non-Voting Common Stock, in each case, outstanding on April 27, 2020 to the stockholders of record on that date. Each Right, which is exercisable only in the event that any person or group acquires 4.9% or more of the Company’s outstanding shares of Class A Voting Common Stock (with certain limited exceptions), would entitle any holder other than the person or group whose ownership position has exceeded the ownership limit to purchase common stock having a value equal to twice the exercise price of the Right, or, at the election of the Board of Directors, to exchange each Right for one share of Class A Common Stock per Class A Right or one share of Class B Non-Voting Common Stock per Class B Right.

Accumulated Other Comprehensive Income (Loss)
The following represents the Company's changes in accumulated other comprehensive income (loss) by component, net of tax for the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31,
 
2020
 
2019
Foreign currency translation adjustments and other:
 
 
 
Balance at beginning of period
$
(369
)
 
$
(395
)
Other comprehensive income (loss) before reclassifications adjustments
(199
)
 
27

Reclassification from other comprehensive income (loss)

 

Other comprehensive income (loss)
(199
)
 
27

Income tax provision (benefit)

 
2

Balance at end of period
(568
)
 
(366
)
 
 
 
 
Pensions and other postretirement benefits:
 
 
 
Balance at beginning of period
(342
)
 
(297
)
Other comprehensive income (loss) before reclassifications

 

Reclassification from other comprehensive income (loss)
3

 
1

Other comprehensive income (loss)
3

 
1

Income tax provision (benefit)
1

 

Balance at end of period
(338
)
 
(296
)
 
 
 
 
Cash flow hedge instruments
 
 
 
Balance at beginning of period

 

Other comprehensive income (loss) before reclassifications
(3
)
 
4

Reclassification from other comprehensive income (loss)

 

Other comprehensive income (loss)
(3
)
 
4

Income tax provision (benefit)
1

 

Balance at end of period
(2
)
 
4

 
 
 
 
Accumulated other comprehensive loss at end of period
$
(908
)
 
$
(658
)
 
 
 
 
Other comprehensive income (loss) attributable to noncontrolling interests
$
(20
)
 
$
6




34

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

16. Segment Information

The Company intends to separate its businesses to form two independent companies: New Tenneco and DRiV. The future New Tenneco consists of two operating segments: Powertrain and Clean Air. DRiV also consists of two operating segments: Motorparts and Ride Performance. Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the four operating segments as "Corporate."

Management uses EBITDA including noncontrolling interests as the key performance measure of segment profitability and uses the measure in its financial and operational decision-making processes, for internal reporting, and for planning and forecasting purposes to effectively allocate resources. EBITDA including noncontrolling interests is defined as earnings before interest expense, income taxes, noncontrolling interests, and depreciation and amortization. Segment assets are not presented as it is not a measure reviewed by the Chief Operating Decision Maker in allocating resources and assessing performance.

EBITDA including noncontrolling interests should not be considered a substitute for results prepared in accordance with U.S. GAAP and should not be considered an alternative to net income, which is the most directly comparable financial measure to EBITDA including noncontrolling interests that is in accordance with U.S. GAAP. EBITDA including noncontrolling interests, as determined and measured by the Company, should not be compared to similarly titled measures reported by other companies.

Segment results for the three months ended March 31, 2020 and 2019 are as follows:
 
Reportable Segments
 
 
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
 
Corporate
 
Reclass & Elims
 
Total
For the Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
1,545

 
$
997

 
$
588

 
$
706

 
$
3,836

 
$

 
$

 
$
3,836

Intersegment revenues
$
6

 
$
38

 
$
29

 
$
9

 
$
82

 
$

 
$
(82
)
 
$

Equity in earnings of nonconsolidated affiliates, net of tax
$

 
$
11

 
$

 
$
2

 
$
13

 
$

 
$

 
$
13

For the Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
1,779

 
$
1,175

 
$
733

 
$
797

 
$
4,484

 
$

 
$

 
$
4,484

Intersegment revenues
$

 
$
46

 
$
46

 
$
11

 
$
103

 
$

 
$
(103
)
 
$

Equity in earnings of nonconsolidated affiliates, net of tax
$

 
$
13

 
$
1

 
$
2

 
$
16

 
$

 
$

 
$
16


Segment EBITDA including noncontrolling interests and the reconciliation to earnings before interest expense, income taxes, and noncontrolling interests are as follows:
 
Three Months Ended March 31,
 
2020
 
2019
EBITDA including noncontrolling interests by Segments:
 
 
 
Clean Air
$
99

 
$
131

Powertrain
(70
)
 
113

Ride Performance
(577
)
 
(45
)
Motorparts
(40
)
 
45

Total Reportable Segments
(588
)
 
244

Corporate
(86
)
 
(99
)
Depreciation and amortization
(171
)
 
(169
)
Earnings (loss) before interest expense, income taxes, and noncontrolling interests
(845
)
 
(24
)
Interest expense
(75
)
 
(81
)
Income tax (expense) benefit
94

 

Net income (loss)
$
(826
)
 
$
(105
)


35

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


Disaggregated Revenue
Original Equipment
Value-Added Sales
OE revenue is generated from providing original equipment manufacturers and servicers with products for automotive, heavy duty, and industrial applications. Supply relationships typically extend over the life of the related vehicle, subject to interim design and technical specification revisions, and do not require the customer to purchase a minimum quantity.

Substrate/Passthrough Sales
Generally, in connection with the sale of exhaust systems to certain OE manufacturers, the Company purchases catalytic converters and diesel particulate filters or components thereof including precious metals (“substrates”) on behalf of its customers which are used in the assembled system. These substrates are included in inventory and are “passed through” to the customer at cost, plus a small margin. Since the Company takes title to the substrate inventory and has responsibility for both the delivery and quality of the finished product including the substrates, the revenues and related expenses are recorded at gross amounts.

Aftermarket
Aftermarket revenue is generated from providing products for the global vehicle aftermarket to a wide range of warehouse distributors, retail parts stores, and mass merchants that distribute these products to customers ranging from professional service providers to “do-it-yourself” consumers.

Revenue from contracts with customers is disaggregated by customer type and geography, as it depicts the nature and amount of the Company’s revenue that is aligned with the Company's key growth strategies. In the following tables, revenue is disaggregated accordingly:
 
Reportable Segments
By Customer Type
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
OE - Substrate
$
700

 
$

 
$

 
$

 
$
700

OE - Value add
845

 
997

 
588

 

 
2,430

Aftermarket

 

 

 
706

 
706

Total
$
1,545

 
$
997

 
$
588

 
$
706

 
$
3,836

Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
OE - Substrate
$
706

 
$

 
$

 
$

 
$
706

OE - Value add
1,073

 
1,175

 
733

 

 
2,981

Aftermarket

 

 

 
797

 
797

Total
$
1,779

 
$
1,175

 
$
733

 
$
797

 
$
4,484


 
Reportable Segments
By Geography
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
North America
$
704

 
$
344

 
$
198

 
$
476

 
$
1,722

Europe, Middle East and Africa
565

 
492

 
297

 
197

 
1,551

Rest of world
276

 
161

 
93

 
33

 
563

Total
$
1,545

 
$
997

 
$
588

 
$
706

 
$
3,836

Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
North America
$
793

 
$
405

 
$
232

 
$
507

 
$
1,937

Europe, Middle East and Africa
641

 
575

 
378

 
237

 
1,831

Rest of world
345

 
195

 
123

 
53

 
716

Total
$
1,779

 
$
1,175

 
$
733

 
$
797

 
$
4,484




36

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

17. Related Party Transactions

The following table summarizes the net sales, purchases, and royalty and other income from related parties for the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Net Sales
 
Purchases
 
Royalty and Other Income
 
Net Sales
 
Purchases
 
Royalty and Other Income
Anqing TP Goetze Piston Ring Company Limited
$
4

 
$
10

 
$

 
$

 
$
14

 
$

Anqing TP Powder Metallurgy Company Limited
$
1

 
$
1

 
$

 
$

 
$
1

 
$

Dongsuh Federal-Mogul Industrial Co., Ltd.
$
1

 
$
2

 
$

 
$
1

 
$
2

 
$

Federal-Mogul Powertrain Otomotiv A.S.
$
12

 
$
59

 
$
4

 
$
28

 
$
59

 
$
1

Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti.
$

 
$
1

 
$

 
$

 
$
3

 
$

Federal-Mogul TP Liners, Inc.
$
4

 
$
12

 
$

 
$
4

 
$

 
$

Icahn Automotive Group LLC
$
33

 
$

 
$
1

 
$
43

 
$

 
$
1

Montagewerk Abgastechnik Emden GmbH
$
3

 
$

 
$

 
$
2

 
$

 
$

PSC Metals, Inc.
$

 
$

 
$

 
$
1

 
$

 
$



The following table is a summary of amounts due to and from the Company's related parties at March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
Receivables
 
Payables and accruals
 
Receivables
 
Payables and accruals
Anqing TP Goetze Piston Ring Company Limited
$
6

 
$
17

 
$
1

 
$
26

Anqing TP Powder Metallurgy Company Limited
$

 
$
1

 
$

 
$
1

Dongsuh Federal-Mogul Industrial Co., Ltd.
$

 
$
2

 
$

 
$
2

Farloc Argentina SAIC
$

 
$

 
$
1

 
$

Federal-Mogul Powertrain Otomotiv A.S.
$
7

 
$
25

 
$
8

 
$
31

Federal-Mogul TP Liners, Inc.
$
2

 
$
6

 
$
2

 
$
7

Icahn Automotive Group LLC
$
41

 
$
8

 
$
52

 
$
10

Montagewerk Abgastechnik Emden GmbH
$

 
$

 
$
1

 
$


See Note 7, Investment in Nonconsolidated Affiliates, for further information for companies within the tables above that represent equity method investments.

Amounts presented as Icahn Automotive Group LLC represent the Company's activity with Auto Plus and Pep Boys.

As part of the Federal-Mogul Acquisition, the Company acquired a redeemable noncontrolling interest related to a subsidiary in India. In accordance with local regulations, the Company initiated a process to make a tender offer of the shares it did not own due to the change in control triggered by the Federal-Mogul Acquisition. The Company entered into separate agreements with IEP subsequent to the purchase agreement whereby IEP agreed to fund and execute the tender offer for the shares on behalf of the Company. During the three months ended March 31, 2020, the tender offer for the shares was completed. Since the transaction was funded and executed by IEP, the completion of the tender offer resulted in an adjustment to additional paid-in capital during the three months ended March 31, 2020. Immediately following the completion of the tender offer, the shares of this noncontrolling interest not owned by the Company were no longer redeemable, or probable of becoming redeemable; therefore, the noncontrolling interest was reclassified from temporary equity to permanent equity during the three months ended March 31, 2020. See Note 2, Summary of Significant Accounting Policies, for further information on this redeemable noncontrolling interest.



