Edgar Filing: TENNECO INC

e10vq

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Quarterly Period Ended September 30, 2009
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12387

TENNECO INC.

(Exact name of registrant as specified in its charter)


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

500 North Field Drive, Lake Forest, Illinois		60045
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (847) 482-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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

Common Stock, par value $0.01 per share: 47,393,593 shares outstanding as of October 30, 2009.

TABLE OF CONTENTS


	Page

Part I — Financial Information
Item 1. Financial Statements (Unaudited)		4
Tenneco Inc. and Consolidated Subsidiaries —
Report of Independent Registered Public Accounting Firm		4
Condensed Consolidated Statements of Income (Loss)		5
Condensed Consolidated Balance Sheets		6
Condensed Consolidated Statements of Cash Flows		7
Condensed Consolidated Statements of Changes in Shareholders’ Equity		8
Condensed Consolidated Statements of Comprehensive Income (Loss)		9
Notes to Condensed Consolidated Financial Statements		11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
Item 3. Quantitative and Qualitative Disclosures About Market Risk		65
Item 4. Controls and Procedures		66
Part II — Other Information
Item 1. Legal Proceedings		*
Item 1A. Risk Factors		67
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		67
Item 3. Defaults Upon Senior Securities		*
Item 4. Submission of Matters to a Vote of Security Holders		*
Item 5. Other Information		*
Item 6. Exhibits		69
EX-10.1
EX-12
EX-15
EX-31.1
EX-31.2
EX-32.1


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

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

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, our prospects and business strategies. These forward-looking statements are included in various sections of this report, including the section entitled “Outlook” appearing in Item 2 of this report. The words “may,” “will,” “believe,” “should,” “could,” “plan,” “expect,” “anticipate,” “estimate,” and similar expressions (and variations thereof), identify these forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, these expectations may not prove to be correct. Because these forward-looking statements are also subject to risks and uncertainties, actual results may differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include:


	•	general economic, business and market conditions, including without limitation the severe financial difficulties facing a number of companies in the automotive industry as a result of the current global economic crisis, including the potential impact thereof on labor unrest, supply chain disruptions, weakness in demand and the collectibility of any accounts receivable due to us from such companies;

	•	our ability to access the capital or credit markets and the cost of capital, including the recent global financial and liquidity crisis, changes in interest rates, market perceptions of the sector in which we operate or ratings of our securities;

	•	the recent volatility in the credit markets, the losses which may be sustained by our lenders due to their lending and other financial relationships and the general instability of financial institutions due to a weakened economy;

	•	changes in consumer demand, prices and our ability to have our products included on top selling vehicles, such as the significant shift in consumer preferences from light trucks, which tend to be higher margin products for our customers and us, to other vehicles in light of higher fuel cost and the impact of the current global economic crisis, and other factors impacting the cyclicality of automotive production and sales of automobiles which include our products, and the potential negative impact on our revenues and margins from such products;

	•	changes in automotive manufacturers’ production rates and their actual and forecasted requirements for our products, such as the significant production cuts over the past year by automotive manufacturers in response to difficult economic conditions;

	•	the overall highly competitive nature of the automotive parts industry, and our resultant inability to realize the sales represented by our awarded book of business (which is based on anticipated pricing for the applicable program over its life, and is subject to increases or decreases due to changes in customer requirements, customer and consumer preferences, and the number of vehicles actually produced by customers);

	•	the loss of any of our large original equipment manufacturer (“OEM”) customers (on whom we depend for a substantial portion of our revenues), or the loss of market shares by these customers if we are unable to achieve increased sales to other OEMs;

	•	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 (such as the 2008 strike at American Axle, which disrupted our supply of products for significant General Motors platforms);

	•	increases in the costs of raw materials, including our ability to successfully reduce the impact of any such cost increases through materials substitutions, cost reduction initiatives, low cost country sourcing, and price recovery efforts with aftermarket and OE customers;

	•	the cyclical nature of the global vehicle industry, including the performance of the global aftermarket sector and the longer product lives of automobile parts;


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

	•	costs related to product warranties;

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

	•	operating hazards associated with our business;

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

	•	the negative impact of higher fuel prices and overall market weakness on discretionary purchases of aftermarket products by consumers;

	•	the cost and outcome of existing and any future legal proceedings;

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

	•	customer acceptance of new products;

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

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

	•	our ability to successfully integrate any acquisitions that we complete;

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

	•	changes in accounting estimates and assumptions, including changes based on additional information;

	•	potential legislation, regulatory changes and other governmental actions, including the ability to receive regulatory approvals and the timing of such approvals;

	•	the impact of changes in and compliance with laws and regulations, including environmental laws and regulations, environmental liabilities in excess of the amount reserved, the adoption of the current mandated timelines for worldwide emission regulation and any changes to the timing of the funding requirements for our pension and other postretirement benefit liabilities;

	•	the potential impairment in the carrying value of our long-lived assets and goodwill or our deferred tax assets;

	•	potential volatility in our effective tax rate;

	•	acts of war and/or terrorism, including, but not limited to, the current military action in Iraq and Afghanistan, the current situation in North Korea, and the continuing war on terrorism, as well as actions taken or to be taken by the United States and other governments as a result of further acts or threats of terrorism, and the impact of these acts on economic, financial and social conditions in the countries where we operate; and

	•	the timing and occurrence (or non-occurrence) of other transactions, events and circumstances which may be beyond our control.

The risks included here are not exhaustive. Refer to “Part I, Item 1A — Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2008, for further discussion regarding our exposure to risks. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor to assess the impact such risk factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

PART I.

FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Tenneco Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Tenneco Inc. and consolidated subsidiaries (the “Company”) as of September 30, 2009, and the related condensed consolidated statements of income (loss), cash flows, comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2009 and 2008, and of changes in shareholders’ equity for the nine-month periods ended September 30, 2009 and 2008. These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Tenneco Inc. and subsidiaries as of December 31, 2008, and the related consolidated statements of income (loss), cash flows, changes in shareholders’ equity, and comprehensive income (loss) and financial statement schedule for the year then ended prior to retrospective adjustment for the adoption of FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51, (not presented herein); and in our report dated February 27, 2009, we expressed an unqualified opinion on those consolidated financial statements and financial statement schedule. We also audited the adjustments described in Note 1 that were applied to retrospectively adjust the December 31, 2008 consolidated balance sheet of the Company (not presented herein). In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated balance sheet in deriving the accompanying retrospectively adjusted condensed consolidated balance sheet as of December 31, 2008.

Deloitte & Touche LLP

Chicago, IL

November 6, 2009

TENNECO INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)


	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	(Millions Except Share and Per Share Amounts)

Revenues
Net sales and operating revenues	$	1,254		$	1,497		$	3,327		$	4,708

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		1,043			1,298			2,783			4,007
Engineering, research, and development		27			29			72			99
Selling, general, and administrative		90			87			256			294
Depreciation and amortization of other intangibles		55			56			162			168

		1,215			1,470			3,273			4,568

Other income (expense)
Loss on sale of receivables		(2	)		(3	)		(6	)		(7	)
Other income (expense)		(2	)		4			(9	)		9

		(4	)		1			(15	)		2

Income before interest expense, income taxes, and noncontrolling interests		35			28			39			142
Interest expense (net of interest capitalized of $1 million and $2 million for the three months ended September 30, 2009 and 2008, respectively and $3 million and $5 million for the nine months ended September 30, 2009 and 2008, respectively)		35			30			101			88
Income tax expense		4			131			18			163

Net income (loss)		(4	)		(133	)		(80	)		(109	)

Less: Net income attributable to noncontrolling interests		4			3			10			8

Net income (loss) attributable to Tenneco Inc.	$	(8	)	$	(136	)	$	(90	)	$	(117	)

Earnings (loss) per share
Weighted average shares of common stock outstanding —
Basic		46,742,403			46,441,954			46,694,885			46,359,051
Diluted		46,742,403			46,441,954			46,694,885			46,359,051
Basic earnings (loss) per share of common stock	$	(0.17	)	$	(2.92	)	$	(1.93	)	$	(2.53	)
Diluted earnings (loss) per share of common stock	$	(0.17	)	$	(2.92	)	$	(1.93	)	$	(2.53	)

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

TENNECO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	September 30,			December 31,
	2009			2008
	(Millions)

ASSETS
Current assets:
Cash and cash equivalents	$	137		$	126
Receivables —
Customer notes and accounts, net		669			529
Other		49			45
Inventories —
Finished goods		173			211
Work in process		136			143
Raw materials		104			114
Materials and supplies		43			45
Deferred income taxes		28			18
Prepayments and other		146			107

Total current assets		1,485			1,338

Other assets:
Long-term receivables, net		8			11
Goodwill		89			95
Intangibles, net		30			26
Deferred income taxes		85			88
Other		116			125

		328			345

Plant, property, and equipment, at cost		3,153			2,960
Less — Accumulated depreciation and amortization		(2,027	)		(1,815	)

		1,126			1,145

Total assets	$	2,939		$	2,828


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term debt)	$	73		$	49
Trade payables		822			790
Accrued taxes		47			30
Accrued interest		31			22
Accrued liabilities		233			201
Other		46			65

Total current liabilities		1,252			1,157

Long-term debt		1,395			1,402

Deferred income taxes		62			51

Postretirement benefits		366			377

Deferred credits and other liabilities		77			61

Commitments and contingencies
Total liabilities		3,152			3,048

Redeemable noncontrolling interests		5			7

Tenneco Inc. Shareholders’ equity:
Common stock		—			—
Premium on common stock and other capital surplus		2,816			2,809
Accumulated other comprehensive loss		(228	)		(318	)
Retained earnings (accumulated deficit)		(2,592	)		(2,502	)

		(4	)		(11	)
Less — Shares held as treasury stock, at cost		240			240

Total Tenneco Inc. shareholders’ equity		(244	)		(251	)