37



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

References herein to "Tenneco", the "Company", "we", "us", and "our" refer to Tenneco Inc. and its consolidated subsidiaries. Unless otherwise stated, all comparisons of March 31, 2020 financial results are to March 31, 2019 financial results.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the condensed consolidated financial statements and related notes included in Item 1 of this quarterly report on Form 10-Q and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission ("SEC") on March 2, 2020 (the "2019 Form 10-K").

EXECUTIVE OVERVIEW
Our Business
We are one of the world's leading manufacturers of clean air, powertrain, and ride performance products and systems for light vehicle, commercial truck, off-highway, industrial, and aftermarket customers. Both original equipment ("OE") vehicle designers and manufacturers and the repair and replacement markets, or aftermarket, are served globally through leading brands, including Monroe®, Champion®, Öhlins®, MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, Thrush®, National®, and Sealed Power®, among others.

The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We have responded quickly to protect our team members’ health and safety while taking aggressive actions to mitigate the financial effect of the pandemic on us. In response to the pandemic, we expanded on structural cost reductions, and implemented a range of temporary cost reductions including plant closures, deferment of discretionary spending, and the reduction of capital expenditures. There are many uncertainties related to COVID-19 that could negatively affect our results of operations, financial position, and cash flows. After considering the effect of COVID-19 on our 2020 forecast, we determined it was likely we would not be able to maintain compliance with our financial covenants, as a required by our credit agreement. As a result, we entered into a third amendment to our credit agreement to increase the maximum leverage ratio and decrease the minimum interest coverage ratio. We believe our liquidity position continues to be adequate based on our current estimates and forecasts.

Other factors that we expect will continue to be critical to our success include winning new business awards, managing our overall global manufacturing footprint to ensure proper placement and workforce levels in line with business needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes, and reducing overall costs. In addition, our ability to adapt to key industry trends, such as a shift in consumer preferences to other vehicles in response to higher fuel costs and other economic and social factors, increasing technologically sophisticated content, changing aftermarket distribution channels, increasing environmental standards, and extended product life of automotive parts, also play a critical role in our success. Other factors that are critical to our success include adjusting to economic challenges such as increases in the cost of raw materials and our ability to successfully reduce the effect of any such cost increases through material substitutions, cost reduction initiatives, and other methods.

Separation Transaction
Following the closing of the Federal-Mogul acquisition on October 1, 2018, we agreed to use our reasonable best efforts to pursue the separation of the combined company. As such, we previously announced our intention to separate our businesses through a spinoff transaction to form two new, independent publicly traded companies, an Aftermarket and Ride Performance company ("DRiV") and a new Powertrain Technology company ("New Tenneco"). Current end-market conditions are affecting our ability to complete a separation within our previously announced timeline, and we expect these trends will continue throughout this year. During 2020, we will be focused on the execution of our accelerated performance improvement plan (“Accelerate”) to facilitate the expected separation of New Tenneco and DRiV. The Accelerate program is focused on achieving additional cost savings, improving capital efficiency, and reducing leverage. We have made significant progress to facilitate the planned separation of the DRiV business and have completed all necessary system and process components required for New Tenneco and DRiV to operate independently. In this respect, we are ready to separate the businesses as soon as favorable conditions are present. In order to facilitate the separation, we continue to evaluate multiple strategic alternatives, as well as options to deleverage and mitigate the ongoing effect of challenging market conditions.

The future New Tenneco consists of two existing operating segments, Clean Air and Powertrain:
The Clean Air segment designs, manufactures, and distributes a variety of products and systems designed to reduce pollution and optimize engine performance, acoustic tuning, and weight on a vehicle for OEMs; and

38



The Powertrain segment focuses on original equipment powertrain products for automotive, heavy duty, and industrial applications.

The DRiV operating segments are Motorparts and Ride Performance:
The Motorparts segment engineers, manufactures, sources, and distributes a broad portfolio of products in the global vehicle aftermarket while also servicing the original equipment and original equipment servicers market with products, including vehicle braking systems and a wide variety of chassis, engine, sealing, wiper, filter, lighting, and other general maintenance applications; and
The Ride Performance segment designs, manufactures, markets, and distributes a variety of ride performance solutions and systems to a global OE customer base, including noise, vibration, and harshness performance materials, advanced suspension technologies, ride control, and braking.

Shareholder Rights Plan
On April 15, 2020, the Board of Directors adopted a shareholder rights plan designed to protect the availability of the Company’s tax assets (the “Section 382 Rights Plan”).  Under the Section 382 Rights Plan, the rights will initially trade with the shares of the Company’s Class A Voting Common Stock and Class B Non-Voting Common Stock and will generally become exercisable only if a person (or any persons acting as a group) acquires 4.9% or more of the outstanding shares of Class A Voting Common Stock.  If the rights become exercisable, all holders of rights (other than any triggering person) will be entitled to acquire shares of common stock at a 50% discount or the Company may exchange each right held by such holders for one share of common stock. Any person which currently owns 4.9% or more of the shares of Class A Voting Common Stock may continue to own their shares but may not acquire any additional shares without triggering the Section 382 Rights Plan. The Board of Directors has the discretion to exempt any person or group from the provisions of the Section 382 Rights Plan. The complete terms of the Section 382 Rights Plan are set forth in the Section 382 Rights Agreement, dated as of April 15, 2020, between the Company and Equiniti Trust Company, as rights agent, which is included as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 16, 2020.

Financial Results for the Three Months Ended March 31, 2020
Consolidated revenues were $3,836 million, a decrease of $648 million, or 14%, for the three months ended March 31, 2020. The net effect of acquisitions and divestitures decreased revenues by $45 million, or 1%. The remaining decrease in revenues was primarily driven by the unfavorable effects of lower sales volume and mix of $499 million, the unfavorable effects of foreign currency exchange of $97 million and net unfavorable effects of other of $7 million.

Cost of sales decreased by $531 million, or 14%, for the three months ended March 31, 2019. The net effect of acquisitions and divestitures decreased cost of sales by $36 million, or 1%. The remaining decrease in cost of sales was primarily driven by lower costs resulting from lower sales volume and unfavorable mix of $385 million, the unfavorable effects of materials sourcing of $24 million, and the unfavorable effect of foreign currency exchange of $89 million, offset by an increase in other costs of $3 million.

Net loss decreased by $721 million to $826 million for the three months ended March 31, 2020 as compared to $105 million for the three months ended March 31, 2019. The decrease was primarily driven by:
an increase in restructuring charges, net and asset impairments of $468 million primarily related to impairment of long-lived asset groups triggered by the effects of the COVID-19 global pandemic on the Company's projected financial information; and
goodwill and intangible impairment charges of $383 million consisting of $267 million of goodwill impairment, $65 million of definite-lived intangible asset impairments and $51 million of indefinite-lived intangible asset impairments.
These unfavorable effects were partially offset by:
a decrease in selling, general, and administrative costs of $69 million primarily due to lower acquisition and expected separation costs and the effects of cost reduction initiatives;
a decrease in engineering, research and development of $15 million primarily due to the effects of cost reduction initiatives; and
an income tax benefit of $94 million primarily resulting from the impairment charges recognized in the three months ended March 31, 2020.

Recent Trends and Market Conditions
There is inherent uncertainty in the continuation of the trends discussed below. In addition, there may be other factors or trends that can have an effect on our business. Our business and operating results are affected by the relative strength of:

General economic conditions

39



Our OE business is directly related to automotive vehicle production by our customers. Automotive production levels depend on a number of factors, including global and regional economic conditions. Demand for aftermarket products is driven by three primary factors: the number of vehicles in operation; the average age of vehicles; and vehicle usage trends (primarily distance traveled).

In late 2019, a novel strain of coronavirus, COVID-19, was first detected in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. COVID-19 has resulted in suspension or reduction of operations, supply chain disruptions, restrictions on domestic and international travel, and a decrease in consumer traffic. These measures have adversely affected workforces, customers, economies, and financial markets, and, along with decreased consumer spending, reductions in revenue, and delays in payments from customers and partners, have led to an economic downturn in many of our markets. As of early May 2020, approximately seventy-five percent of our plants and distribution centers were operating at various levels of production.

We presently believe the effect of lost production in the first quarter of 2020 as a result of COVID-19 is $340 million on value-add revenue. However, the COVID-19 outbreak continues to spread as of the date of this report and will likely continue during the second half of our fiscal year and, accordingly, we cannot predict the extent to which the COVID-19 will ultimately affect our business, results of operations or financial condition. While we have not yet seen significant effects, we expect we may see more customers looking for longer payment terms, customers asking to defer payments, and vendors looking for improved payment terms. We expect that, as customer demand returns, we will face periods where payments are due to suppliers relating to existing and additional inventories to support renewed production before we have generated new receivables from customers from that renewed production.

Cost Reductions and Other Responses to COVID-19
The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity in response to the effects and anticipated effects to our business resulting from COVID-19 as described under “Liquidity and Capital Resources - Liquidity and Financing Arrangements”. The Company will continue to evaluate further ways to manage costs in line with reduced revenue.

Global production levels (According to IHS Markit, April, 2020)
For the three months ended March 31, 2020, global light vehicle production was down across all major markets in which we operate and down 23% overall compared to same three-month period in 2019. Production levels in North America declined 10%, production in South America was down 17%, Europe production decreased 19%, China light vehicle production decreased by 47%, and India declined 21%.

Global light vehicle production for the second quarter of 2020 is expected to decline significantly across all major markets in which we operate compared to the same three-month period in 2019. Production is projected to be down 47% overall with a 70% decline in North America, down 81% in South America, a 60% decline in Europe, down 11% in China, and a 78% decline expected in India.

For the three months ended March 31, 2020, global commercial truck production was down 27% overall and down in most major markets in which we operate compared to the same three-month period in 2019. Commercial truck production in Brazil was up 13%, however production was down 28% in our primary market of North America, down 25% in Europe, China posted a decrease of 18%, and India experienced a decrease of 58%.

Global commercial truck production for the second quarter of 2020 is expected to decline significantly across all major markets in which we operate compared to the same three-month period in 2019. Production is projected to be down 44% overall with a 55% decline in North America, down 47% in Brazil, a decline of 45% in Europe, down 34% in China, and a decline of 73% expected in India.

Part replacement trends
The strength of our aftermarket business is influenced by several key drivers. These include the vehicle population (or "parc"), average vehicle age, fuel prices, and vehicle distance traveled. The vehicle parc is estimated to have expanded in most major markets, including the U.S., China, and Germany.  Average vehicle ages also increased, despite growth in new vehicle sales, in most regions. Vehicle distance traveled varies by region and is sensitive to several factors, including fuel prices, and transportation alternatives.


40



Geopolitical risk
We conduct business globally, which subjects us to numerous risks and uncertainties including, without limitation, “Brexit” implications, joint ventures in unstable regions, and substantial new tariffs. For example, we have operations in the U.K. which may be materially affected by the U.K.'s referendum to leave the European Union, which has created uncertainty in both the U.K. and Europe. We also have an interest in a Turkish joint venture, which may be affected by recent turmoil in that region. In addition, we do business in Mexico and China where there could be potential changes in trade agreements (e.g., the North American Free Trade Agreement) and new or changed tariffs in the U.S. (such as those relating to China).

Foreign currencies
Given the global nature of our operations, we are subject to fluctuations in foreign exchanges rates and there has been significant volatility in foreign currency rates.

Business Strategy
Many of the key components of our business strategy are described below. As we continue to monitor and respond to the COVID-19 global pandemic, we expect that certain of these business strategies will be secondary to our attention to the pandemic and our response and mitigation measures worldwide.

Continue to optimize operational performance by aggressively pursuing cost competitiveness in all business segments and continuing to drive cash flow generation and meet capital allocation objectives
As we continue to expand our distribution and service capabilities globally, we seek to continue optimizing our performance through enhanced efficiencies in order to meet the world-class delivery performance our customers increasingly require. We have made and will continue to make investments in our global distribution network to maximize our manufacturing footprint and manage complexities of our supply chain. By achieving efficiency gains and cost competitiveness, we strive to generate strong cash flow and meet our capital allocation objectives, including deleveraging our balance sheet.

From a design perspective, we will bring a lean mindset to our portfolio to ensure standardization, remove redundancies, reduce transit costs, leverage economies of scale, and optimize manufacturing productivity. We will also continually look for ways to innovate and leverage cross- and up-sell opportunities to the market through a customer-centric product development process. From a manufacturing perspective, we will maintain a continuous improvement philosophy by streamlining plant operations and our network, and executing projects to improve efficiency.

Serving our customers also requires that we compete effectively at the unit cost level, in particular with OE customers. We are making concerted and systematic efforts to continuously improve our position on the cost curve for each of our component part categories. In doing so, we will continue to be a preferred supplier to our customers.

We will be mindful of the changing market conditions that might necessitate adjustments to our resources and manufacturing capacity around the world. We will also remain committed to protecting the environment as well as the health and safety of our employees.

Pursue focused transactional opportunities, consistent with our capital allocation priorities, product line enhancements, technological advancements, geographic positioning, penetration of emerging markets and market share growth
Throughout our history, we have successfully identified and capitalized on acquisitions, alliances, and divestitures to achieve strategic growth and alignment. Through these transactions, we have (1) expanded our product portfolio with complementary technologies; (2) realized incremental business from existing customers; (3) gained access to new customers; (4) achieved leadership positions in geographic regions outside North America; and (5) re-focused on areas that will contribute to our profitable growth.

We intend to continue to explore strategic alliances, joint ventures, acquisitions, divestitures, and other transactions that complement, expand, enhance or realign our existing products, technology, systems development efforts, customer base and/or global presence. We are committed to developing a broader ecosystem-based approach that allows us to work with new and existing customers, suppliers, and entrants to provide timely and leading-edge solutions across the mobility market. We will align with companies that have proven products, proprietary technology, advanced research capabilities, broad geographic reach, and/or strong market positions to further strengthen our product leadership, technology position, global reach, and customer relationships.

41




Adapt cost structure to economic realities
We aggressively respond to difficult economic environments, aligning our operations to any resulting reductions in production levels and replacement demand and executing comprehensive restructuring and cost-reduction initiatives. Suppliers must continually identify and implement product innovation and cost reduction activities to fund customer annual price concession expectations in order to retain current business as well as to be competitively positioned for future new business opportunities.

Original Equipment Specific Strategies
The converging forces of connectivity, autonomy, electrification, and shared mobility are spawning a new age of automotive autonomy and a unique opportunity to position our business for significant growth and profitability. We strive to strengthen our global position by designing, manufacturing, delivering, and marketing technologically innovative products and solutions for OE manufacturers. The key components of our OE strategy are described below:

Capitalize on our breadth of technology, differentiated products, and global reach to support and strengthen relationships with existing and emerging OE customers across the world
We conduct business with nearly all of the major automotive OE customers around the world. Within the highly competitive automotive parts industry, we seek to extend the significant advantages that come from our world-class global manufacturing, engineering and distribution footprint and global sourcing capabilities. This footprint enables the design, production and delivery of premium parts emphasizing quality, safety and reliability virtually anywhere in the world and also supports the continual innovation of new products, technologies, and solutions for new and existing OE customers.

Maintain technological leadership to drive further growth from secular market trends
In order to maintain our strong market positions, we are focused on meeting changing performance requirements and keeping up with emerging OE trends such as connectivity, autonomy, shared mobility, and electrification. In pursuit of delivering the ideal ride characteristics for any application, our ride performance division will leverage its innovative technology, NVH performance materials, differentiated products, and advanced system capabilities to provide innovative solutions. Aligning product lines and technical capabilities creates an ideal foundation to meet changing performance requirements for comfort and safety and again ultimately reinventing the ride of the future. The addition of Öhlins to the portfolio will accelerate the development of advanced technology suspension solutions, while also fast-tracking time to market. That acquisition is yet another example of our strategy to leverage key technologies that will better position us to take advantage of secular trends. It also enhances our portfolio in broader mobility markets through the addition of Öhlins’ range of premium OE and aftermarket automotive and motorsports performance products. In addition, our suite of mobility solutions under development represents an opportunity to drive greater partnership with OE manufacturers and broader mobility ecosystem players, creating and capturing value, and growth with higher value content per vehicle.

OE manufacturers are responding to changing end customer trends and preferences alongside their own challenging cost structures by reducing design and production complexities and investing in advanced technologies that enable vehicle electrification and autonomy. We anticipate that OE suppliers with high technology capabilities in vehicle system integration will be able to enable a more seamless transition to next-generation electric vehicles and become preferred suppliers to OE manufacturers. Though many vehicle and customer requirements will evolve, we believe one of the remaining characteristics that will continue to provide differentiated experience and value in the future of mobility is the ride experience. By leveraging our deep component level expertise as well as working with partners across the broader mobility ecosystem, our intent is to lead in the next generation development of motion management products, systems and solutions to engineer the ideal ride for any customer.

Penetrate adjacent market segments
We seek to penetrate a variety of adjacent sales opportunities and achieve growth in higher-margin businesses by applying our design, engineering and manufacturing capabilities. For example, we aggressively leverage our technology and engineering leadership in powertrain, clean air, ride performance and aftermarket into adjacent sales opportunities for heavy-duty trucks, buses, agricultural equipment, construction machinery, and other vehicles in other regions around the world.

We design and launch clean air products for commercial vehicle customers such as Caterpillar, for whom we are their global diesel clean air system integrator, John Deere, Navistar, Deutz, Daimler Trucks, Scania, Weichai Power, FAW Group, and Kubota. We also engineer and build modular NOx-reduction systems for large engines that meet standards of the International Maritime Organization, among others.

42




Aftermarket Specific Strategies
Our aftermarket business strategy incorporates a go-to-market model that we believe differentiates us from our competitors and creates structural support for sustained revenue growth. The model is designed to drive revenue growth by capitalizing on three of the company’s key competitive strengths: a leading portfolio of products and brands; extensive global manufacturing, distribution and service capabilities; and market intelligence gathered from the company’s distributors, installers and consumers.

We expect this distinctive go-to-market model will result in a sustainable competitive advantage, particularly as the industry trends previously mentioned disrupt the traditional aftermarket landscape and business practices. We expect the demand for replacement parts to increase as a result of the increase in the average age of VIO and the increase in the average miles driven per year. The characteristics of aftermarket sales and distribution are defined regionally, which require regionally focused strategies to address the key success factors of our customers. The key components of our aftermarket strategy are described below:

Leverage the strength of our global aftermarket leading brands positions, product portfolio and range, marketing and selling expertise, and distribution and logistics capabilities
Our aftermarket business includes multiple leading brands with strong product offerings. Our portfolio includes the industry’s most well-respected and enduring brands.

We will leverage our go-to-market model to build upon our brand strengths and grow our global aftermarket business by consistently delivering differentiated benefits, by growing our brand equity among our target end-customers, and by leveraging our broad product coverage and extensive distribution network. We are in an outstanding position to capitalize on aftermarket trends and expand in mature markets (e.g., North America, Europe, and Australia) as well as high-growth regions (i.e. China, South America, India, and Southeast and Northeast Asia). Important focus areas are enhancing our presence in high-growth markets; leveraging our portfolio and strong presence in suspension to expand our business globally; and diversifying outside of chassis with our sealing, engine and underhood products, as well as other components.

Continue to strengthen our aftermarket capabilities and product offerings in mature markets, including North America and Europe
The scale of our aftermarket business allows for strong distribution channels that significantly enhance our go-to-market capabilities across mature markets in North America and Europe. We continually rationalize our already strong distribution networks with the goal of improved customer service at a lower cost. This is achieved by continually harnessing and leveraging market intelligence and sharing information with our channel partners to drive best practices in go-to-market, manufacturing and distribution processes.

The North America and Europe go-to-market capabilities will be defined by positioning our distribution and installer partners for success. We believe this will require maintaining an extensive catalog of products to provide the ability to address customer requirements quickly and easily. Managing a large and complex catalog of products requires an understanding of the composition of the car parc within the regions including wear patterns, typical replacement rates based on weather, road quality, and average miles driven annually. These compositions differ significantly by region, which will affect the range and frequency of replacement part requirements. The understanding of these regional dynamics will help us provide the right parts when they are needed and achieve the industry’s best “Order to Delivery” times. We will continue to innovate product solutions that will be cost competitive and reliable, reduce install time, reduce the number of unique parts that installers need to inventory on-site, reduce the number of unique installer tools and equipment required, and improve installer safety.

In addition to having a comprehensive product offering, we also strive to maintain very close relationships with our customers and help position them for success. We have launched a series of “Tech First” initiatives to provide online, on demand, and onsite technical training and support to vehicle repair technicians who use and install our products in North America, Europe, and China and plan to expand into South America. This initiative included Garage Gurus™, a network of technical support centers that provide some of the most comprehensive training programs in the industry to educate our partners and customers with emerging vehicle technologies and vehicle repair operational skills. We believe it is key to our strategy to provide aftermarket parts that are simple to install and to make sure our customers have the resources to know how to install these parts properly. In having the right products and resources for our customers, we believe we will continue to be a preferred aftermarket supplier and continue to drive growth in the Americas and emerging economic areas.
 