Noncontrolling interests		26			24

Total equity		(218	)		(227	)

Total liabilities, redeemable noncontrolling interests and equity	$	2,939		$	2,828

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

TENNECO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
				(Millions)

Operating Activities
Net income (loss)		$ (4	)		$ (133	)	$	(80	)		$ (109	)
Adjustments to reconcile net income (loss) to cash provided (used) by operating activities —
Depreciation and amortization of other intangibles		55			56			162			168
Deferred income taxes		(7	)		102			(10	)		84
Stock-based compensation		1			2			5			7
Loss on sale of assets		2			2			6			7
Changes in components of working capital —
(Increase) decrease in receivables		(67	)		34			(124	)		(114	)
(Increase) decrease in inventories		9			(4	)		76			(51	)
(Increase) decrease in prepayments and other current assets		(30	)		(3	)		(35	)		(42	)
Increase (decrease) in payables		92			(9	)		56			41
Increase (decrease) in accrued taxes		1			(17	)		20			8
Increase (decrease) in accrued interest		8			9			9			8
Increase (decrease) in other current liabilities		13			(12	)		8			4
Changes in long-term assets		2			(3	)		8			6
Changes in long-term liabilities		3			19			4			24
Other		(1	)		(3	)		3			(7	)

Net cash provided by operating activities		77			40			108			34

Investing Activities
Proceeds from the sale of assets		1			—			3			2
Cash payments for plant, property, and equipment		(20	)		(65	)		(86	)		(192	)
Cash payments for software related intangible assets		(1	)		(1	)		(5	)		(9	)
Acquisition of business, net of cash acquired		—			3			1			(16	)
Investments and other		1			—			1			—

Net cash used by investing activities		(19	)		(63	)		(86	)		(215	)

Financing Activities
Issuance of common shares		—			—			—			1
Issuance of long-term debt		4			—			6			—
Debt issuance cost of long-term debt		—			—			(8	)		—
Retirement of long-term debt		(7	)		(1	)		(15	)		(4	)
Increase (decrease) in bank overdrafts		6			(18	)		(18	)		(18	)
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt		(51	)		27			24			148
Distributions to noncontrolling interest partners		—			—			(10	)		(4	)

Net cash provided (used) by financing activities		(48	)		8			(21	)		123

Effect of foreign exchange rate changes on cash and cash equivalents		16			(22	)		10			(3	)

Increase (decrease) in cash and cash equivalents		26			(37	)		11			(61	)
Cash and cash equivalents, July 1 and January 1, respectively		111			164			126			188

Cash and cash equivalents, September 30 (Note)		$ 137			$ 127		$	137			$ 127

Supplemental Cash Flow Information
Cash paid during the period for interest		$ 26			$ 22		$	91			$ 83
Cash paid during the period for income taxes (net of refunds)		20			26			32			50
Non-cash Investing and Financing Activities
Period ended balance of payable for plant, property, and equipment		$ 13			$ 24		$	13			$ 24
Assumption of debt from business acquisition		—			$ 10			—			$ 10


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

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statements of cash flows.

TENNECO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)


	Nine Months Ended September 30,
	2009					2008
	Shares		Amount			Shares		Amount
	(Millions Except Share Amounts)

Tenneco Inc. Shareholders:
Common Stock
Balance January 1		48,314,490	$	—			47,892,532	$	—
Issued pursuant to benefit plans		287,704		—			182,322		—
Stock options exercised		131,904		—			180,176		—

Balance September 30		48,734,098		—			48,255,030		—

Premium on Common Stock and Other Capital Surplus
Balance January 1				2,809					2,800
Premium on common stock issued pursuant to benefit plans				7					7

Balance September 30				2,816					2,807

Accumulated Other Comprehensive Loss
Balance January 1				(318	)				(73	)
Other comprehensive income (loss)				90					(68	)

Balance September 30				(228	)				(141	)

Retained Earnings (Accumulated Deficit)
Balance January 1				(2,502	)				(2,087	)
Net income (loss) attributable to Tenneco Inc.				(90	)				(117	)

Balance September 30				(2,592	)				(2,204	)

Less — Common Stock Held as Treasury Stock, at Cost
Balance January 1 and September 30		1,294,692		240			1,294,692		240

Total Tenneco Inc. shareholders’ equity			$	(244	)			$	222

Noncontrolling Interests:
Balance January 1			$	24				$	25
Net income attributable to noncontrolling interests				7					5
Dividend declared				(5	)				(3	)

Balance September 30			$	26				$	27

Total equity			$	(218	)			$	249

The accompanying notes to condensed consolidated financial statements are an integral part

of these condensed consolidated statements of changes in shareholders’ equity.

TENNECO INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)


	Three Months Ended September 30, 2009
	Tenneco Inc.						Noncontrolling Interests				Total
	Accumulated						Accumulated				Accumulated
	Other						Other				Other
	Comprehensive			Comprehensive			Comprehensive		Comprehensive		Comprehensive			Comprehensive
	Income			Income			Income		Income		Income			Income
	(Loss)			(Loss)			(Loss)		(Loss)		(Loss)			(Loss)
							(Millions)

Net Income (Loss)					$ (8	)				$ 4					$ (4	)

Accumulated Other Comprehensive Income (Loss)
Cumulative Translation Adjustment
Balance July 1		$ (3	)					$ —				$ (3	)
Translation of foreign currency statements		47			47			—		—		47			47

Balance September 30		44						—				44

Additional Liability for Pension Benefits
Balance July 1		(276	)					—				(276	)

Additional liability for pension benefits, net of tax of $1 million		4			4							4			4

Balance September 30		(272	)									(272	)

Balance September 30		$ (228	)					$ —				$ (228	)

Other Comprehensive Income (Loss)					51					—					51

Comprehensive Income (Loss)					$ 43					$ 4					$ 47


	Three Months Ended September 30, 2008
	Tenneco Inc.						Noncontrolling Interests				Total
	Accumulated						Accumulated				Accumulated
	Other						Other				Other
	Comprehensive			Comprehensive			Comprehensive		Comprehensive		Comprehensive			Comprehensive
	Income			Income			Income		Income		Income			Income
	(Loss)			(Loss)			(Loss)		(Loss)		(Loss)			(Loss)
							(Millions)

Net Income (Loss)					$ (136	)			$	3					$ (133	)

Accumulated Other Comprehensive Income (Loss)
Cumulative Translation Adjustment
Balance July 1		$ 151					$	—				$ 151
Translation of foreign currency statements		(133	)		(133	)		—		—		(133	)		(133	)

Balance September 30		18						—				18

Additional Liability for Pension Benefits
Balance July 1		(158	)					—				(158	)

Additional liability for pension benefits, net of tax of $4 million		(1	)		(1	)						(1	)		(1	)

Balance September 30		(159	)									(159	)

Balance September 30		$ (141	)				$	—				$ (141	)

Other Comprehensive Income (Loss)					(134	)				—					(134	)

Comprehensive Income (Loss)					$ (270	)			$	3					$ (267	)

TENNECO INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)


	Nine Months Ended September 30, 2009
	Tenneco Inc.						Noncontrolling Interests				Total
	Accumulated						Accumulated				Accumulated
	Other						Other				Other
	Comprehensive			Comprehensive			Comprehensive		Comprehensive		Comprehensive			Comprehensive
	Income			Income			Income		Income		Income			Income
	(Loss)			(Loss)			(Loss)		(Loss)		(Loss)			(Loss)
							(Millions)

Net Income (Loss)				$	(90	)			$	10				$	(80	)

Accumulated Other Comprehensive Income (Loss)
Cumulative Translation Adjustment
Balance January 1		$ (42	)				$	—				$ (42	)
Translation of foreign currency statements		86			86			—		—		86			86

Balance September 30		44						—				44

Additional Liability for Pension Benefits
Balance January 1		(276	)					—				(276	)

Additional liability for pension benefits, net of tax of $1 million		4			4							4			4

Balance September 30		(272	)									(272	)

Balance September 30		$ (228	)				$	—				$ (228	)

Other Comprehensive Income (Loss)					90					—					90

Comprehensive Income (Loss)				$	—				$	10				$	10


	Nine Months Ended September 30, 2008
	Tenneco Inc.						Noncontrolling Interests				Total
	Accumulated						Accumulated				Accumulated
	Other						Other				Other
	Comprehensive			Comprehensive			Comprehensive		Comprehensive		Comprehensive			Comprehensive
	Income			Income			Income		Income		Income			Income
	(Loss)			(Loss)			(Loss)		(Loss)		(Loss)			(Loss)
							(Millions)

Net Income (Loss)				$	(117	)			$	8				$	(109	)

Accumulated Other Comprehensive Income (Loss)
Cumulative Translation Adjustment
Balance January 1		$ 85					$	—				$ 85
Translation of foreign currency statements		(67	)		(67	)		—		—		(67	)		(67	)

Balance September 30		18						—				18

Additional Liability for Pension Benefits
Balance January 1		(158	)					—				(158	)

Additional liability for pension benefits, net of tax of $4 million		(1	)		(1	)						(1	)		(1	)

Balance September 30		(159	)									(159	)

Balance September 30		$ (141	)				$	—				$ (141	)

Other Comprehensive Income (Loss)					(68	)				—					(68	)

Comprehensive Income (Loss)				$	(185	)			$	8				$	(177	)

The accompanying notes to condensed consolidated financial statements are an integral part

of these condensed consolidated statements of comprehensive income (loss).

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) As you read the accompanying financial statements you should also read our Annual Report on Form 10-K for the year ended December 31, 2008.

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

Our condensed consolidated financial statements include all majority-owned subsidiaries. We carry investments in 20 percent to 50 percent owned companies as an equity method investment, at cost plus equity in undistributed earnings since the date of acquisition and cumulative translation adjustments. We have eliminated all intercompany transactions. We have evaluated all subsequent events through November 6, 2009, the date the financial statements were issued.