Increase aftermarket position in high-growth regions, notably in Asia Pacific
The Asia Pacific region, particularly the high-growth markets of China and India, presents a significant opportunity for us to expand our business. We have made investments in distribution and in our sales force in both China and the rest of Asia to help

43



drive growth in this increasingly important region. We must take into account the different operational requirements in Asia Pacific in order to drive aftermarket growth in this region.

The Asia Pacific light vehicle and commercial vehicle aftermarket industry is fragmented with a large number of small distributors and installers that require different strategies and solutions than more mature consolidated markets. Distribution in smaller volumes will require us to have a hub and spoke warehousing approach to compete on the basis of optimal “Order to Delivery” timeliness while maintaining a broad range of products.

Additionally, buying online is the preferred purchase method for many smaller distribution and installer partners. The sophistication of the existing online marketplaces in Asia Pacific will require us to develop adaptive and flexible omnichannel tools in order to compete effectively. We believe that developing a competitive online platform for our Asia Pacific customers will be the foundation for us to build a digital platform that will improve our competitiveness globally.

Critical Accounting Estimates
Refer to our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on March 2, 2020.

Non-GAAP Measures
We use EBITDA including noncontrolling interests as the key performance measure of segment profitability and uses the measure in its financial and operational decision-making processes, for internal reporting, and for planning and forecasting purposes to effectively allocate resources. EBITDA including noncontrolling interests is defined as earnings before interest expense, income taxes, noncontrolling interests, and depreciation and amortization. EBITDA including noncontrolling interests should not be considered a substitute for results prepared in accordance with US GAAP and should not be considered an alternative to net income. EBITDA including noncontrolling interests, as determined and measured by us, should not be compared to similarly titled measures reported by other companies.


44



RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2020 compared to the Three Months Ended March 31, 2019
Consolidated Results of Operations
The following table presents our condensed consolidated results of operations. The amounts for the three months ended March 31, 2019 below reflect the reclassifications to the prior period as discussed in Part I, Item I.
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
2020
 
2019
 
$ Change
 
% Change (1)
 
(millions, except percent, share, and per share amounts)
Revenues
 
 
 
 
 
 
 
Net sales and operating revenues
$
3,836

 
$
4,484

 
$
(648
)
 
(14
)%
Costs and expenses
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation and amortization)
3,339

 
3,870

 
(531
)
 
(14
)%
Selling, general, and administrative
249

 
318

 
(69
)
 
(22
)%
Depreciation and amortization
171

 
169

 
2

 
1
 %
Engineering, research, and development
77

 
92

 
(15
)
 
(16
)%
Restructuring charges, net and asset impairments
484

 
16

 
468

 
n/m

Goodwill and intangible impairment charges
383

 
60

 
323

 
n/m

 
4,703

 
4,525

 
178

 
4
 %
Other income (expense)
 
 
 
 
 
 
 
Non-service pension and other postretirement benefit (costs) credits
1

 
(2
)
 
3

 
(150
)%
Equity in (earnings) losses of nonconsolidated affiliates, net of tax
13

 
16

 
(3
)
 
n/m

Other income (expense), net
8

 
3

 
5

 
n/m

 
22

 
17

 
5

 
n/m

Earnings (loss) before interest expense, income taxes, and noncontrolling interests
(845
)
 
(24
)
 
(821
)
 
n/m

Interest expense
(75
)
 
(81
)
 
6

 
(7
)%
Earnings (loss) before income taxes and noncontrolling interests
(920
)
 
(105
)
 
(815
)
 
n/m

Income tax (expense) benefit
94

 

 
94

 
 %
Net income (loss)
(826
)
 
(105
)
 
(721
)
 
n/m

Less: Net income (loss) attributable to noncontrolling interests
13

 
12

 
1

 
8
 %
Net income (loss) attributable to Tenneco Inc.
$
(839
)
 
$
(117
)
 
$
(722
)
 
617
 %
Earnings (loss) per share
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Earnings (loss) per share
$
(10.34
)
 
$
(1.44
)
 
 
 
 
Weighted average shares outstanding
81,168,562

 
80,874,637

 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Earnings (loss) per share
$
(10.34
)
 
$
(1.44
)
 
 
 
 
Weighted average shares outstanding
81,168,562

 
80,874,637

 
 
 
 
 
(1) Percentages above denoted as "n/m" are not meaningful to present in the table.


45



Revenues
Revenues decreased by $648 million, or 14%, as compared to the three months ended March 31, 2019. The net effect of acquisitions and divestitures decreased revenues by $45 million, or 1%. The remaining decrease in revenues was primarily driven by the unfavorable effects of lower sales volume and mix of $499 million, the unfavorable effects of foreign currency exchange of $97 million and net unfavorable effects of other of $7 million.

The table below reflects our consolidated revenues for the three months ended March 31, 2020 and 2019 (amounts in millions):
Three months ended March 31, 2019
$
4,484

Acquisitions and divestitures, net
(45
)
Drivers in the change of organic revenues:


Volume and mix
(499
)
Currency exchange rates
(97
)
Others
(7
)
Three months ended March 31, 2020
$
3,836


Cost of Sales
Cost of sales decreased by $531 million, or 14%, as compared to the three months ended March 31, 2019. The net effect of acquisitions and divestitures decreased cost of sales by $36 million, or 1%. The remaining decrease in cost of sales was primarily driven by lower costs resulting from lower sales volume and unfavorable mix of $385 million, the unfavorable effects of materials sourcing of $24 million, and the unfavorable effect of foreign currency exchange of $89 million, offset by an increase in other costs of $3 million.

The table below reflects our consolidated cost of sales for the three months ended March 31, 2020 and 2019 (amounts in millions):
Three months ended March 31, 2019
$
3,870

Acquisitions and divestitures, net
(36
)
Drivers in the change of organic cost of sales:


Volume and mix
(385
)
Material
(24
)
Currency exchange rates
(89
)
Others
3

Three months ended March 31, 2020
$
3,339


Selling, general, and administrative (SG&A)
SG&A decreased by $69 million to $249 million compared to $318 million for the three months ended March 31, 2019. The decreased was primarily due to $25 million lower acquisition and expected separation costs with the remainder due to cost reduction initiatives.

Depreciation and amortization
Depreciation and amortization increased by $2 million to $171 million compared to $169 million for the three months ended March 31, 2019.

Engineering, research, and development
Engineering, research, and development decreased by $15 million to $77 million compared to $92 million for the three months ended March 31, 2019. The decrease was due primarily to the effect of cost reduction initiatives.

Restructuring charges, net and asset impairments
Restructuring charges, net and asset impairments increased by $468 million to $484 million compared to $16 million for the three months ended March 31, 2019. The increase is primarily attributable to property, plant, and equipment asset impairments in the Ride Performance segment of $455 million and a $16 million impairment charge incurred on assets in the corporate component during the three months ended March 31, 2020. The remaining increase was partially offset by a $3 million reduction in severance and other charges. As a result of these asset impairments, depreciation expense is expected to decrease in future periods.

Goodwill and intangible impairment charges
There was a $267 million goodwill impairment charge and a $116 million intangible impairment recorded in the three months ended March 31, 2020 as compared to $60 million goodwill impairment charge in the three months ended March 31, 2019.

46




Non-service pension and postretirement benefit costs (credits)
Non-service pension and postretirement benefit costs (credits) increased by $3 million to a net credit of $1 million for the three months ended March 31, 2020 as compared to a net cost of $2 million for the three months ended March 31, 2019. The change was primarily attributable to a decrease in the discount rate, which was partially offset by a decrease in the long-term rate of return and higher amortization.

Equity in (earnings) losses of nonconsolidated affiliates, net of tax
Equity in (earnings) losses of nonconsolidated affiliates, net of tax decreased by $3 million as compared to the three months ended March 31, 2019. The decrease is primarily attributable to the equity in earnings of nonconsolidated affiliates located in China and Korea.

Other expense (income), net
Other income, net increased by $5 million as compared to the three months ended March 31, 2019.

Interest expense
Interest expense decreased by $6 million as compared to the three months ended March 31, 2019. The decrease was primarily attributable to lower interest rates on our variable rate debt. Interest expense includes financing charges on sales of accounts receivable, which decreased by $2 million as compared to the three months ended March 31, 2019. As a result of the amended credit agreement, interest expense is expected to increase in future periods.

Income tax expense (benefit)
Income tax benefit increased by $94 million in the three months ended March 31, 2019 as compared to no income tax expense (benefit) in the three months ended March 31, 2019. The change was primarily attributable to the goodwill and intangible impairment charges and property, plant, and equipment asset impairment charges recognized for the three months ended March 31, 2020.

Net income (loss)
Net loss increased by $721 million to $826 million for the three months ended March 31, 2020 as compared to $105 million for the three months ended March 31, 2019, as result of the aforementioned items.

Earnings (loss) before interest expense, income taxes, noncontrolling interests, and depreciation and amortization (“EBITDA including noncontrolling interests”)
The following table presents the reconciliation from EBITDA including noncontrolling interests to net income (loss) for the three months ended March 31, 2020 and 2019 ($ in millions):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
EBITDA including noncontrolling interests by segment:
 
 
 
 
Clean Air
 
$
99

 
$
131

Powertrain
 
(70
)
 
113

Ride Performance
 
(577
)
 
(45
)
Motorparts
 
(40
)
 
45

Corporate
 
(86
)
 
(99
)
Depreciation
 
(171
)
 
(169
)
Earnings before interest expense, income taxes, and noncontrolling interest
 
(845
)
 
(24
)
Interest expense
 
(75
)
 
(81
)
Income tax (expense) benefit
 
94

 

Net income (loss)
 
$
(826
)
 
$
(105
)

See "Segment Results of Operations" for further information on EBITDA including noncontrolling interests.


47



Segment Results of Operations

Overview of Net Sales and Operating Revenues
Our Clean Air segment has substrate sales. Substrates are porous ceramic filters coated with a catalyst - typically, precious metals such as platinum, palladium and rhodium. We do not manufacture substrates, as they are supplied to us by Tier 2 suppliers generally as directed by our OE customers. We generally earn a small margin on these components of the system. These substrate components have been increasing as a percentage of our revenue as the need for more sophisticated emission control solutions increases to meet more stringent environmental regulations, and as we capture more diesel aftertreatment business. While these substrates dilute our gross margin percentage, they are a necessary component of an emission control system.

Our value-add content in an emission control system includes designing the system to meet environmental regulations through integration of the substrates into the system, maximizing use of thermal energy to heat up the catalyst quickly, efficiently managing airflow to reduce back pressure as the exhaust stream moves past the catalyst, managing the expansion and contraction of the emission control system components due to temperature extremes experienced by an emission control system, using advanced acoustic engineering tools to design the desired exhaust sound, minimizing the opportunity for the fragile components of the substrate to be damaged when we integrate it into the emission control system and reducing unwanted noise, vibration and harshness transmitted through the emission control system.

We disclose substrate sales amounts because we believe investors utilize this information to understand the effect of this portion of our revenues on our overall business and because it removes the effect of potentially volatile precious metals pricing from our revenues. While our OE customers generally assume the risk of precious metals pricing volatility, it affects our reported revenues.

The table below reflects our segment revenues for the three months ended March 31, 2020 and 2019 (amounts in millions):

Segment Revenue

New Tenneco
 
DRiV
 

 


Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total Revenues
Three months ended March 31,
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Revenues
$
1,545

 
$
1,779

 
$
997

 
$
1,175

 
$
588

 
$
733

 
$
706

 
$
797

 
$
3,836

 
$
4,484



 

 

 

 

 

 

 

 

 

Value-add revenues
845

 
1,073

 
997

 
1,175

 
588

 
733

 
706

 
797

 
3,136

 
3,778

Currency effect on value-add revenue
(19
)
 

 
(26
)
 

 
(17
)
 

 
(19
)
 

 
(81
)
 

Value-add revenue excluding currency
$
864

 
$
1,073

 
$
1,023

 
$
1,175

 
$
605

 
$
733

 
$
725

 
$
797

 
$
3,217

 
$
3,778


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Substrate sales
$
700

 
$
706

 
$

 
$

 
$

 
$

 
$

 
$

 
$
700

 
$
706


Segment Revenue
Clean Air
Clean Air revenue decreased $234 million, or 13%, as compared to the three months ended March 31, 2019. Lower light vehicle and off-highway and other vehicle revenues contributed $188 million to the decrease, foreign currency exchange had a $35 million unfavorable effect on Clean Air revenue, while other unfavorable effects decreased revenue by $11 million.

Powertrain
Powertrain revenue decreased $178 million, or 15%, as compared to the three months ended March 31, 2019. Lower light vehicle, commercial truck, industrial, off-highway and other vehicle revenue contributed $145 million to the decrease, foreign currency exchange had a $26 million unfavorable effect on Powertrain revenue, while other unfavorable effects decreased revenue by $7 million.

Ride Performance
Ride Performance revenue decreased $145 million, or 20%, as compared to the three months ended March 31, 2019. Lower light vehicle, commercial truck and off-highway and other vehicle revenues contributed $106 million to the decrease, as well as a decrease in revenues from divestitures of $19 million, foreign currency exchange had a $17 million unfavorable effect on Ride Performance revenue, while other unfavorable effects decreased revenue by $3 million.


48



Motorparts
Motorparts revenue decreased $91 million, or 11%, as compared to the three months ended March 31, 2019. Lower volume contributed $60 million to the decrease, as well as a decrease in revenues from divestitures of $26 million, and foreign currency exchange had a $19 million unfavorable effect on Motorparts revenues. The unfavorable effects were partially offset by other net favorable effects of $14 million.

Earnings (loss) before interest expense, income taxes, noncontrolling interests, and depreciation and amortization (“EBITDA including noncontrolling interests”)
The following table presents the EBITDA including noncontrolling interests by segment for the three months ended March 31, 2020 and 2019 (amounts in millions):
 
Three Months Ended March 31,
 
Three Months
 
2020
 
2019
 
2020 vs 2019
EBITDA including noncontrolling interests by Segments:
 
 
 
 
 
Clean Air
$
99

 
$
131

 
$
(32
)
Powertrain
$
(70
)
 
$
113

 
$
(183
)
Ride Performance
$
(577
)
 
$
(45
)
 
$
(532
)
Motorparts
$
(40
)
 
$
45

 
$
(85
)

Clean Air
Clean Air EBITDA including noncontrolling interests decreased $32 million as compared to the three months ended March 31, 2019. The decrease is primarily attributable to lower volume and unfavorable mix, partially offset by improved operating efficiencies.

Powertrain
Powertrain EBITDA including noncontrolling interests decreased $183 million as compared to the three months ended March 31, 2019. The decrease is primarily attributable to a goodwill impairment charge in the amount of $160 million and lower volume, partially offset by lower selling, general, and administrative costs during the three months ended March 31, 2020 compared to the same period of 2019.

Ride Performance
Ride Performance EBITDA including noncontrolling interests decreased $532 million as compared to the three months ended March 31, 2019. The decrease is primarily attributable to asset impairment charges of $455 million, and goodwill and intangible impairment charges of $113 million recognized during the three months ended March 31, 2020 as compared to a goodwill impairment charge in the amount of $60 million recognized during the three months ended March 31, 2019. Also contributing to the decrease is lower volume and unfavorable mix, partially offset by lower selling, general, and administrative costs.

Motorparts
Motorparts EBITDA including noncontrolling interests decreased $85 million compared to the three months ended March 31, 2019. The decrease is primarily attributable to goodwill and intangible impairment charges in the amount of $110 million recognized in the three months ended March 31, 2020. Also contributing to the decrease is lower volume and unfavorable mix, partially offset by lower selling, general, and administrative costs.




49



The EBITDA including noncontrolling interests results shown in the preceding table include the following items, certain of which may have an effect on the comparability of EBITDA including noncontrolling interests results between periods (amounts in millions):
 
Reportable Segments
 
 
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
 
Corporate
 
Reclass & Elims
 
Total
Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring charges, net

 
1

 
6

 
2

 
9

 
4

 

 
13

Restructuring related costs
1

 
(1
)
 
19

 
1

 
20

 
1

 
 
 
21

Other non-restructuring asset impairments

 

 
455

 

 
455

 
16

 
 
 
471

Acquisition and expected separation costs (1)
4

 

 

 

 
4

 
21

 

 
25

Goodwill and intangibles impairment charge

 
160

 
113

 
110

 
383

 

 

 
383

Total adjustments
$
5

 
$
160

 
$
593

 
$
113

 
$
871

 
$
42

 
$

 
$
913

 
(1) Costs related to the Acquisitions and expected separation.

 
Reportable Segments
 
 
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
 
Corporate
 
Reclass & Elims
 
Total
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs to achieve synergies (1)
1

 

 
3

 
3

 
7

 

 

 
7

Restructuring and related expenses (2)
4

 
1

 
10

 
1

 
16

 
1

 

 
17

Cost reduction initiatives (3)

 

 

 

 

 
8

 

 
8

Acquisition and expected separation costs(4)

 

 

 

 

 
40

 

 
40

Process harmonization(5)
4

 

 

 
5

 
9

 

 

 
9

Purchase accounting adjustments (6)

 
2

 
3

 
36

 
41

 

 

 
41

Goodwill impairment charge (7)

 

 
60

 

 
60

 

 

 
60

Total adjustments
$
9

 
$
3

 
$
76

 
$
45

 
$
133

 
$
49

 
$

 
$
182

 
(1) Cost to achieve synergies related to the Acquisitions.
(2) The Ride Performance segment includes $8 million of other charges for the three-month period ended March 31, 2019.
(3) Costs related to cost reduction initiatives.
(4) Costs related to the Acquisitions and expected separation.
(5) Change due to process harmonization.
(6) This primarily relates to non-cash charge to cost of goods sold for the amortization of the inventory fair value step-up recorded as part of the Federal-Mogul Acquisition.
(7) Post segment reorganization impairment of goodwill.








50



Liquidity and Capital Resources

Liquidity and Financing Arrangements
The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We believe our liquidity position continues to be adequate. However, with the recent economic downturn related to COVID-19, we expect to see lower revenue and lower earnings, putting pressure on our liquidity position. In addition, while we have not yet seen significant effects, we expect we may see more customers looking for longer payment terms, customers asking to defer payments, and vendors looking for improved payment terms. We expect that, as customer demand returns, we will face periods where payments are due to our suppliers relating to existing and additional inventories needed to support renewed production before we have generated new receivables from customers from that renewed production.

We have implemented a range of actions aimed at temporarily reducing costs and preserving liquidity in response to the effects and anticipated effects to our business resulting from COVID-19. These measures include:
Temporarily suspending or reducing operations;
As discussed in more detail in Note 10, Debt and Other Financing Arrangements and below, we entered into an amendment to our senior credit facility to increase the maximum leverage ratio and decrease the minimum interest coverage ratio;
As of March 31, 2020, we had liquidity of $1.57 billion, comprised of $770 million cash and $800 million undrawn on our revolving credit facility. Subsequent to March 31, 2020, we drew down the remaining amount available under our revolving credit facility to enhance our liquidity position;
For the second quarter of 2020, overall salary costs are expected to be reduced at least 25% through a combination of unpaid furloughs, net pay decreases, and available temporary support programs in all regions Tenneco does business. Additionally, the executive leadership team (the CEO’s direct staff) has reduced their salaries 50% and the CEO will not take a salary during this period;
We expect to reduce our headcount globally, subject to negotiation with works councils in certain jurisdictions, beginning in the second quarter of 2020 and expect these actions to be completed during 2020. We expect to record a charge in the range of $25 million to $30 million for the second quarter of 2020 in connection with the cash severance costs expected to be paid and expect to achieve annualized cost savings of approximately $65 million in connection with this action;
Capital expenditures in 2020 are expected to be reduced to less than $400 million. This is a reduction from previous guidance of 2020 expenditures between $610-$650 million and 2019 expenditures, which were greater than $700 million;
Consideration of any applicable provisions under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) including deferral of the company’s portion of 2020 FICA payroll taxes which will be repaid in 2021 and 2022, and deferral of our U.S. qualified pension plan contributions;
The Tenneco Board of Directors annual retainer fees will be reduced by 25% for the remainder of 2020; and
Beginning in the second quarter of 2020, we may defer payments and extend payment terms with certain suppliers and other business partners to address the working capital issues described above and otherwise defer or delay cash outlays as necessary and practical.

At March 31, 2020, we are in compliance with all financial covenants under the credit agreement. Prior to the outbreak of the COVID-19 global pandemic, we believed we had the ability to comply with these financial covenants. There are many uncertainties related to COVID-19 that could negatively affect our results of operations, financial position, and cash flows. After considering the effect of COVID-19 on our 2020 forecast, we determined it was likely we would not be able to maintain compliance with our financial covenants, as required by our credit agreement. As a result, on May 5, 2020, we entered into a third amendment to our credit agreement to increase the maximum leverage ratio and decrease the minimum interest coverage ratio. The amendment is discussed in more detail below.