Certain reclassifications have been made to the prior period cash flow statements to conform to the current year presentation. We have reclassified several amounts within the operating section of the cash flow statement, none of which were significant, to conform to the current year presentation.

On January 1, 2009, we adopted new accounting guidance on the presentation and disclosure of noncontrolling interests in consolidated financial statements, which required us to reclassify retrospectively for all periods presented, noncontrolling ownership interests (formerly called minority interests) from the mezzanine section of the balance sheet between liabilities and equity to the equity section of the balance sheet, and to change our presentation of net income (loss) in the condensed consolidated statements of cash flows to include the portion of net income (loss) attributable to noncontrolling ownership interests. We have noncontrolling interests in two joint ventures with redemption features that could require us to purchase the noncontrolling interest at fair value in the event of a change in control of Tenneco Inc. Additionally, a noncontrolling interest in a third joint venture requires us to purchase the noncontrolling interest at fair value in the event of default or under certain other circumstances. We do not believe that it is probable that the redemption features in any of these joint venture agreements will be triggered. However, the redemption of these shares is not solely within our control. Accordingly, the related noncontrolling interests are presented as “Redeemable noncontrolling interests” in the mezzanine section of our condensed consolidated balance sheets. We have also expanded our financial statement presentation and disclosure of noncontrolling ownership interests on our condensed consolidated statements of income (loss), condensed consolidated statements of comprehensive income (loss) and condensed consolidated statements of changes in shareholders’ equity in accordance with these new disclosure requirements.

(2) We adopted new accounting guidance on fair value measurements and disclosures relating to our financial assets and liabilities which are measured on a recurring basis on January 1, 2008, and on January 1, 2009, for those financial assets and liabilities which are measured on non-recurring basis. The adoption of the new fair value accounting guidance did not have a material impact on our fair value measurements. The new guidance defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal most advantageous market for the asset or liability in an orderly transaction between market participants. A fair value hierarchy has been defined, which 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.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The fair value of our recurring financial assets and liabilities at September 30, 2009 are as follows:

Level 1

Level 2

Level 3

(Millions)

Financial Assets:

Foreign exchange forward contracts

n/a

Foreign exchange forward contracts — We use foreign exchange forward purchase and sales contracts with terms of less than one year to hedge our exposure to changes in foreign currency exchange rates. Our primary exposure to changes in foreign currency rates results from intercompany loans made between affiliates to minimize the need for borrowings from third parties. Additionally, we enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. We do not enter into derivative financial instruments for speculative purposes. The fair value of our foreign exchange forward contracts is based on a model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics. We record the change in fair value of these foreign exchange forward contracts as part of currency gains (losses) within cost of sales in the condensed consolidated statements of income (loss). The fair value of foreign exchange forward contracts are recorded in prepayments and other current assets or other current liabilities in the condensed consolidated balance sheet. The fair value of our foreign exchange forward contracts, presented on a gross basis by derivative contract at September 30, 2009 was as follows:


	Fair Value of Derivative Instruments
	Asset		Liability
	Derivatives		Derivatives		Total

Foreign exchange forward contracts	$	2	$	1	$	1

The following table summarizes by major currency the notional amounts, weighted-average settlement rates, and fair value for foreign currency forward purchase and sale contracts as of September 30, 2009:


		Notional Amount			Weighted Average		Fair Value in
		in Foreign Currency			Settlement Rates		U.S. Dollars
		(Millions Except Settlement Rates)

Australian dollars	—Purchase		51			0.882	$	45
	—Sell		(9	)		0.882		(8	)
British pounds	—Purchase		33			1.598		53
	—Sell		(32	)		1.598		(51	)
European euro	—Purchase		—			—		—
	—Sell		(20	)		1.465		(29	)
South African rand	—Purchase		429			0.133		57
	—Sell		(89	)		0.133		(12	)
U.S. dollars	—Purchase		19			1.002		19
	—Sell		(85	)		1.001		(85	)
Other	—Purchase		789			0.017		13
	—Sell		(1	)		0.934		(1	)

							$	1

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

(3) The carrying and estimated fair values of our financial instruments by class at September 30, 2009 were as follows:


	Carrying Amount			Fair Value
	(Millions)
	Asset (Liabilities)

Long-term debt (including current maturities)	$	(1,400	)	$	(1,364	)
Instruments with off-balance sheet risk:
Foreign exchange forward contracts		1			1

Asset and Liability Instruments — The fair value of cash and cash equivalents, short and long-term receivables, accounts payable, and short-term debt was considered to be the same as or was not determined to be materially different from the carrying amount.

Long-term Debt — The fair value of our public fixed rate senior secured, senior and senior subordinated notes is based on quoted market prices. The fair value of our private borrowings under our senior credit facility and other long-term debt instruments is based on the market value of debt with similar maturities, interest rates and risk characteristics.

(4) Our financing arrangements are primarily provided by a committed senior secured financing arrangement with a syndicate of banks and other financial institutions. The arrangement is secured by substantially all our domestic assets and pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries, as well as guarantees by our material domestic subsidiaries. As of September 30, 2009, the senior credit facility consisted of a five-year, $139 million term loan A maturing in March 2012, a five-year, $550 million revolving credit facility maturing in March 2012, and a seven-year $130 million tranche B-1 letter of credit/revolving loan facility maturing in March 2014. Our outstanding debt also includes $245 million of 101/4 percent senior secured notes due July 15, 2013, $250 million of 81/8 percent senior notes due November 15, 2015, and $500 million of 85/8 percent senior subordinated notes due November 15, 2014. At September 30, 2009, we had unused borrowing capacity of $390 million under our $680 million revolving credit facility with $242 million in outstanding borrowings and $48 million in letters of credit.

The term loan A facility is payable in twelve consecutive quarterly installments, commencing June 30, 2009, as follows: $6 million due each of June 30, September 30, December 31, 2009 and March 31, 2010, $15 million due each of June 30, September 30, December 31, 2010 and March 31, 2011, and $17 million due each of June 30, September 30, December 31, 2011 and March 16, 2012. Over the next twelve months we plan to repay $41 million of the senior term loan due 2012 by increasing our revolver borrowings which are classified as long-term debt. Accordingly, we have classified the $41 million repayment as long-term debt. The revolving credit facility requires that any amounts drawn be repaid by March 2012. Prior to that date, funds may be borrowed, repaid and re-borrowed under the revolving credit facility without premium or penalty. Letters of credit may be issued under the revolving credit facility.

The tranche B-1 letter of credit/revolving loan facility requires repayment by March 2014. We can borrow revolving loans and issue letters of credit under the $130 million tranche B-1 letter of credit/revolving loan facility. The tranche B-1 letter of credit/revolving loan facility is reflected as debt on our balance sheet only if we borrow money under this facility or if we use the facility to make payments for letters of credit. There is no additional cost to us for issuing letters of credit under the tranche B-1 letter of credit/revolving loan facility, however, outstanding letters of credit reduce our availability to borrow revolving loans under this portion of the facility. We pay the tranche B-1 lenders interest equal to LIBOR plus a margin, which is offset by the return on the funds deposited with the administrative agent by the lenders which earn interest at an annual rate approximately equal to LIBOR less 25 basis points. Outstanding revolving loans reduce the funds on deposit with the administrative agent which in turn reduce the earnings of those deposits.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

On February 23, 2009, in light of the challenging macroeconomic environment and auto production outlook, we amended our senior credit facility to increase the allowable consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA as defined in the senior credit facility agreement) and reduce the allowable consolidated interest coverage ratio (consolidated EBITDA divided by consolidated interest expense as defined in the senior credit facility agreement). The financial ratios required under the senior credit facility for the remainder of 2009 and beyond are set forth below. As of September 30, 2009, we were in compliance with all the financial covenants and operational restrictions of the senior credit facility.


			Interest
	Leverage		Coverage
Period Ending	Ratio		Ratio

December 31, 2009		6.60		1.60
March 31, 2010		5.50		2.00
June 30, 2010		5.00		2.25
September 30, 2010		4.75		2.30
December 31, 2010		4.50		2.35
March 31, 2011		4.00		2.55
June 30, 2011		3.75		2.55
September 30, 2011		3.50		2.55
December 31, 2011		3.50		2.55
Each quarter thereafter		3.50		2.75

Beginning February 23, 2009, and following each fiscal quarter thereafter, the margin we pay on borrowings under our term loan A and revolving credit facility incurred interest at an annual rate equal to, at our option, either (i) the London Interbank Offered Rate plus a margin of 550 basis points, or (ii) a rate consisting of the greater of (a) the JPMorgan Chase prime rate plus a margin of 450 basis points, and (b) the Federal Funds rate plus 50 basis points plus a margin of 450 basis points. The margin we pay on these borrowings will be reduced by 50 basis points following each fiscal quarter for which our consolidated net leverage ratio is less than 5.0, and will be further reduced by an additional 50 basis points following each fiscal quarter for which the consolidated net leverage ratio is less than 4.0.

Also beginning February 23, 2009, and following each fiscal quarter thereafter, the margin we pay on borrowings under our tranche B-1 facility incurred interest at an annual rate equal to, at our option, either (i) the London Interbank Offered Rate plus a margin of 550 basis points, or (ii) a rate consisting of the greater of (a) the JPMorgan Chase prime rate plus a margin of 450 basis points, and (b) the Federal Funds rate plus 50 basis points plus a margin of 450 basis points. The margin we pay on these borrowings will be reduced by 50 basis points following each fiscal quarter for which our consolidated net leverage ratio is less than 5.0.