We believe cash flows from operations, combined with our cash on hand, will be sufficient to meet our future capital requirements, including debt amortization, capital expenditures, pension contributions, and other operational requirements, for the following year based on our current estimates and forecasts. We believe we will maintain compliance with the new financial ratios set forth in the amended credit agreement. However, our ability to meet the financial covenants depends upon a number of operational and economic factors, including the effects of COVID-19, many of which are beyond our control. In the event we are unable to meet these financial covenants, we would consider several options to meet our cash flow needs. Such actions include additional restructuring initiatives and other cost reductions, sales of assets, reductions to working capital and capital spending, issuance of equity, and other alternatives to enhance our financial and operating position.

51




Credit Facilities
The table below shows our borrowing capacity on committed credit facilities at March 31, 2020 ($ in billions):
 
 Committed Credit Facilities
at March 31, 2020
 
Term
 
Available(b)
 
 
 
(in billions)
Tenneco Inc. revolving credit facility (a)
2023
 
$
0.8

Tenneco Inc. Term Loan A
2023
 

Tenneco Inc. Term Loan B
2025
 

Subsidiaries’ credit agreements
2020 - 2028
 

 
 
 
$
0.8

 
(a) 
We are required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment.
(b) 
Letters of credit reduce the available borrowings under the revolving credit facility.

We also have $69 million of outstanding letters of credit under our uncommitted facilities at March 31, 2020.

As of March 31, 2020, we had liquidity of $1.57 billion, comprised of $770 million cash and $800 million undrawn on our revolving credit facility. Subsequent to March 31, 2020, we drew down the remaining amount available under our revolving credit facility to enhance our liquidity position.

Term Loans
We entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and other lenders (the "New Credit Facility") in connection with the Federal-Mogul Acquisition, which has been amended by the first amendment, dated February 14, 2020 (the “First Amendment”), by the second amendment, dated February 14, 2020 (the “Second Amendment”), and by the third amendment, dated May 5, 2020 (the "Third Amendment"). The New Credit Facility consists of $4.9 billion of total debt financing, consisting of a five-year $1.5 billion revolving credit facility, a five-year $1.7 billion term loan A facility ("Term Loan A") and a seven-year $1.7 billion term loan B facility ("Term Loan B"). We paid $8 million in one-time fees in connection with the First Amendment and Second Amendment, and $10 million in one-time fees in connection with the Third Amendment.

New Credit Facility — Interest Rates and Fees
At March 31, 2020, before giving effect to the Third Amendment, the interest rate on borrowings under the revolving credit facility and the Term Loan A facility was LIBOR plus 2.00% and will remain at LIBOR plus 2.00% for each relevant period for which our consolidated net leverage ratio (as defined by the New Credit Facility) is equal to or greater than 3.0 to 1. The interest rate on borrowings under the revolving credit facility and the Term Loan A facility are subject to step-downs as follows:
Consolidated net leverage ratio
Interest rate
greater than 3.0 to 1
LIBOR plus 2.00%
less than 3.0 to 1 and greater than 2.5 to 1
LIBOR plus 1.75%
less than 2.5 to 1 and greater than 1.5 to 1
LIBOR plus 1.50%
less than 1.5 to 1
LIBOR plus 1.25%

The Third Amendment provides for an increase to the margin applicable to borrowings under the revolving credit facility and the Term Loan A facility at certain leverage levels as set forth below as one of several conditions for obtaining less restrictive financial maintenance covenants described below under New Credit Facility — Other Terms and Conditions:
Consolidated net leverage ratio
Interest rate
greater than 6.0 to 1
LIBOR plus 2.50%
less than 6.0 to 1 and greater than 4.5 to 1
LIBOR plus 2.25%

Initially, and so long as our corporate family rating is Ba3 (with a stable outlook) or higher from Moody’s Investors Service, Inc. (“Moody’s”) and BB- (with a stable outlook) or higher from Standard & Poor’s Financial Services LLC (“S&P”), the interest rate on borrowings under the Term Loan B facility will be LIBOR plus 2.75%; at any time the foregoing conditions are not satisfied, the interest rate on the Term Loan B facility will be LIBOR plus 3.00%. When the Term Loan B facility is no

52



longer outstanding and we, and our subsidiaries, have no other secured indebtedness (with certain exceptions set forth in the New Credit Facility), and upon us achieving and maintaining two or more corporate credit and/or corporate family ratings higher than or equal to BBB- from S&P, BBB- from Fitch Ratings Inc. (“Fitch”) and/or Baa3 from Moody’s (in each case, with a stable or positive outlook), the collateral under the New Credit Facility may be released. On June 3, 2019, Moody’s lowered our corporate family rating to B1 and the interest rate on borrowings under the term loan B was raised to LIBOR plus 3.00%.

New Credit Facility — Other Terms and Conditions Before giving effect to the Third Amendment, the New Credit Facility also contained two financial maintenance covenants for the revolving credit facility and the Term Loan A facility including (i) a requirement to have a consolidated net leverage ratio (as defined in the New Credit Facility) as of the end of each fiscal quarter, with step-downs, as follows: 
(i) Consolidated net leverage ratio
not greater than 4.50 to 1
through March 31, 2021
not greater than 4.25 to 1
through September 30, 2021
not greater than 4.00 to 1
through March 31, 2022
not greater than 3.75 to 1
through September 30, 2022
not greater than 3.50 to 1
thereafter
and (ii) a requirement to maintain a consolidated interest coverage ratio (as defined in the New Credit Facility) for any period of four consecutive fiscal quarters of not less than 2.75 to 1.

After giving effect to the Third Amendment, we must comply with certain less restrictive financial maintenance covenants for the revolving credit facility and the Term Loan A facility. The financial maintenance covenants are subject to several covenant reset triggers (“Covenant Reset Triggers”) that limit certain activities of ours by implementing more restrictive affirmative and negative covenants. If a Covenant Reset Trigger occurs, the financial maintenance covenants revert back to the financial maintenance covenants in effect immediately prior to the Third Amendment (and described above) (the “Prior Financial Covenants”). The financial maintenance covenants include (i) a requirement to have a senior secured leverage ratio (as defined in the New Credit Facility), with step-downs, as detailed in the table below; (ii) a requirement to have a consolidated net leverage ratio (as defined in the New Credit Facility), with step-downs, as follows:
(i) Senior secured net leverage ratio
 
(ii) Consolidated net leverage ratio
not greater than 6.75 to 1
at June 30, 2020
 
not greater than 4.50 to 1
at March 31, 2020
not greater than 9.50 to 1
at September 30, 2020
 
not greater than 5.25 to 1
at March 31, 2022
not greater than 8.75 to 1
at December 31, 2020
 
not greater than 4.75 to 1
at June 30, 2022
not greater than 8.25 to 1
at March 31, 2021
 
not greater than 4.25 to 1
at September 30, 2022
not greater than 4.50 to 1
at June 30, 2021
 
not greater than 3.75 to 1
thereafter
not greater than 4.25 to 1
at September 30, 2021
 
 
 
not greater than 4.00 to 1
at December 31, 2021
 
 
 
and (iii) a requirement to maintain a consolidated interest coverage ratio (as defined in the New Credit Facility) for any period of four consecutive fiscal quarters of not less than 2.75 to 1 as of March 31, 2020, 2.00 to 1 as of June 30, 2020, 1.50 to 1 through March 31, 2021, and 2.75 to 1 thereafter.

We may make a one-time election to revert back to the Prior Financial Covenants and terminate the Covenant Reset Triggers upon delivery of a covenant reset certificate that attests to compliance with the Prior Financial Covenants as of the end of the relevant fiscal period (“Covenant Reset Certificate”). See Note 10, Debt and Other Financing Arrangements included in Part I, Item I for additional details.

After giving effect to the Third Amendment, so long as no default exists under its New Credit Facility, we would be permitted to (i) make regularly scheduled interest and principal payments as and when due in respect of the Senior Unsecured Notes, (ii) refinance the Senior Unsecured Notes with the net cash proceeds of permitted refinancing indebtedness (as defined in the New Credit Facility); (iii) make payments in respect of the Senior Unsecured Notes in an amount equal to the net cash proceeds of qualified capital stock (as defined in the New Credit Facility) issued after May 5, 2020; (iv) convert any Senior Unsecured Notes into qualified capital stock issued after May 5, 2020; and (v) make additional payments of the Senior Unsecured Notes provided that after giving effect to such additional payments the consolidated leverage ratio would be equal to or less than 2.00 to 1 after giving effect to such additional payments. The foregoing limitations regarding repayment and refinancing of the Senior Unsecured Notes and such incremental equivalent debt apply from the effectiveness of the Third Amendment until delivery of a Covenant Reset Certificate.


53



The covenants in the New Credit Facility generally prohibit us from repaying certain subordinated indebtedness. So long as no default exists, we would, under its New Credit Facility, be permitted to repay or refinance its subordinated indebtedness (i) with the net cash proceeds of permitted refinancing indebtedness (as defined in the New Credit Facility); (ii) in an amount equal to the net cash proceeds of qualified capital stock (as defined in the New Credit Facility) issued after October 1, 2018; (iii) in exchange for qualified capital stock issued after October 1, 2018; and (iv) with additional payments provided that such additional payments are capped based on a pro forma consolidated leverage ratio after giving effect to such additional payments.

Such additional payments on subordinated indebtedness (x) will not be permitted at any time the pro forma consolidated leverage ratio is greater than 2.00 to 1 after giving effect to such additional payments and (y) will be permitted in an unlimited amount at any time the pro forma consolidated leverage ratio is equal to or less than 2.00 to 1 after giving effect to such additional payments.

The New Credit Facility includes customary events of default and other provisions that could require all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if we fail to comply with the terms of the New Credit Facility or if other customary events occur.

The financial ratios required under the New Credit Facility and the actual ratios we calculated as of March 31, 2020 for the first quarter of 2020, are as follows: leverage ratio of 3.98 actual versus 4.50 (maximum) required; and interest coverage ratio of 4.80 actual versus 2.75 (minimum) required.

Senior Notes
We have outstanding 5.375% senior unsecured notes due December 15, 2024 ("2024 Senior Notes") and 5.000% senior unsecured notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes"). We have outstanding 5.000% euro denominated fixed rate notes which are due July 15, 2024 ("5.000% Euro Fixed Rate Notes"), 4.875% euro denominated fixed rate notes due April 15, 2022 ("4.875% Euro Fixed Rate Notes"), and floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Notes, the "Senior Secured Notes").

Senior Unsecured Notes and Senior Secured Notes — Other Terms and Conditions The Senior Unsecured Notes and Senior Secured Notes contain covenants that will, among other things, limit our ability to create liens and enter into sale and leaseback transactions. In addition, the Senior Secured Notes and 2024 Senior Unsecured Notes also require, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, our consolidated fixed charge coverage ratio, as calculated on a pro forma basis, be greater than 2.00, as well as containing restrictions on its operations, including limitations on: (i) incurring additional indebtedness; (ii) paying dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations.

Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee its Senior Unsecured Notes and Senior Secured Notes on a joint and several basis. There are no significant restrictions on the ability of the subsidiaries that have guaranteed our Senior Notes to make distributions to us.

Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements
We have securitization programs for some of our accounts receivable, with limited recourse provisions. Borrowings on these securitization programs, which are recorded in short-term debt, at March 31, 2020 and December 31, 2019 are as follows (amounts in millions):
 
 
March 31, 2020
 
December 31, 2019
Borrowings on securitization programs
 
$
8

 
$
4


Off-Balance Sheet Arrangements
We have an accounts receivable factoring program in the U.S. with a commercial bank. Under this program we sell receivables from certain 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. In addition, we have two other receivable factoring programs in the U.S. with commercial banks under which we sell receivables from certain of our aftermarket customers to whom we have extended payment terms. Both arrangements are uncommitted and may be terminated with 10 days prior notice for one program and 30 days prior notice for the other program.


54



We also have subsidiaries in several countries in Europe that are parties to accounts receivable factoring facilities. The commitments for these arrangements are generally for one year, but some may be canceled with notice 90 days prior to renewal. In some instances, the arrangement provides for cancellation by the applicable financial institution at any time upon notification. Certain of these programs in Europe include deferred purchase price arrangements.

These 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. If we were not able to factor receivables under these programs, our borrowings under our revolving credit agreement might increase, although this could be partially mitigated by exercising our right to shorten payment terms with certain of the aftermarket customers whose receivables we sell under the U.S. factoring programs in the event that those factoring programs are terminated.

In the U.S and Canada, we participate in supply chain financing programs with certain of our aftermarket customers to whom we have extended payment terms whereby the accounts receivable are satisfied through the early receipt of negotiable financial instruments that are payable at a later date when payments from our customers are due. We sell these financial instruments before their maturity date to various financial institutions at a discount.

If these supply chain financing programs were terminated or the financial institutions that currently participate in these programs were to reduce their purchases of drafts, our borrowings under our revolving credit agreement might increase, although this could be partially mitigated by exercising our right to shorten payment terms with certain of the aftermarket customers whose drafts we sell under the U.S. and Canadian programs in the event that those programs are terminated or otherwise reduced.

The accounts receivables under the programs described above are transferred in their entirety to the acquiring entities and are accounted for as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under these factoring programs approximates the fair value of such receivables. We are the servicer of the receivables under some of these arrangements and are responsible for performing all accounts receivable administration functions. Where we receive a fee to service and monitor these transferred accounts receivables, such fees are sufficient to offset the costs and as such, a servicing asset or liability is not recorded as a result of such activities.

The amount of accounts receivable outstanding and derecognized for these factoring and drafting arrangements was $1.1 billion and $1.0 billion at March 31, 2020 and December 31, 2019. In addition, the deferred purchase price receivable was $37 million and $33 million at March 31, 2020 and December 31, 2019.

Proceeds from the factoring of accounts receivable qualifying as sales and drafting programs was $1.2 billion for both the three months ended March 31, 2020 and 2019.

Financing charges associated with the factoring of receivables are as follows (amounts in millions):
 
Three Months Ended March 31,
 
2020
 
2019
Loss on sale of receivables(a)
$
6

 
$
8

 
(a) Amount is included in "Interest expense" in the condensed consolidated statements of income (loss).

Supply Chain Financing
Certain of our suppliers participate in supply chain financing programs under which they securitize their accounts receivables from us. Financial institutions participate in the supply chain financing program on an uncommitted basis and can cease purchasing receivables or drafts from our suppliers at any time. We are in the process of winding down these programs and expect to end them by the end of 2020.


55



Cash Flows
Operating Activities
Operating activities for the three months ended March 31, 2020 and 2019 were as follows (amounts in millions):
 
Three Months Ended March 31,
 
2020
 
2019
Operational cash flow before changes in operating assets and liabilities
$
(1
)
 
$
91

 
 
 
 
Changes in operating assets and liabilities:
 
 
 
Receivables
139

 
(312
)
Inventories
(73
)
 
11

Payables and accrued expenses
(136
)
 
157

Accrued interest and income taxes
29

 
(38
)
Other assets and liabilities
(110
)
 
(59
)
Total change in operating assets and liabilities
(151
)
 
(241
)
Net cash provided (used) by operating activities
$
(152
)
 
$
(150
)

Cash used by operations for the three months ended March 31, 2020 was $152 million an increase of $2 million compared to the three months ended March 31, 2019. The activity was the result of:
an increase in cash used from operational cash flows before operating assets and liabilities of $92 million; and
a net decrease of $90 million due to favorable changes in working capital items.

Investing Activities
Investing activities for the three months ended March 31, 2020 and 2019 were as follows (amounts in millions):
 
Three Months Ended March 31,
 
2020
 
2019
Proceeds from sale of assets
$
2

 
$
1

Net proceeds from sale of business

 
22

Cash payments for property, plant, and equipment
(137
)
 
(210
)
Acquisitions, net of cash acquired

 
(158
)
Proceeds from deferred purchase price of factored receivables
56

 
60

Other
2

 
2

Net cash (used) provided by investing activities
$
(77
)
 
$
(283
)

Cash used by investing activities for the three months ended March 31, 2020 decreased due to a decrease in cash payments for property, plant, and equipment and no cash payments for acquisitions.

Cash payments for property, plant, and equipment were $137 million and $210 million for the three months ended March 31, 2020 and 2019.

56




Financing Activities
Financing activities for the three months ended March 31, 2020 and 2019 were as follows (amounts in millions):
 
Three Months Ended March 31,
 
2020
 
2019
Proceeds from term loans and notes
$
67

 
$
28

Repayments of term loans and notes
(84
)
 
(64
)
Debt issuance costs of long-term debt
(8
)
 

Borrowings on revolving lines of credit
3,161

 
2,119

Payments on revolving lines of credit
(2,659
)
 
(1,981
)
Issuance (repurchase) of common shares
(1
)
 
(2
)
Cash dividends

 
(20
)
Purchase of common stock under the share repurchase program

 

Net increase (decrease) in bank overdrafts
(2
)
 
(1
)
Other
11

 
(3
)
Distributions to noncontrolling interest partners
(2
)
 
(1
)
Net cash (used) provided by financing activities
$
483

 
$
75


Cash flow provided by financing activities was $483 million for the three months ended March 31, 2020. This included net repayments on term loans of $17 million and net borrowings on revolving lines of credit of $502 million.

Cash flow provided by financing activities was $75 million for the three months ended March 31, 2019. This included net repayments on term loans of $36 million, net repayments on revolving lines of credit of 138 million.

Dividends on Common Stock
We did not pay a dividend during the three months ended March 31, 2020. This was a decrease of $20 million as compared to the three months ended March 31, 2019, due to the suspension of the dividend program in the second quarter 2019.


57


Supplemental Guarantor Financial Information
Basis of Presentation
Substantially all of the Company's existing and future material domestic 100% owned subsidiaries (which are referred to as the "Guarantor Subsidiaries") fully and unconditionally guarantee its senior notes on a joint and several basis. However, a subsidiary’s guarantee may be released in certain customary circumstances such as a sale of the subsidiary or all or substantially all of its assets in accordance with the indenture applicable to the notes. The Guarantor Subsidiaries are combined in the presentation below.

Summarized Financial Information
The following tables present summarized financial information for the Parent and the Guarantors on a combined basis after the elimination of (a) intercompany transactions and balances among the Parent and the Guarantors and (b) the equity in earnings from and investments in any subsidiary that is a Nonguarantor:

Income Statements
 
Three Months Ended
March 31,
 
Twelve Months Ended December 31,
 
2020
 
2019
   Net sales and operating revenues
$
1,695

 
$
6,390

Operating expenses
$
2,211

 
$
6,885

Net income (loss)
$
(480
)
 
$
(498
)
Net income (loss) attributable to Tenneco Inc.
$
(480
)
 
$
(498
)

Balance Sheets
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
Current assets
$
2,061

 
$
1,947

Non-current assets
$
2,698

 
$
3,089

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
$
1,300

 
$
1,347

Non-current liabilities
$
6,564

 
$
6,102

Intercompany due to (due from)
$
113

 
$
107











58



Environmental Matters, Legal Proceedings and Product Warranties
Note 13, Commitments and Contingencies in our condensed consolidated financial statements located in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.


59




ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain global market risks, including foreign currency exchange risk, commodity price risk, interest rate risk
associated with our debt, and equity price risk associated with our share-based compensation awards.

Foreign Currency Exchange Rate Risk
We manufacture and sell our products in North America, South America, Asia, Europe, and Africa. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which we manufacture and sell our products. We generally try to use natural hedges within our foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, we consider managing certain aspects of our foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the U.S. dollar, euro, British pound, Polish zloty, Singapore dollar, Thailand bhat, South African rand, Mexican peso, and Canadian dollar.

Foreign Currency Forward Contracts
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. In managing our foreign currency exposures, we identify and aggregate existing offsetting positions and then hedge residual exposures through third-party derivative contracts. The gain or loss on these contracts is recorded as foreign currency gains (losses) within cost of sales in the condensed consolidated statements of income (loss). The fair value of foreign currency forward contracts are recorded in prepayments and other current assets in the condensed consolidated balance sheets. The fair value of the Company's foreign currency forward contracts was a net liability position of $1 million and an asset position of less than $1 million at March 31, 2020 and December 31, 2019.

The following table summarizes by position the notional amounts for foreign currency forward contracts at March 31, 2020 (all of which mature in 2019):
 
Notional Amount
Long position
$
52

Short position
$
(53
)

Interest Rate Risk
Our financial instruments that are sensitive to market risk for changes in interest rates are primarily our debt securities. We use our revolving credit facility to finance our short-term and long-term capital requirements. We pay a current market rate of interest on these borrowings. Our long-term capital requirements have been financed with long-term debt with original maturity dates ranging from five to ten years. On March 31, 2020, we had $1.6 billion par value of fixed rate debt and $3.6 billion par value of floating rate debt. Of the fixed rate debt, $458 million is fixed through 2022, $611 million is fixed through 2024, and $500 million is fixed through 2026. We also had $3.6 billion of principal amounts in long-term debt obligations that are subject to variable interest rates. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources” earlier in this Management’s Discussion and Analysis and Note 10, Debt and Other Financing Arrangements in our condensed consolidated financial statements located in Part I, Item 1 of this Form 10-Q.