The February 23, 2009, amendment to our senior credit facility also placed further restrictions on our operations including limitations on: (i) debt incurrence, (ii) incremental loan extensions, (iii) liens, (iv) restricted payments, (v) optional prepayments of junior debt, (vi) investments, (vii) acquisitions, and (viii) mandatory prepayments. The definition of EBIDTA was amended to allow for $40 million of cash restructuring charges taken after the date of the amendment and $4 million annually in aftermarket changeover costs. We agreed to pay each consenting lender a fee. The lender fee plus amendment costs were approximately $8 million.

On December 24, 2008, we amended our senior secured credit facility to increase the margin we pay on the borrowings from 1.50 percent to 3.00 percent on revolver loans, term loan A and tranche B-1 loans, from 0.50 percent to 2.00 percent on prime-based loans, from 1.00 percent to 2.50 percent on federal funds based loans and from 0.35 percent to 0.50 percent on the commitment fee associated with the facility. In addition, we agreed to pay each consenting lender a fee. The lender fee plus amendment costs were approximately $3 million.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

In December 2008, we terminated the fixed-to-floating interest rate swaps we entered into in April 2004. The change in the market value of these swaps was recorded as part of interest expense with an offset to other long-term assets or liabilities.

(5) We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. U.S. GAAP requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. 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.

Valuation allowances have been established for deferred tax assets based on a “more likely than not” threshold. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:


	•	Future reversals of existing taxable temporary differences;

	•	Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards; and

	•	Tax-planning strategies.

In 2008, we recorded tax expense of $289 million primarily related to establishing a valuation allowance against our net deferred tax assets in the U.S. During the first nine months of 2009, we recorded an additional valuation allowance of $25 million primarily related to U.S. tax benefits recorded on first nine months 2009 U.S. losses. In the U.S., we utilize the results from 2008 and a projection of our results for 2009 as a measure of the cumulative losses in recent years. Accounting standards do not permit us to give any consideration to a likely economic recovery in the U.S. or the recent new business we have won particularly in the commercial vehicle segment in evaluating the requirement to record a valuation allowance. Consequently, we concluded that our ability to fully utilize our NOLs was limited due to projecting the current negative economic environment into the future and the impact of the current negative operating environment on our tax planning strategies. As a result of tax planning strategies which have not yet been implemented but which we plan to implement and which do not depend upon generating future taxable income, we continue to carry deferred tax assets in the U.S. of $70 million relating to the expected utilization of those NOLs. The federal NOL expires beginning in 2020 through 2028. The state NOLs expire in various years through 2028.

If our operating performance improves on a sustained basis, our conclusion regarding the need for a valuation allowance could change, resulting in the reversal of some or all of the valuation allowance in the future. The charge to establish the U.S. valuation allowance also includes items related to the losses allocable to certain state jurisdictions where it was determined that tax attributes related to those jurisdictions were potentially not realizable.

We are required to record a valuation allowance against deferred tax assets generated by taxable losses in each period in the U.S. as well as in other foreign countries. Our future provision for income taxes will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated. This will cause variability in our effective tax rate.

(6) We have an agreement to sell an interest in some of our U.S. trade accounts receivable to a third party. Receivables become eligible for the program on a daily basis, at which time the receivables are sold to the third party without recourse, net of a discount, through a wholly-owned subsidiary. Under this agreement, as well as individual agreements with third parties in Europe, we have sold accounts receivable of $208 million and $179 million at September 30, 2009 and December 31, 2008, respectively. We recognized a loss of $2 million and $3 million for the three month periods ended September 30, 2009 and 2008, respectively, and $6 million and

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

$7 million for the nine month periods ended September 30, 2009 and 2008, respectively, on these sales of trade accounts, representing the discount from book values at which these receivables were sold to the third party. The discount rate varies based on funding cost incurred by the third party, which has averaged approximately five percent during 2009. In the U.S. securitization program, we retain ownership of the remaining interest in the pool of receivables not sold to the third party. The retained interest represents a credit enhancement for the program. We record the retained interest based upon the amount we expect to collect from our customers, which approximates book value.

In January 2009, the U.S. securitization program was amended and extended to March 2, 2009 at a facility size of $120 million. These revisions had the affect of reducing the amount of receivables sold by approximately $10 million to $30 million compared to the terms of the previous program. On February 23, 2009, this program was extended for 364 days to February 22, 2010 at a facility size of $100 million. In April 2009, we further amended the U.S. securitization program by removing receivables related to General Motors Corporation and Chrysler LLC from the program. The program was further amended in June 2009 to include receivables from Chrysler Group LLC and in July 2009 to include receivables from General Motors Company.

Removing General Motors Corporation and Chrysler LLC from our existing securitization program allowed us to sell all or a portion of those receivables into the supplier program established by the United States Treasury Department to support suppliers by guaranteeing receivables of certain domestic OEMs. Those receivables sold into the program were paid in cash on the original due date of the accounts receivable. We elected to end our participation in the U.S. Treasury program in July.

(7) Over the past several years, we have adopted plans to restructure portions of our operations. These plans were approved by our Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. Our Board of Directors approved a restructuring project in 2001, known as Project Genesis, which was designed to lower our fixed costs, relocate capacity, reduce our work force, improve efficiency and utilization, and better optimize our global footprint. We have subsequently engaged in various other restructuring projects related to Project Genesis. We incurred $40 million in restructuring and related costs during 2008, of which $17 million was recorded in cost of sales and $23 million was recorded in selling, general, administrative and engineering expense. In the third quarter of 2009, we incurred $11 million in restructuring and related costs, all of which was recorded in cost of sales. In the first nine months of 2009, we incurred $17 million in restructuring and related costs, of which $14 million was recorded in cost of sales, $1 million was recorded in selling, general, administrative and engineering expense and $2 million was recorded in depreciation and amortization expense.

Under the terms of our amended and restated senior credit agreement that took effect on February 23, 2009, we are allowed to exclude $40 million of cash charges and expenses, before taxes, related to cost reduction initiatives incurred after February 23, 2009 from the calculation of the financial covenant ratios required under our senior credit facility. As of September 30, 2009, we have excluded $15 million in allowable charges relating to restructuring initiatives against the $40 million available under the terms of the February 2009 amended and restated senior credit facility.

On September 22, 2009, we announced that we will be closing our original equipment ride control plant in Cozad, Nebraska as we continue to restructure our operations. We had originally announced plans to close one OE ride control plant in the United States as part of our global restructuring announcement in October of 2008, but postponed this action in January 2009 in order to preserve cash during the global economic crisis. We expect the elimination of 500 positions at the Cozad plant and expect to record up to $20 million in restructuring and related expenses, of which approximately $14 million represents cash expenditures, with all expenses recorded by third quarter of 2010. We plan to hire at other facilities as we move production from Cozad to those facilities, resulting in a net decrease of approximately 60 positions. During the third quarter of 2009 we did record $11 million of restructuring and related expenses related to this initiative.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

We still expect, as originally announced in October 2008 and revised in January 2009, the elimination of 1,100 positions and estimate that we will record up to $31 million in charges, of which approximately $25 million represents cash expenditures, in connection with the restructuring program announced in the fourth quarter of 2008. We recorded $24 million of these charges in 2008, $6 million in the first nine months of 2009 and expect to record the remaining $1 million during the rest of 2009.

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

As of September 30, 2009, we have the obligation to remediate or contribute towards the remediation of certain sites, including two existing Superfund sites. At September 30, our estimated share of environmental remediation costs at these sites was approximately $17 million. Based on information known to us, we have established reserves that we believe are adequate for these costs. Although we believe these estimates of remediation costs are reasonable and are based on the latest available information, the costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute towards the remediation costs. In addition, certain environmental statutes provide that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at these sites has been considered, where appropriate, in our determination of our estimated liability.

The $17 million noted above includes $5 million of estimated environmental remediation costs that result from the bankruptcy of Mark IV Industries. Prior to our 1996 acquisition of The Pullman Company, Pullman had sold certain assets to Mark IV. As partial consideration for the purchase of these assets, Mark IV agreed to assume Pullman’s and its subsidiaries’ historical obligations to contribute to the environmental remediation of certain sites. Mark IV recently filed a petition for insolvency under Chapter 11 of the United States Bankruptcy Code and notified Pullman that it no longer intends to continue to contribute toward the remediation of those sites. We are conducting a thorough analysis and review of these matters and it is possible that our estimate may change as additional information becomes available to us.

We do not believe that any potential costs associated with our current status as a potentially responsible party in the Superfund sites, or as a liable party at the other locations referenced herein, will be material to our consolidated results of operations, financial position or cash flows.

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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Argentine subsidiaries is currently defending against a criminal complaint alleging the failure to comply with laws requiring the proceeds of export transactions to be collected, reported and/or converted to local currency within specified time periods. As another example, we have recently become subject to an audit in 11 states of our practices with respect to the payment of unclaimed property to those states. We have practices in place designed to ensure that we pay unclaimed property as required. We are in the early stages of this audit, which could cover over 20 years. We vigorously defend ourselves against all of these claims. In future periods, we could be subjected to cash costs or non-cash charges to earnings if any of these matters is resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our future consolidated financial position, results of operations or cash flows.

In addition, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. A small percentage of claims have been asserted by railroad workers alleging exposure to asbestos products in railroad cars manufactured by The Pullman Company, one of our subsidiaries. Nearly all of the claims are related to alleged exposure to asbestos in our automotive emission control products. Only a small percentage of these claimants allege that they were automobile mechanics and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other evidence, it is unlikely that mechanics were exposed to asbestos by our former muffler products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number of each in some cases exceeding 100 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. As major asbestos manufacturers continue to go out of business or file for bankruptcy, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these matters is resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolution. During the first nine months of 2009, dismissals were initiated on behalf of 3 plaintiffs and are in process; we were dismissed from an additional 737 cases. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future consolidated financial condition, results of operations or cash flows.

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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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


	Nine Months
	Ended September 30,
	2009			2008
	(Millions)

Beginning Balance January 1,	$	27		$	25
Accruals related to product warranties		10			13
Reductions for payments made		(9	)		(10	)

Ending Balance September 30,	$	28		$	28

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


	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	(Millions Except Share and Per Share Amounts)

Basic earnings (loss) per share —
Net income (loss) attributable to Tenneco Inc.	$	(8	)	$	(136	)	$	(90	)	$	(117	)

Average shares of common stock outstanding		46,742,403			46,441,954			46,694,885			46,359,051

Earnings (loss) per average share of common stock	$	(0.17	)	$	(2.92	)	$	(1.93	)	$	(2.53	)

Diluted earnings (loss) per share —
Net income (loss) attributable to Tenneco Inc.	$	(8	)	$	(136	)	$	(90	)	$	(117	)

Average shares of common stock outstanding		46,742,403			46,441,954			46,694,885			46,359,051
Effect of dilutive securities:
Restricted stock		—			—			—			—
Stock options		—			—			—			—

Average shares of common stock outstanding including dilutive securities		46,742,403			46,441,954			46,694,885			46,359,051

Earnings (loss) per average share of common stock	$	(0.17	)	$	(2.92	)	$	(1.93	)	$	(2.53	)

As a result of the net loss for the three months and nine months ended September 30, 2009 and 2008, the calculation of diluted loss per share does not include the dilutive effect of 1,342,994 and 879,990 stock options for the three month periods ended September 30, 2009 and 2008, respectively, and 907,178 and 1,131,327 stock options for the nine month periods ended September 30, 2009 and 2008, respectively. The calculation also does not include the dilutive effect of 381,159 shares of restricted stock for the three month period ended September 30, 2009 and 39,992 shares of restricted stock for the nine month period ended September 30, 2008. In addition, for the three month periods ended September 30, 2009 and 2008, options to purchase 2,336,927 and 2,317,909 shares of common stock and 264,354 and 492,923 shares of restricted stock were outstanding, respectively, but not included in the computation of diluted earnings (loss) per share because the options were anti-dilutive. For the nine month periods ended September 30, 2009 and 2008, options to purchase 2,772,743 and 2,066,572 shares of common stock and 645,513 and 452,931 shares of restricted stock were outstanding, respectively, but not included in the computation of diluted earnings (loss) per share as they were anti-dilutive.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

(10) Equity Plans — Tenneco has granted a variety of awards, including common stock, restricted stock, performance units, stock appreciation rights (“SARs”), and stock options to our directors, officers, and employees.

On May 13, 2009, our stockholders approved an amendment to the Tenneco Inc. 2006 Long-Term Incentive Plan to increase the shares of common stock available thereunder by 2.3 million. Each share underlying an award generally counts as one share against the total plan availability. Each share underlying a full value award (e.g. restricted stock), however, counts as 1.25 shares against the total plan availability.

Accounting Methods — The impact of recognizing compensation expense related to nonqualified stock options is contained in the table below.


	Nine Months Ended September 30,
	2009			2008
	(Millions)

Selling, general and administrative	$	2		$	3

Loss before interest expense, income taxes and noncontrolling interests		(2	)		(3	)
Income tax benefit		—			—

Net loss	$	(2	)	$	(3	)

Decrease in basic earnings per share	$	(0.05	)	$	(0.07	)
Decrease in diluted earnings per share	$	(0.05	)	$	(0.07	)

We immediately expense stock options awarded to employees who are eligible to retire. When employees become eligible to retire during the vesting period, we recognize the remaining expense associated with their stock options.

As of September 30, 2009, there was approximately $3 million of unrecognized compensation costs related to these stock-based awards that we expect to recognize over a weighted average period of 1.2 years.

Compensation expense for restricted stock, long-term performance units and SARs, was approximately $4 million for the nine months ended September 30, 2009 and 2008, respectively, and was recorded in selling, general, and administrative expense on the statement of income (loss).

Cash received from stock option exercises during the nine months ended September 30, 2009 and 2008 was $1 million in each period, respectively. Stock option exercises during the first nine months of 2009 and 2008 would have generated an excess tax benefit of $1 million in each period, respectively. We did not record the excess tax benefit as we have federal and state net operating losses which are not currently being utilized.

Assumptions — We calculated the fair values of stock option awards using the Black-Scholes option pricing model with the weighted average assumptions listed below. The fair value of share-based awards is determined at the time the awards are granted which is generally in January of each year, and requires judgment in estimating employee and market behavior. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


	Nine Months
	Ended September 30,
	2009			2008

Stock Options Granted
Weighted average grant date fair value, per share	$	1.31		$	8.03
Weighted average assumptions used:
Expected volatility		82.6	%		37.7	%
Expected lives		4.5			4.1
Risk-free interest rates		1.48	%		2.79	%
Dividends yields		0.00	%		0.00	%

Expected lives of options are based upon the historical and expected time to post-vesting forfeiture and exercise. We believe this method is the best estimate of the future exercise patterns currently available.

The risk-free interest rates are based upon the Constant Maturity Rates provided by the U.S. Treasury. For our valuations, we used the continuous rate with a term equal to the expected life of the options.

Stock Options — The following table reflects the status and activity for all options to purchase common stock for the period indicated:


	Nine Months Ended September 30, 2009
						Weighted Avg.
	Shares			Weighted Avg.		Remaining		Aggregate
	Under			Exercise		Life in		Intrinsic
	Option			Prices		Years		Value
								(Millions)

Outstanding Stock Options
Outstanding, January 1, 2009		3,149,376		$	15.16		4.1	$	1
Granted		697,600			1.99
Cancelled		—			—
Forfeited		(12,994	)		19.41
Exercised		—			—			$	—

Outstanding, March 31, 2009		3,833,982		$	12.75		5.0	$	—
Granted		12,159			6.61
Cancelled		—			—
Forfeited		(25,841	)		26.31
Exercised		(41,460	)		2.29			$	—

Outstanding, June 30, 2009		3,778,840		$	12.75		4.7	$	5
Granted		—			—
Cancelled		—			—
Forfeited		(8,775	)		14.36
Exercised		(90,144	)		7.59			$	1

Outstanding, September 30, 2009		3,679,921		$	12.87		4.6	$	19

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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


	Nine Months Ended
	September 30, 2009
				Weighted Avg.
				Grant Date
	Shares			Fair Value

Nonvested Restricted Shares
Nonvested balance at January 1, 2009		435,468		$	24.58
Granted		431,975			1.96
Vested		(204,965	)		24.17
Forfeited		—			—

Nonvested balance at March 31, 2009		662,478		$	9.92
Granted		5,622			6.61
Vested		(19,569	)		12.75
Forfeited		—			—

Nonvested balance at June 30, 2009		648,531		$	9.81
Granted		—			—
Vested		(2,277	)		14.58
Forfeited		(741	)		1.84

Nonvested balance at September 30, 2009		645,513		$	9.84

The fair value of restricted stock grants is equal to the average market price of our stock at the date of grant. As of September 30, 2009, approximately $4 million of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 1.1 years.

Long-Term Performance Units and SARs — Long-term performance units and SARs are paid in cash and recognized as a liability based upon their fair value. As of September 30, 2009, less than $1 million of total unrecognized compensation costs is expected to be recognized over a weighted-average period of approximately 1.1 years.

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


	Three Months Ended September 30,
	Pension												Postretirement
	2009						2008						2009			2008
	US			Foreign			US			Foreign			US			US
	(Millions)

Service cost — benefits earned during the period	$	—		$	1		$	—		$	2		$	1		$	—
Interest cost		5			5			5			5			2			2
Expected return on plan assets		(6	)		(5	)		(6	)		(5	)		—			—
Settlement loss		—			—			—			—			—			—
Net amortization:
Actuarial loss		1			1			1			1			1			1
Prior service cost		—			—			—			—			(1	)		(1	)

Net pension and postretirement costs	$	—		$	2		$	—		$	3		$	3		$	2

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


	Nine Months Ended September 30,
	Pension												Postretirement
	2009						2008						2009			2008
	US			Foreign			US			Foreign			US			US
							(Millions)

Service cost — benefits earned during the period	$	1		$	3		$	1		$	6		$	1		$	1
Interest cost		15			13			15			13			6			7
Expected return on plan assets		(17	)		(14	)		(17	)		(16	)		—			—
Settlement loss		2			—			—			—			—			—
Net amortization:
Actuarial loss		2			2			2			3			4			4
Prior service cost		—			1			—			1			(4	)		(4	)

Net pension and postretirement costs	$	3		$	5		$	1		$	7		$	7		$	8

For the nine months ended September 30, 2009, we made pension contributions of approximately $8 million for our domestic pension plans and $13 million for our foreign pension plans. Based on current actuarial estimates, we believe we will be required to make approximately $6 million in contributions for the remainder of 2009.

We made postretirement contributions of approximately $7 million during the first nine months of 2009. Based on current actuarial estimates, we believe we will be required to make approximately $3 million in contributions for the remainder of 2009.

The assets of some of our pension plans are invested in trusts that permit commingling of the assets of more than one employee benefit plan for investment and administrative purposes. Each of the plans participating in the trust has interests in the net assets of the underlying investment pools of the trusts. The investments for all our pension plans are recorded at estimated fair value, in compliance with the recent accounting guidance on fair value measurement.

The Tenneco Pension Plan for Hourly Employees, Tenneco Clevite Division Retirement Plan, Tenneco Angola Hourly Bargaining Pension Plan and Tenneco Local 878 (UAW) Retirement Income Plan pension plans were merged into the Tenneco Retirement Plan for Salaried Employees effective December 31, 2008. The plans were merged to reduce the cost of plan administration. There were no changes to the terms of the plans or to the benefits provided.