We estimate that the fair value of our long-term debt at March 31, 2020 was about 79% percent of its book value. A one percentage point increase or decrease in interest rates related to our variable interest rate debt would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $58 million.

Equity Prices
We selectively use swaps to reduce market risk associated with our equity-based deferred compensation liabilities, which increase as our stock price increases and decrease as our stock price decreases. We have entered into a cash-settled share swap agreement that moves in the opposite direction of these liabilities, allowing us to fix a portion of the liabilities at a stated amount. At March 31, 2020, we hedged our deferred compensation liabilities related to approximately 1,350,000 common share equivalents, an increase of 750,000 common share equivalents from December 31, 2019. In the first quarter of 2020, we entered into an S&P 500 index fund ETF swap agreement in order to further reduce market risk associated with our deferred compensation liabilities. This agreement will act as a natural hedge offsetting an equivalent amount of indexed investments in our deferred compensation plans. The fair value of these swap agreements was a net liability position of $2 million and $1 million at March 31, 2020 and December 31, 2019, which is recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheets.


60



ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officers and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), as the end of the quarter covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, due to the material weakness in our internal control over financial reporting previously identified and described more fully under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company’s disclosure controls and procedures were not effective as of March 31, 2020 to ensure information required to be disclosed by our Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.

Internal Controls Surrounding the North America Motorparts business
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis.

As previously identified and described more fully under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company identified a deficiency within its North America Motorparts business that constitutes a material weakness, as it did not maintain a sufficient complement of resources in the North America Motorparts business to ensure that appropriate controls were designed, maintained and executed, including controls over account reconciliations and manual journal entries, related to the integration of a previously acquired entity within the North America Motorparts business. The material weakness continued to exist as of the end of the period covered by this Quarterly Report.

The material weakness did not result in any material misstatements of the Company’s financial statements or disclosures but did result in out-of-period adjustments during the quarter ended December 31, 2019. Additionally, this material weakness could result in the misstatement of relevant account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation Plan for Material Weakness in Internal Control over Financial Reporting
The Company continues to take action on the remediation plan more fully described under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. While the Company is moving forward with these remediation activities, additional work needs to be done in this area. Accordingly, we concluded that this material weakness had not yet been remediated as of March 31, 2020.

We will continue to monitor the effectiveness of these and other processes, procedures and controls and make any further changes management determines appropriate.

Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

61



PART II OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
Note 13, Commitments and Contingencies, in our condensed consolidated financial statements located in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.
ITEM 1A.RISK FACTORS
We are exposed to certain risks and uncertainties that could have a material adverse effect on our business, financial condition and operating results. Except as set forth below, there have been no material changes to the Risk Factors described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The risks described herein or in our Annual Report on Form 10-K are not the only risks facing us. 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 effect such risk factors might have on our business, financial condition and operating results, or the extent to which any such risk factor or combination of risk factors may affect our business, financial condition and operating results.

The novel coronavirus (COVID-19) global pandemic has had and is expected to continue to have an adverse effect on our business and results of operations.
In late 2019, a novel strain of coronavirus, COVID-19, was first detected in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, reductions in revenue, and delays in payments from customers and partners, have led to an economic downturn in many of our markets. As a result of COVID-19, and in response to government mandates or recommendations, as well as decisions made to protect the health and safety of employees, consumers and communities, we and our customers have experienced significant closures and instances of reduced operations. Additionally, we have closed many of our corporate office and other facilities and have implemented a work from home policy for many corporate employees which may negatively impact productivity and cause other disruptions to our business.

The uncertainties created by the COVID-19 global pandemic, including the severity and duration of the outbreak and additional actions that may be taken by governmental authorities make it is difficult to forecast the effects of the virus on the Company’s future results, including our ability to execute our near-term and long-term business strategies and initiatives in the expected time frame. However, we currently expect COVID-19 to affect revenue for the quarter ended June 30, 2020 more significantly than it has affected the quarter ended March 31, 2020, primarily as a result of the increasing number of markets impacted. Additionally, it is possible that we may experience supply chain disruptions as well as labor shortages as a result of COVID-19, further disrupting operations and impacting revenues negatively.

To the extent the COVID-19 global pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this ‘‘Risk Factors’’ section or to the “Risk Factors” described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, such as those relating to our high level of indebtedness, our need to generate sufficient cash flows to service our indebtedness, our ability to comply with the covenants contained in the agreements that govern our indebtedness and to have access to sufficient liquidity through the COVID-19 pandemic, decreased revenue from loss of customer market share, and working capital requirements.

We may not be able to fully utilize our net operating loss and other tax carryforwards.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. A corporation generally experiences an “ownership change” if the percentage of its shares of stock owned by its “5-percent shareholders,” as such term is defined in Section 382 of the Code, increases by more than 50 percentage points over a rolling three-year period. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our tax attributes is materially limited, it would harm our future operating results by effectively increasing our future tax obligations.

In April 2020, our Board of Directors approved a Section 382 Rights Agreement (the “Section 382 Rights Plan”), which may cause substantial dilution to a person or group that attempts to acquire 4.9% or more of the Company’s Class A Voting Common Stock on terms not approved by our Board of Directors. The purpose of the Rights Plan is to protect value by preserving the Company’s ability to use certain of its tax attributes to offset potential future income taxes. Although the Section 382 Rights Plan is intended to reduce the likelihood of an “ownership change” that could adversely affect utilization of our tax assets, there is no assurance that the Section 382 Rights Plan will prevent all transfers that could result in such an

62



“ownership change.” The Section 382 Rights Plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, a large block of our Class A Voting Common Stock. A third party that acquires in excess of 4.9% or more of our Class A Voting Common Stock could suffer substantial dilution of its ownership interest under the terms of the Section 382 Rights Plan. This may adversely affect the marketability of our Class A Voting Common Stock by discouraging existing or potential investors from acquiring our stock or additional shares of our stock.


63



ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) Not applicable.
(c) Purchase of equity securities by the issuer and affiliated purchasers. The following table provides information relating to our purchase of shares of our common stock in the first quarter of 2020. These purchases reflect shares withheld upon vesting of restricted stock for tax withholding obligations. We generally intend to continue to satisfy tax withholding obligations in connection with the vesting of outstanding restricted stock through the withholding of shares.

Period
Total Number of
Shares Purchased (1)
 
Average
Price Paid
 
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
 
Maximum Value of
Shares That
May Yet be
Purchased
Under
These Plans
or Programs
(Millions)
January 2020
15,720

 
$
9.89

 

 
$

February 2020
101,834

 
10.10

 

 

March 2020
2,090

 
7.85

 

 

Total
119,644

 
$
10.04

 

 
$

(1)
Shares withheld upon vesting of share settled restricted stock units in the first quarter of 2020.

64



ITEM 6.EXHIBITS
INDEX TO EXHIBITS
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2020
Exhibit
Number
 
Description
 
 
 
First Amendment, dated February 14, 2020, to the Credit Agreement, dated as of October 1, 2018, by
and among Tenneco Inc., Tenneco Automotive Operating Company Inc., J.P. Morgan Chase Bank,
N.A., as administrative agent, and the other lenders party thereto (incorporated herein by reference to
Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated February 19, 2020, File No
1-12387).
 
 
 
Second Amendment, dated February 14, 2020, to the Credit Agreement, dated as of October 1, 2018, by and among Tenneco, Inc., Tenneco Automotive Operating Company Inc., J.P. Morgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto (incorporated herein by reference to Exhibit 10.2 of the registrant's Current Report on Form 8-K dated February 19, 2020, File No 1-12387).
 
 
 
Third Amendment, dated May 5, 2020, to the Credit Agreement, dated as of October 1, 2018, by
and among Tenneco Inc., Tenneco Automotive Operating Company Inc., J.P. Morgan Chase Bank,
N.A., as administrative agent, and the other lenders party thereto (incorporated herein by reference to
Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated May 6, 2020, File No 1-12387).
 
 
 
Form of Cash-Settled Long-Term Performance Unit Award Agreement under the Tenneco Inc. 2006
Long- Term Incentive Plan (for the period January 1, 2020 - December 31, 2022). (incorporated by
reference to Exhibit 10.52 of the registrant’s Annual Report on Form 10-K filed March 2, 2020. File
No. 1-12387).
 
 
 
Form of Cash-Settled Restricted Stock Unit Award Agreement under the Tenneco Inc. 2006
Long-Term Incentive Plan (for awards commencing after February 18, 2020) (incorporated by
reference to Exhibit 10.53 of the registrant’s Annual Report on Form 10-K filed March 2, 2020. File
No. 1-12387).
 
 
 
Form of Restricted Stock Unit Award Agreement under the Tenneco Inc. 2006 Long-Term Incentive
Plan (for awards commencing after February 18, 2020) (incorporated by reference to Exhibit 10.15 of the registrant’s Annual Report on Form 10-K filed March 2, 2020. File No. 1-12387).
 
 
 
Cooperation Agreement, dated as of March 18, 2020, by and among Tenneco Inc., Protean Services
LLC, and Daniel A. Ninivaggi (incorporated by reference to Exhibit 10.1 of the registrant’s Current
Report on Form 8-K filed March 19, 2020. File No. 1-12387).
 
 
 
Separation Agreement and General Release, effective as of January 7, 2020, by and between Tenneco
Inc. and Roger J. Wood.
 
 
 
Offer Letter to Kenneth R. Trammell dated April 1, 2020
 
 
 
Restricted Stock Unit Inducement Grant Award Agreement, effective as of April 1, 2020, by and
between Tenneco Inc. and Kenneth R. Trammell.
 
 
 
Tenneco Automotive Operating Company Inc. Severance Benefit Plan and Summary Plan
Description, as amended and restated effective as of April 1, 2020.
 
 
 
List of Guarantor Subsidiaries.

Certification of Brian J. Kesseler under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
Certification of Kenneth R. Trammell under Section 302 of the Sarbanes-Oxley Act of 2002.



 
 
 
Certification of Brian J. Kesseler and Kenneth R. Trammell under Section 906 of the Sarbanes-Oxley Act of 2002.
*101.INS
Inline XBRL Instance Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
*101.SCH
Inline XBRL Taxonomy Extension Schema Document.
 
 
 
*101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
*101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
*101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 
 
 

65



*101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Tenneco Inc. has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
TENNECO INC.
 
 
 
By:
 
/S/    KENNETH R. TRAMMELL
 
 
Kenneth R. Trammell
 
 
Interim Executive Vice President and Chief Financial
Officer (on behalf of the Registrant)
 
 
                        
TENNECO INC.
 
 
By:
/s/    JOHN S. PATOUHAS
 
John S. Patouhas
 
Vice President and Chief Accounting Officer (principal accounting officer)
 
Dated: May 11, 2020

66