(12) On September 1, 2008, we acquired the suspension business of Gruppo Marzocchi, an Italian based worldwide leader in supplying suspension technology in the two wheeler market. The consideration paid for the Marzocchi acquisition included cash of approximately $1 million, plus the assumption of Marzocchi’s net debt (debt less cash acquired) of about $5 million. In February 2009, we recorded an opening balance sheet adjustment of $1 million to cash, as a result of an expected post-closing purchase price settlement with Marzocchi, which resulted in a corresponding decrease to goodwill. We finalized the purchase price allocation during the third quarter of 2009. Adjustments to the opening balance sheet decreased goodwill to zero and included the capitalization of intangible assets, including $4 million for trademarks and $2 million for patents, the capitalization of $2 million of fixed assets, and the release of $1 million in a restructuring accrual. The calculated fair value of these intangible and tangible purchased assets included Level 2 observable inputs and Level 3 unobservable inputs that utilized our own assumptions. The fair value of fixed assets purchased was calculated based on a current cost to replace valuation methodology adjusted for various factors including physical deterioration and functional and economic obsolescence. The fair value of the intangible assets purchased was calculated using a market-based model to calculate the discounted after-tax royalty savings based on the Company’s weighted average cost of capital. This market-based model utilized inputs such as similar market transactions in the marketplace and the Company’s historic and

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

projected revenue growth trends. The acquisition of the Gruppo Marzocchi suspension business includes a manufacturing facility in Bologna, Italy, associated engineering and intellectual property, the Marzocchi brand name, sales, marketing and customer service operations in the United States and Canada, and purchasing and sales operations in Taiwan.

On May 30, 2008, we acquired from Delphi Automotive Systems LLC certain ride control assets and inventory at Delphi’s Kettering, Ohio facility for a cash payment of $19 million. We are utilizing a portion of the purchased assets in other locations to grow our OE ride control business globally. We finalized the purchase price allocation during the second quarter of 2009. Adjustments recorded to the opening balance sheet were not significant. The calculated fair value of the purchased assets included Level 2 observable inputs and Level 3 unobservable inputs that utilized our own assumptions. The fair value of the inventory items was calculated at current replacement cost while the fair value of the machinery and equipment purchased was based on values existing in the used-asset market. In conjunction with the purchase agreement, we entered into an agreement to lease a portion of the Kettering facility from Delphi and we have entered into a long-term supply agreement with General Motors Corporation to continue supplying passenger car shocks and struts to General Motors from the Kettering facility. The agreement has been assumed by the new General Motors Company.

(13) In August 2009, the Financial Accounting Standards Board (FASB) issued new accounting guidance relating to the fair value measurement for liabilities in which a quoted price in an active market for the identical liability is not available. The new accounting guidance requires the use of a valuation technique that uses a quoted price of either an identical liability or similar liability when traded as an asset or another valuation technique based on the amount an entity would either pay to transfer the identical liability or would receive to enter into an identical liability. This new guidance is effective for the first reporting period (including interim periods) beginning after issuance, which is October 1, 2009 for the Company. We do not believe the adoption of this new accounting guidance will have a material impact on our condensed consolidated financial statements.

In June 2009, the FASB issued new accounting guidance which changes the criterion relating to the consolidation of variable interest entities (VIE) and amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE by requiring a qualitative rather than quantitative analysis. The new accounting guidance also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE and enhanced disclosures about an entity’s involvement with a VIE. The new accounting guidance is effective for a reporting entity’s first annual reporting period that begins after November 15, 2009, and for interim and annual reporting periods thereafter. We are evaluating the new guidelines applicable to the consolidation of variable interest entities to determine the effect on our condensed consolidated financial statements and related disclosures.

In May 2009, the FASB issued new accounting guidance on subsequent events which requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The new accounting guidance for subsequent events is effective for interim or annual reporting periods ending after June 15, 2009. We have incorporated these new disclosure requirements within footnote 1 of our notes to condensed consolidated financial statements.

In April 2009, the FASB issued new accounting guidance which requires public companies to disclose information relating to fair value of financial instruments for interim and annual reporting periods. Additional disclosure is required for all financial instruments for which it is practicable to estimate fair value, including the fair value and carrying value and the significant assumptions used to estimate the fair value of these financial instruments. This new accounting guidance is effective for interim reporting periods ending after June 15, 2009 on a prospective basis with comparative disclosures only for periods after initial adoption. We have incorporated these new disclosure requirements within footnote 3 of our notes to condensed consolidated financial statements.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

In December 2008, the FASB issued new accounting guidance on employers’ disclosure about postretirement benefit plan assets which requires disclosure of plan asset investment policies and strategies, the fair value of each major category of plan assets, information about inputs and valuation techniques used to develop fair value measurements of plan assets, and additional disclosure about significant concentrations of risk in plan assets for an employer’s pension and other postretirement plans. These additional disclosure requirements for postretirement benefit plan assets is effective for fiscal years ending after December 15, 2009. We do not believe the adoption of this new accounting guidance will have a material impact on our condensed consolidated financial statements, however, we will expand our footnote disclosures relating to our pension plan to meet the additional disclosure requirements.

In March 2008, the FASB issued new accounting guidance on the disclosures about derivative instruments and hedging activities which requires enhanced disclosures about an entity’s derivative and hedging activities including how and why an entity uses derivative instruments, how an entity accounts for derivatives and hedges and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This new accounting guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted these new guidelines on a prospective basis on January 1, 2009 and have incorporated the disclosure requirements within footnote 2 of our notes to condensed consolidated financial statements.

In December 2007, the FASB issued new accounting guidance on noncontrolling interests in consolidated financial statements to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. The new accounting guidance clarified that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the condensed consolidated financial statements, establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation and provides for expanded disclosure in the condensed consolidated financial statements relating to the interests of the parent’s owners and the interests of the noncontrolling owners of the subsidiary. The new accounting guidance applies prospectively (except for the presentation and disclosure requirements) for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. The presentation and disclosure requirements will be applied retrospectively for all periods presented. The adoption of this new accounting guidance has changed the presentation of our condensed consolidated financial statements based on the new disclosure requirements for noncontrolling interests.

In September 2006, the FASB issued new accounting guidance on fair value measurements which defines fair value, establishes a fair value hierarchy for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. This new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007. The FASB issued in February 2008 a delay in the effective date of this new guidance for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. We have adopted the measurement and disclosure provisions of this new guidance relating to our financial assets and financial liabilities which are measured on a recurring basis (at least annually) effective January 1, 2008. For our nonfinancial assets and liabilities, we have adopted the measurement and disclosure provisions of this new guidance on January 1, 2009. We have added additional disclosures in footnote 2 of our notes to condensed consolidated financial statements, relating to the fair value of our financial and non-financial assets and liabilities.

(14) We have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee our senior credit facility, our senior secured notes, our senior notes and our senior subordinated notes on a joint and several basis. The arrangement for the senior credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries. The $245 million senior secured notes is also secured by

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

second-priority liens on substantially all our domestic assets, excluding some of the stock of our domestic subsidiaries. No assets or capital stock of our direct or indirect foreign subsidiaries secure these notes. You should also read Note 17 of the condensed consolidated financial statements of Tenneco Inc., where we present the Supplemental Guarantor Condensed Consolidating Financial Statements.

We have issued guarantees through letters of credit in connection with some obligations of our affiliates. As of September 30, 2009, we have guaranteed $48 million in letters of credit to support some of our subsidiaries’ insurance arrangements, foreign employee benefit programs, environmental remediation activities and cash management and capital requirements.

Negotiable Financial Instruments — One of our European subsidiaries receives payment from one of its OE customers whereby the accounts receivable are satisfied through the delivery of negotiable financial instruments. We may collect these financial instruments before their maturity date by either selling them at a discount or using them to satisfy accounts receivable that have previously been sold to a European bank. Any of these financial instruments which are not sold are classified as other current assets as they do not meet our definition of cash equivalents. The amount of these financial instruments that was collected before their maturity date and sold at a discount totaled $2 million as of September 30, 2009, compared with $23 million at December 31, 2008. No negotiable financial instruments were held by our European subsidiary as of September 30, 2009 or December 31, 2008.

In certain instances several of our Chinese subsidiaries receive payment from OE customers and satisfy vendor payments through the receipt and delivery of negotiable financial instruments. Financial instruments used to satisfy vendor payables and not redeemed totaled $17 million and $6 million at September 30, 2009 and December 31, 2008, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $18 million and $6 million at September 30, 2009 and December 31, 2008, respectively, and were classified as other current assets. One of our Chinese subsidiaries that issues its own negotiable financial instruments to pay its vendors is required to maintain a cash balance if they exceed certain credit limits with the financial institution that guarantees those financial instruments. A restricted cash balance was not required at that Chinese subsidiary at September 30, 2009 and December 31, 2008.

The negotiable financial instruments received by one of our European subsidiaries and some of our Chinese subsidiaries are checks drawn by our OE customers and guaranteed by their banks that are payable at a future date. The use of these instruments for payment follows local commercial practice. Because negotiable financial instruments are financial obligations of our customers and are guaranteed by our customers’ banks, we believe they represent a lower financial risk than the outstanding accounts receivable that they satisfy which are not guaranteed by a bank.

(15) The deterioration in the global economy and global credit markets in the past year has negatively impacted global business activity in general, and specifically the automotive industry in which we operate. The market turmoil and tightening of credit, as well as the dramatic decline in the housing market in the United States and Western Europe, have led to a lack of consumer confidence evidenced by a rapid decline in light vehicle purchases in 2008 and the first six months of 2009. Light vehicle production during the first six months of 2009 decreased by 50 percent in North America and 35 percent in Europe as compared to the first six months of 2008. OE production has stabilized and overall the production environment strengthened in the third quarter compared to the second quarter as production began to track more closely to vehicle sales after inventory corrections in the first half of the year. In North America, light vehicle production in the third quarter 2009 was down 21 percent year-over-year. However, the industry built 2.3 million vehicles in the third quarter compared with 1.8 million in the second quarter of this year, a 32 percent increase. In Europe, light vehicle production in the third quarter 2009 was down 15 percent year-over-year. Approximately 4.2 million vehicles were built in the third quarter, down from 4.4 million in the second quarter primarily due to the normal August shut-downs.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

In response to current economic conditions, some of our customers have eliminated or are expected to eliminate certain light vehicle models or brands in order to remain or become financially viable. While we do not believe that models eliminated to date will have a significant impact to us, changes in the models produced by our customers or sales of their brands may have an adverse effect on our market share. Additional declines in consumer demand would have a further adverse effect on the financial condition of our OE customers, and on our future results of operations. Continued or further financial difficulties at any of our major customers could have an adverse impact on the level of our future revenues and collection of our receivables from such customers.

Other than the impact from production shutdowns during the second and third quarters, we incurred no other economic loss from the bankruptcy filings of Chrysler LLC or General Motors Corporation. We have collected substantially all of our pre-petition receivables from Chrysler LLC and General Motors Corporation.

Further deterioration in the industry may have an impact on our ability to meet future financial covenants which would require us to enter into negotiations with our senior credit lenders to request additional covenant relief. Such conditions and events may also result in incremental charges related to impairment of goodwill, intangible assets and long-lived assets, and in charges to record an additional valuation allowance against our deferred tax assets. In addition, a bankruptcy filing by a significant customer could result in a condition of default under our U.S. accounts receivables securitization agreement, terminating future purchases of receivables under that agreement, which would have an adverse effect on our liquidity. See Note 6 of our notes to condensed consolidated financial statements.

In the event that economic conditions diminish our future revenues, we would pursue a range of actions 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.

(16) We are a global manufacturer with three geographic reportable segments: (1) North America, (2) Europe, South America and India (“Europe”), and (3) Asia Pacific. Each segment manufactures and distributes ride control and emission control products primarily for the automotive industry. We have not aggregated individual operating segments within these reportable segments. We evaluate segment performance based primarily on income before interest expense, income taxes, and noncontrolling interests. Products are transferred between segments and geographic areas on a basis intended to reflect as nearly as possible the “market value” of the products.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table summarizes certain Tenneco Inc. segment information:


	Segment
	North						Asia		Reclass &
	America			Europe			Pacific		Elims			Consolidated
							(Millions)

At September 30, 2009 and for the Three Months Then Ended
Revenues from external customers	$	578		$	541		$	135	$	—		$	1,254
Intersegment revenues		2			47			4		(53	)		—
Income before interest expense, income taxes, and noncontrolling interests		17			10			8		—			35
At September 30, 2008 and for the Three Months Then Ended
Revenues from external customers	$	662		$	707		$	128	$	—		$	1,497
Intersegment revenues		4			73			3		(80	)		—
Income before interest expense, income taxes, and noncontrolling interests		(2	)		24			6		—			28
At September 30, 2009 and for the Nine Months Then Ended
Revenues from external customers	$	1,515		$	1,467		$	345	$	—		$	3,327
Intersegment revenues		5			119			9		(133	)		—
Income before interest expense, income taxes, and noncontrolling interests		27			(1	)		13		—			39
Total assets		1,148			1,413			361		17			2,939
At September 30, 2008 and for the Nine Months Then Ended
Revenues from external customers	$	2,019		$	2,258		$	431	$	—		$	4,708
Intersegment revenues		9			178			12		(199	)		—
Income before interest expense, income taxes, and noncontrolling interests		24			97			21		—			142
Total assets		1,585			1,573			367		37			3,562

(17) Supplemental guarantor condensed consolidating financial statements are presented below:

Basis of Presentation

Subject to limited exceptions, all of our existing and future material domestic 100% owned subsidiaries (which are referred to as the Guarantor Subsidiaries) fully and unconditionally guarantee our senior subordinated notes due in 2014, our senior notes due in 2015 and our senior secured notes due 2013 on a joint and several basis. We have not presented separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries because management has determined that such information is not material to the holders of the notes. Therefore, the Guarantor Subsidiaries are combined in the presentation below.

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

Distributions

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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF INCOME (LOSS)


	For the Three Months Ended September 30, 2009
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims			Consolidated
	(Millions)

Revenues
Net sales and operating revenues —
External		$ 533			$ 721			$ —			$ —			$ 1,254
Affiliated companies		31			118			—			(149	)		—

		564			839			—			(149	)		1,254

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		547			645			—			(149	)		1,043
Engineering, research, and development		11			16			—			—			27
Selling, general, and administrative		29			61			—			—			90
Depreciation and amortization of other intangibles		22			33			—			—			55

		609			755			—			(149	)		1,215

Other income (expense)
Loss on sale of receivables		—			(2	)		—			—			(2	)
Other income (loss)		(1	)		—			(1	)		—			(2	)

		(1	)		(2	)		(1	)		—			(4	)

Income (loss) before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies		(46	)		82			(1	)		—			35

Interest expense —
External (net of interest capitalized)		—			1			34			—			35
Affiliated companies (net of interest income)		36			(4	)		(32	)		—			—
Income tax expense (benefit)		(1	)		5			—			—			4
Equity in net income (loss) from affiliated companies		73			—			(5	)		(68	)		—

Net income (loss)		(8	)		80			(8	)		(68	)		(4	)

Less: Net income (loss) attributable to noncontrolling interests		—			4			—			—			4

Net income (loss) attributable to Tenneco Inc.		$ (8	)		$ 76			$ (8	)		$ (68	)		$ (8	)

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF INCOME (LOSS)


	For the Three Months Ended September 30, 2008
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims			Consolidated
	(Millions)

Revenues
Net sales and operating revenues — External		$ 602			$ 895			$ —			$ —			$ 1,497
Affiliated companies		26			140			—			(166	)		—

		628			1,035			—			(166	)		1,497

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		533			931			—			(166	)		1,298
Engineering, research, and development		12			17			—			—			29
Selling, general, and administrative		29			57			1			—			87
Depreciation and amortization of other intangibles		21			35			—			—			56

		595			1,040			1			(166	)		1,470

Other income (expense)
Loss on sale of receivables		—			(3	)		—			—			(3	)
Other income (loss)		50			(6	)		1			(41	)		4

		50			(9	)		1			(41	)		1

Income (loss) before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies		83			(14	)		—			(41	)		28

Interest expense —
External (net of interest capitalized)		—			2			28			—			30
Affiliated companies (net of interest income)		33			(4	)		(29	)		—			—
Income tax expense (benefit)		39			6			86			—			131
Equity in net income (loss) from affiliated companies		(23	)		—			(51	)		74			—

Net income (loss)		(12	)		(18	)		(136	)		33			(133	)

Less: Net income (loss) attributable to noncontrolling interests		—			3			—			—			3

Net income (loss) attributable to Tenneco Inc.		$ (12	)		$ (21	)		$ (136	)		$ 33			$ (136	)

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF INCOME (LOSS)


	For the Nine Months Ended September 30, 2009
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims			Consolidated
	(Millions)

Revenues
Net sales and operating revenues —
External		$ 1,390			$ 1,937			$ —		$	—			$ 3,327
Affiliated companies		71			288			—			(359	)		—

		1,461			2,225			—			(359	)		3,327

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		1,348			1,794			—			(359	)		2,783
Engineering, research, and development		25			47			—			—			72
Selling, general, and administrative		78			176			2			—			256
Depreciation and amortization of other intangibles		67			95			—			—			162

		1,518			2,112			2			(359	)		3,273

Other income (expense)
Loss on sale of receivables		—			(6	)		—			—			(6	)
Other income (loss)		(4	)		9			—			(14	)		(9	)

		(4	)		3			—			(14	)		(15	)

Income (loss) before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies		(61	)		116			(2	)		(14	)		39

Interest expense —
External (net of interest capitalized)		(1	)		3			99			—			101
Affiliated companies (net of interest income)		103			(10	)		(93	)		—			—
Income tax expense (benefit)		4			14			—			—			18
Equity in net income (loss) from affiliated companies		94			—			(82	)		(12	)		—

Net income (loss)		(73	)		109			(90	)		(26	)		(80	)

Less: Net income (loss) attributable to noncontrolling interests		—			10			—			—			10

Net income (loss) attributable to Tenneco Inc.		$ (73	)		$ 99			$ (90	)	$	(26	)		$ (90	)

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF INCOME (LOSS)


	For the Nine Months Ended September 30, 2008
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims			Consolidated
	(Millions)

Revenues
Net sales and operating revenues — External		$ 1,835			$ 2,873			$ —			$ —			$ 4,708
Affiliated companies		68			373			—			(441	)		—

		1,903			3,246			—			(441	)		4,708

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		1,635			2,813			—			(441	)		4,007
Engineering, research, and development		40			59			—			—			99
Selling, general, and administrative		101			190			3			—			294
Depreciation and amortization of other intangibles		62			106			—			—			168

		1,838			3,168			3			(441	)		4,568

Other income (expense)
Loss on sale of receivables		—			(7	)		—			—			(7	)
Other income (loss)		60			(5	)		(1	)		(45	)		9

		60			(12	)		(1	)		(45	)		2

Income (loss) before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies		125			66			(4	)		(45	)		142

Interest expense —
External (net of interest capitalized)		(2	)		2			88			—			88
Affiliated companies (net of interest income)		98			(6	)		(92	)		—			—
Income tax expense (benefit)		35			37			91			—			163
Equity in net income (loss) from affiliated companies		11			—			(26	)		15			—

Net income (loss)		5			33			(117	)		(30	)		(109	)

Less: Net income (loss) attributable to noncontrolling interests		—			8			—			—			8

Net income (loss) attributable to Tenneco Inc.		$ 5			$ 25			$ (117	)		$ (30	)		$ (117	)

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

BALANCE SHEET


	September 30, 2009
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims			Consolidated
				(Millions)

ASSETS
Current assets:
Cash and cash equivalents		$ —			$ 137			$ —			$ —			$ 137
Receivables, net		402			1,001			36			(721	)		718
Inventories		172			284			—			—			456
Deferred income taxes		—			70			—			(42	)		28
Prepayments and other		29			117			4			(4	)		146

Total current assets		603			1,609			40			(767	)		1,485

Other assets:
Investment in affiliated companies		543			—			619			(1,162	)		—
Notes and advances receivable from affiliates		3,771			264			5,787			(9,822	)		—
Long-term receivables, net		4			4			—			—			8
Goodwill		22			67			—			—			89
Intangibles, net		16			14			—			—			30
Deferred income taxes		63			23			—			(1	)		85
Other		30			60			26			—			116

		4,449			432			6,432			(10,985	)		328

Plant, property, and equipment, at cost		1,036			2,117			—			—			3,153
Less — Accumulated depreciation and amortization		(721	)		(1,306	)		—			—			(2,027	)

		315			811			—			—			1,126

Total assets		$ 5,367			$ 2,852			$ 6,472			$ (11,752	)		$ 2,939


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term debt)
Short-term debt — non-affiliated		$ —			$ 72			$ 1			$ —			$ 73
Short-term debt — affiliated		240			335			10			(585	)		—
Trade payables		310			631			—			(119	)		822
Accrued taxes		26			25			—			(4	)		47
Other		151			162			56			(59	)		310

Total current liabilities		727			1,225			67			(767	)		1,252

Long-term debt — non-affiliated		—			10			1,385			—			1,395
Long-term debt — affiliated		4,339			219			5,264			(9,822	)		—
Deferred income taxes		—			63			—			(1	)		62
Postretirement benefits and other liabilities		351			88			—			4			443
Commitments and contingencies

Total liabilities		5,417			1,605			6,716			(10,586	)		3,152

Redeemable noncontrolling interests		—			5			—			—			5

Tenneco Inc. Shareholders’ equity		(50	)		1,216			(244	)		(1,166	)		(244	)

Noncontrolling interests		—			26			—			—			26

Total equity		(50	)		1,242			(244	)		(1,166	)		(218	)

Total liabilities, redeemable noncontrolling interests and equity		$ 5,367			$ 2,852			$ 6,472			$ (11,752	)		$ 2,939

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

BALANCE SHEET


	December 31, 2008
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass
	Subsidiaries			Subsidiaries			Company)			& Elims			Consolidated
	(Millions)

ASSETS
Current assets:
Cash and cash equivalents		$ 16			$ 110			$ —			$ —			$ 126
Receivables, net		461			792			33			(712	)		574
Inventories		193			320			—			—			513
Deferred income taxes		58			—			—			(40	)		18
Prepayments and other		24			83			—			—			107

Total current assets		752			1,305			33			(752	)		1,338

Other assets:
Investment in affiliated companies		399			—			614			(1,013	)		—
Notes and advances receivable from affiliates		3,641			234			5,605			(9,480	)		—
Long-term receivables, net		1			10			—			—			11
Goodwill		22			73			—			—			95
Intangibles, net		17			9			—			—			26
Deferred income taxes		64			24			46			(46	)		88
Other		36			66			23			—			125

		4,180			416			6,288			(10,539	)		345

Plant, property, and equipment, at cost		1,039			1,921			—			—			2,960
Less — Accumulated depreciation and amortization		(687	)		(1,128	)		—			—			(1,815	)

		352			793			—			—			1,145

Total assets		$ 5,284			$ 2,514			$ 6,321			$ (11,291	)		$ 2,828


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term debt)
Short-term debt — non-affiliated		$ —			$ 49			$ —			$ —			$ 49
Short-term debt — affiliated		174			371			10			(555	)		—
Trade payables		332			594			—			(136	)		790
Accrued taxes		12			18			—			—			30
Other		132			169			48			(61	)		288

Total current liabilities		650			1,201			58			(752	)		1,157

Long-term debt — non-affiliated		—			12			1,390			—			1,402
Long-term debt — affiliated		4,229			127			5,124			(9,480	)		—
Deferred income taxes		43			54			—			(46	)		51
Postretirement benefits and other liabilities		345			89			—			4			438
Commitments and contingencies

Total liabilities		5,267			1,483			6,572			(10,274	)		3,048

Redeemable noncontrolling interests		—			7			—			—			7

Tenneco Inc. Shareholders’ equity		17			1,000			(251	)		(1,017	)		(251	)

Noncontrolling interests		—			24			—			—			24

Total equity		17			1,024			(251	)		(1,017	)		(227	)

Total liabilities, redeemable noncontrolling interests and equity		$ 5,284			$ 2,514			$ 6,321			$ (11,291	)		$ 2,828

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF CASH FLOWS


	Three Months Ended September 30, 2009
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims		Consolidated
	(Millions)

Operating Activities
Net cash provided (used) by operating activities	$	144			$ (12	)	$	(55	)		$ —		$ 77

Investing Activities
Proceeds from the sale of assets		—			1			—			—		1
Cash payment for plant, property, and equipment		(11	)		(9	)		—			—		(20	)
Cash payment for software related intangible assets		—			(1	)		—			—		(1	)
Investments and other		—			1			—			—		1

Net cash used by investing activities		(11	)		(8	)		—			—		(19	)

Financing Activities
Issuance of long-term debt		—			—			4			—		4
Retirement of long-term debt		—			(2	)		(5	)		—		(7	)
Increase (decrease) in bank overdrafts		—			6			—			—		6
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt		—			6			(57	)		—		(51	)
Intercompany dividends and net increase (decrease) in intercompany obligations		(133	)		20			113			—		—
Distribution to noncontrolling interest partners		—			—			—			—		—

Net cash provided (used) by financing activities		(133	)		30			55			—		(48	)

Effect of foreign exchange rate changes on cash and cash equivalents		—			16			—			—		16

Increase (decrease) in cash and cash equivalents		—			26			—			—		26
Cash and cash equivalents, July 1		—			111			—			—		111

Cash and cash equivalents, September 30 (Note)	$	—			$ 137		$	—			$ —		$ 137


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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF CASH FLOW


	Three Months Ended September 30, 2008
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims		Consolidated
	(Millions)

Operating Activities
Net cash provided (used) by operating activities	$	46			$ 44			$ (50	)		$ —		$ 40

Investing Activities
Proceeds from the sale of assets		—			—			—			—		—
Cash payment for plant, property, and equipment		(23	)		(42	)		—			—		(65	)
Cash payment for software related intangible assets		—			(1	)		—			—		(1	)
Acquisition of business (net of cash acquired)		—			3			—			—		3
Investments and other		—			—			—			—		—

Net cash used by investing activities		(23	)		(40	)		—			—		(63	)

Financing Activities
Issuance of common stock		—			—			—			—		—
Retirement of long-term debt		—			(1	)		—			—		(1	)
Increase (decrease) in bank overdrafts		—			(18	)		—			—		(18	)
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt		—			8			19			—		27
Intercompany dividends and net increase (decrease) in intercompany obligations		(19	)		(12	)		31			—		—
Distribution to minority interest partners		—			—			—			—		—
Other		—			—			—			—		—

Net cash provided (used) by financing activities		(19	)		(23	)		50			—		8

Effect of foreign exchange rate changes on cash and cash equivalents		—			(22	)		—			—		(22	)
Increase (decrease) in cash and cash equivalents		4			(41	)		—			—		(37	)

Cash and cash equivalents, July 1		6			158			—			—		164

Cash and cash equivalents, September 30 (Note)	$	10			$ 117			$ —			$ —		$ 127


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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF CASH FLOWS


	Nine Months Ended September 30, 2009
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims		Consolidated
	(Millions)

Operating Activities
Net cash provided (used) by operating activities	$	184			$ 116			$ (192	)		$ —		$ 108

Investing Activities
Proceeds from the sale of assets		—			3			—			—		3
Cash payment for plant, property, and equipment		(35	)		(51	)		—			—		(86	)
Cash payment for software related intangible assets		(1	)		(4	)		—			—		(5	)
Acquisition of business (net of cash acquired)		—			1			—			—		1
Investments and other		—			1			—			—		1

Net cash used by investing activities		(36	)		(50	)		—			—		(86	)

Financing Activities
Issuance of long-term debt		—			—			6			—		6
Debt issuance cost of long-term debt		—			—			(8	)		—		(8	)
Retirement of long-term debt		—			(4	)		(11	)		—		(15	)
Increase (decrease) in bank overdrafts		—			(18	)		—			—		(18	)
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt		—			21			3			—		24
Intercompany dividends and net increase (decrease) in intercompany obligations		(164	)		(38	)		202			—		—
Distribution to noncontrolling interest partners		—			(10	)		—			—		(10	)

Net cash provided (used) by financing activities		(164	)		(49	)		192			—		(21	)

Effect of foreign exchange rate changes on cash and cash equivalents		—			10			—			—		10

Increase (decrease) in cash and cash equivalents		(16	)		27			—			—		11
Cash and cash equivalents, January 1		16			110			—			—		126

Cash and cash equivalents, September 30 (Note)	$	—			$ 137			$ —			$ —		$ 137


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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF CASH FLOWS


	Nine Months Ended September 30, 2008
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims		Consolidated
	(Millions)

Operating Activities
Net cash provided (used) by operating activities	$	31		$	86		$	(83	)		$ —	$	34

Investing Activities
Proceeds from the sale of assets		—			2			—			—		2
Cash payment for plant, property, and equipment		(76	)		(116	)		—			—		(192	)
Cash payment for software related intangible assets		(5	)		(4	)		—			—		(9	)
Acquisition of business		(19	)		3			—			—		(16	)
Investments and other		—			—			—			—		—

Net cash used by investing activities		(100	)		(115	)		—			—		(215	)

Financing Activities
Issuance of common stock		—			—			1

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